Provincials Avoid `Summer Lull' by Tripling Sales in July: Canada Credit
Canadian provincial bond sales reached a record for July and may continue apace after concern over the European sovereign debt crisis and tensions surrounding a Group of 20 conference crimped some borrowing.
Provinces issued C$7 billion ($6.8 billion) of debt through July 28, more than triple the 10-year monthly average of C$2.2 billion, according to research by Warren Lovely, a government debt strategist at Canadian Imperial Bank of Commerce in Toronto. Canadian-dollar sales by provinces including Ontario, Quebec, Saskatchewan and Manitoba totaled C$4.6 billion.
“There’s been no summer lull for provincial issuers,” Lovely said in an e-mail. “With strong investor demand at home and abroad, there’s little reason to expect a near-term let up in supply.”
Relative yields on provincial bonds, with about C$450 billion outstanding, widened to as much as 71 basis points on May 21, from 39 basis points on Jan. 15, according to a Bank of America Merrill Lynch index, as investors seeking the safest assets purchased federal bonds instead on concern deficits in some European countries could spiral out of control. Spreads ended yesterday at 59 basis points.
Provincial issuance dried up as borrowing costs rose and Canada hosted G-20 meetings in Toronto in the final week in June, where demonstrators set police cars on fire and smashed store and office windows.
“European worries have abated over the course of July,” Benoit Lalonde, vice president of fixed income at Laurentian Bank of Canada, said by phone from Montreal. “Appetite for credit resurfaced and that’s why provinces started to issue.”
‘Ahead of Schedule’
Provinces have funded about 41 percent of their borrowing needs of about C$78 billion for the fiscal year that started April 1, Lovely said, adding some of them are “nicely ahead of schedule.” Although many regional governments may have lower deficits than initially forecast, Lovely expects borrowing levels to remain at about projected levels as some “pre-fund” next year’s deficits while conditions are favorable.
Elsewhere in credit markets, the extra yield investors demand to hold Canadian corporate debt rather than the federal government’s widened to 151 basis points on July 28, from 142 the previous day, according to the Merrill data. Spreads widened two basis points in July and 17 so far this year.
Provincial bonds returned less than 0.1 percent in July, adding to the 4 percent rise so far this year, according to the Merrill data. That compares with a loss of 0.4 percent this month and a gain of 4.1 percent this year for federal government debt. Corporate bonds lost investors 0.2 percent in July, paring the 4.2 percent year-to-date return.
Nova Scotia Deficit
Canada’ gross domestic product rose 0.2 percent in May, after stalling in April, Statistics Canada will report today, according to the median of 21 estimates in a Bloomberg survey of economists.
Nova Scotia yesterday reported a deficit of C$241.9 million for the fiscal year ended March 31, less than the C$488.4 million forecast in April, as personal and corporate taxes rose and spending cuts kicked in, according to a statement from the office of Finance Minister Graham Steele.
Nova Scotia issued its first U.S. dollar debt in three years this month, with the sale of $750 million of five-year notes, as it took advantage of investor demand for Canadian fixed income products to diversify sources of funding.
“Market tone and volume of issuance picked up in July, particularly when compared to a slower second quarter,” Nova Scotia Treasurer Peter Urbanc said in an e-mail. “The strong interest in our five-year U.S. dollar global was evidence of high cash balances and a strong bid for high quality and rare issuers.”
Pricing in Results
Ontario, Canada’s largest province, issued C$15.6 billion in debt so far this year, about 41 percent of current requirements, according to CIBC. Quebec, the second largest, sold C$6.2 billion, or about 50 percent, including CIBC estimates for pre-funding.
Bond markets are “pricing good economic results and the possibility of lower borrowing requirements,” Jean-Francois Godin, a Montreal-based vice-president of fixed income research at Desjardins Securities Inc., said by phone from Montreal. “That’s why spreads are moving down. That should help spreads either tighten or support them where they are.”
To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
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