Canadian fixed-income investors increased their participation in international bond markets last year continuing a trend that has been building slowly since the elimination of the Foreign Property rule in June 2005, according to research from Greenwich Associates.

Greenwich Associates found that investors expanded their activity in Maple Bonds (Canadian-dollar denominated issues from foreign companies) as well as in several European fixed-income instruments.

It observed a particularly large jump in the percentage of Canadian institutions that said they have either bought Maple Bonds (46% of those surveyed in 2007 versus 33% in 2006) or planned to in the next 12 months (33% versus 25% last year). The increase was especially pronounced for the most active investors — those with more than $5 billion in annual fixed-income trading volume — where more than half said they used Maple Bonds in 2007, up from only 38% in 2006.

“The movement into foreign bonds is not overwhelming, but it is noticeable, and it is being driven in large part by Canadian pension funds looking to improve investment performance amid relatively low expected rates of return on domestic fixed-income products,” says Greenwich Associates Toronto-based consultant Lea Hansen.

Also, 13% of Canadian fixed-income investors said they used European investment-grade credit bonds in 2007, up from 6% last year — and the rise was even larger for the most active Canadian investors, where usage jumped to 15% from 8%. Looking 12 months out, 13% of all Canadian investors said they plan to buy European credit bonds, as did 21% of the biggest institutions, up from 11% last year.

However, there were definite soft spots in the international picture, Greenwich notes. Canadian institutions’ purchases of U.S. Treasuries remained flat year-on-year, with fewer saying they expect to use the product over the next 12 months (25% in 2007 versus 30% in 2006).

“The popularity of electronic trading among Canadian fixed-income investors continues to accelerate in an impressive fashion,” Greenwich says. It reports that 44% of investors surveyed now say they trade at least some bonds electronically, a meaningful increase from the 34% in 2006.

The share of fixed-income trading volume executed electronically in Canada increased far less dramatically — 9% versus 7% a year ago — indicating that while more investors are using the medium, they are doing so cautiously, it says. By comparison, in the U.S., 38% of fixed income trading volume was executed electronically in 2007.