Amazon.com Inc. ’s record loonie bond sale has the Canadian fixed income market working hard to accommodate the deluge of debt, pushing risk spreads higher and spurring other borrowers to delay note sales of their own.

Fund managers are selling high-quality bonds to make room for the $14 billion Amazon debt sale, weighing on valuations across the market. Even so, the changes are relatively mild, and risk premiums remain low by historical standards as investors keep pouring money into the market.

The Amazon deal, which priced Monday, is the largest ever corporate bond raised in Canadian dollars, eclipsing previous a record set by Alphabet Inc. last month, when it raised $8.5 billion. The five-part offering makes Amazon a top-10 issuer based on outstanding debt, overtaking two pillars of Canadian industry, National Bank of Canada and Telus Corp., according to a Bloomberg index.

So-called hyperscalers have been tapping every corner of the credit market to raise cash for massive artificial intelligence efforts, and have expanded their investor base by borrowing in currencies like the loonie and euro.

The Amazon deal was so large that it has sapped buying capacity for upcoming offerings in Canada, according to Chris Whelan, head of tactical trading strategy of fixed income at TD Securities.

“Each deal will feel a bit heavier for the next month,” Whelan told Bloomberg, and borrowers are likely to hold off on big sales for “a good while,” he said.

“While Canada has proven its viability as a funding alternative for global issuers, another record-breaking deal in the near term would be surprising despite the robust demand,” Whelan added. “That said, typical strong deal conditions for issuers in the Canadian market should continue.”

Seeing as the Canadian government typically auctions 30-year bonds in $3 billion tranches, it’s “no surprise” that Amazon’s deal, which includes a $4.75 billion 30-year portion, would “distort the Canadian bond market,” said Etienne Bordeleau, a portfolio manager at Ninepoint Partners LP. He pointed to Canada’s long-dated sovereign bonds “massively” underperforming comparable Treasuries on Monday.

To make room for the Amazon debt, investors have sold high-grade credits including longer-dated securities from utilities and bonds from Alphabet, which tapped the loonie market just last month, said Dhruv Mallick, head of credit at Leith Wheeler Investment Counsel Ltd.

Investment-grade Canadian corporate bond spreads widened by about two basis points on Tuesday, a relatively mild move suggesting the market is absorbing the deal well.

At just 84.5 basis points above government curve, those spreads are still more than 30 per cent tighter than the five-year average.

Those narrow margins are supported by strong inflows into Canadian fixed income, which has allowed the market to fund increasingly larger transactions, according to Randall Malcolm, senior managing director of fixed income at SLC Management.

“This has made more global corporate issuers consider Canadian dollars as a potential funding source,” he said.

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Canadian investors are now expecting more hyperscaler debt, which could eventually develop a liquid technology credit sector that the country has lacked, according to Mallick.

“Canada is open for business,” Bordeleau said.

Bloomberg.com