Provinces Set for Record Sales, Led by Ontario: Canada Credit

Canada’s provinces are poised for record domestic issuance this year as governments take advantage of stronger risk appetite among foreign investors to lock in longer-term borrowing at two-decade-low costs.

The 10 provinces sold C$48.3 billion ($48.2 billion) of debt in the first 11 months of 2010, up 9 percent from last year and about C$1 billion away from the most ever, according to Canadian Imperial Bank of Commerce. Ontario, the nation’s largest province, has issued about C$22 billion in Canadian- dollar debt this year.

Provincial treasurers are sticking to the domestic market to raise funds as foreign investors pile into Canada’s fixed-income market, lured by the relative soundness of its economy versus other Group of Seven nations. Provinces didn’t issue any foreign-currency bonds in October and November, the first two-month stretch of all-domestic borrowing for almost three years, CIBC data show.

“Greater demand from non-residents, or the offshore bid, has been a factor,” David DesLauriers, managing director of government finance at Toronto-Dominion Bank, said by phone from Toronto. “They have been participating in the provincial sector in greater amounts this year compared to last year.”

Sales of 30-year bonds more than doubled so far this year to C$18.2 billion, from C$7.8 billion in 2009, as issuers seek to take advantage of the low-interest-rate environment for as long as possible to ensure low refinancing risks, and as investors become more comfortable with risk, DesLauriers said.

Lowest Level

Average yields on the Bank of America Merrill Lynch Canadian Provincial and Municipal Index, which tracks 397 bonds with a par value of C$468 billion, reached 2.9 percent on Oct. 19, the lowest level since at least 1992.

Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian corporations rather than the federal government tightened yesterday to 142 basis points, or 1.42 percentage points, from 144 the day before, according to a separate Bank of America Merrill Lynch index. Yields rose to 4.02 percent, from 4.01 percent the day before, when they rose above 4 percent for the first time since July.

The securities lost 0.85 percent in November as a drop in bond prices drove yields to 3.91 percent on average, from 3.64 percent on Oct. 31.

Shaw Communications Inc. paid 330 basis points over benchmarks to sell C$400 million of 6.75 percent bonds due in November 2039, and 230 basis points over benchmarks on C$500 million of 5.5 percent bonds due in December 2020. Calgary-based Shaw won regulatory approval in October for its C$2 billion purchase of Canwest Global Communications Corp.’s television assets.

Terasen Bonds

Terasen Gas Inc., the Surrey, British Columbia-based natural gas supplier, sold C$100 million of 5.2 percent bonds maturing in December 2040. The debt priced to yield 160 basis points over federal benchmarks.

In the provincial bond market, relative yields held steady yesterday at 53 basis points. Yields rose to 3.28 percent, from 3.25 percent the day before. The securities lost 1.2 percent in November, the biggest loss since December 2009.

Quebec Finance Minister Raymond Bachand said yesterday the province’s cumulative budget deficit through 2013-14 will be C$500 million lower than projected earlier this year. Bachand, who was speaking at a press conference in Quebec City, also said the 2010-11 deficit for Canada’s second-most populous province is now projected to be C$4.6 billion, higher than the C$4.5 billion previously estimated. Quebec raised its budget contingency for the year to C$400 million from C$300 million.

‘Under Control’

“The government is managing the situation and continues to keep its spending under control,” Bachand said. “We’re going in the right direction and we’re staying the course.”

The minister also said the 2011-12 deficit will be C$3.2 billion, compared with a C$2.9 billion projection in March. The 2009-10 deficit is estimated at C$3.2 billion, C$1.1 billion less than earlier projected. The province’s borrowing requirement for this fiscal year was raised by C$1.9 billion.

Ontario cut its deficit forecast for the currency fiscal year by C$1 billion. The province will run a deficit of C$18.7 billion in the current fiscal year, down from a June forecast of C$19.7 billion, Finance Minister Dwight Duncan said on Nov. 18. Ontario will have budget gaps of C$17.3 billion in 2011-12 and C$15.9 billion in 2012-13 and a balanced budget in seven years.

Borrowing Needs

The province’s long-term public borrowing needs are forecast to fall to C$38.7 billion in the latest outlook, down C$1 billion from the March budget. Borrowing requirements will be C$38.8 billion and C$40.2 billion in the next two years, according to financial documents.

“When we look out to the 2011-12 borrowing year for the provinces, we don’t see a tremendous drop but I don’t see a big increase either,” said TD’s DesLauriers. “If I had to guess, Ontario would probably be a little lower. That might be offset by slightly higher amounts in some of the other provinces.”

The yield on Canada’s 10-year government bonds dropped for the first time in three days, falling six basis points to 3.14 percent. The benchmark’s yield is up three basis points this week. The price of the 3.5 percent security due in June 2020 rose 46 cents today to C$102.91.

Canada’s 10-year bonds yielded 23 basis points more than the equivalent maturity U.S. security. The so-called yield advantage in Canada’s favor has declined from 37 basis points on Oct. 7, which was the most since January 2009, according to Bloomberg data.


Government bonds had their worst month of the year in November, down 1 percent, compared with a drop of about 0.7 percent for Treasuries.

Canada’s dollar weakened today by as much as 0.6 percent to C$1.0081 per U.S. dollar after a pair of employment reports dimmed prospects for a Bank of Canada interest-rate increase early next year.

Statistics Canada said today in Ottawa that employers added 15,200 jobs in November after an increase of 3,000 in the previous month. The median forecast of 24 economists in a Bloomberg News survey was for a gain of 19,800. The jobless rate unexpectedly dropped to 7.6 percent from 7.9 percent.

U.S. payrolls increased by 39,000 last month, the Labor Department said today in Washington, trailing the median economist estimate in a Bloomberg News survey for an increase of 150,000 jobs. The jobless rate rose to 9.8 percent from 9.6 percent.

Provincial Bonds Up

Provincial bonds are up 7.1 percent this year, on track for the strongest returns since 2005, as international investors purchase Canadian debt securities at a record pace.

Combined domestic and international provincial issuance is C$67.5 billion so far this year and may reach C$75 billion, matching last year’s pace, DesLauriers said.

“With demand for high quality Canadian-dollar paper so strong, provinces have skewed their issuance to the domestic market of late,” Warren Lovely, a governments strategist at CIBC World Markets, wrote in an e-mail. “We’ll see a return of international issuance soon enough, but Ontario for one will end up completing more of its program in the reliably cost-effective Canadian dollar market than it did last year.”

Provincial issuance will likely climb to about C$75 billion in the fiscal year beginning April 1, from C$73 billion in the current fiscal year, Lovely estimates.

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