Ontario’s borrowing costs spiked the most in six months as investors wagered the province’s credit rating will be cut after Kathleen Wynne’s Liberals won re-election on a plan that would increase the deficit.
The extra yield investors demand to hold Ontario’s latest 10-year bond over a Canadian government benchmark note rose 2 basis points at 10:20 a.m. in Toronto, the biggest one day jump since January 10, according to data compiled by Bloomberg. Standard & Poor’s has a negative outlook on the province’s AA-credit rating, a signal it expects a rating change will be lower. Moody’s Investors Service called Wynne’s fiscal plan a credit negative on May 2.
“We’re on high alert that S&P will downgrade Ontario,” said Aubrey Basdeo head of Canadian fixed-income in Toronto at BlackRock Inc., the world’s biggest money manager. “She’s front-loading the deficit or the total debt in anticipation future years will benefit from stronger growth. They’re just looking at the raw numbers and they’re seeing a deteriorating financial balance sheet.”
Wynne has promised to use deficit-fueled stimulus spending to spur an economy that stagnated at 1.3 percent growth in each of the past two years before paring back to balance the books in years to come.
Under the Liberal plan, a C$3 billion ($2.8 billion) boost to program spending this year would increase the deficit to C$12.5 billion from C$11.3 billion last year. Wynne has pledged to eliminate the deficit by the 2017-18 fiscal year by holding spending for three years following the 2014 increase.
An S&P downgrade would put Ontario in the single-A range of its ratings scale, though investors would take the ratings of other firms into account as well to determine borrowing costs. Moody’s Investors Service rates the province Aa2 with a stable outlook and Fitch Ratings has a negative outlook on its AA rating. DBRS Ltd. has a stable outlook on its AA Low rating.
“It should happen quickly, although the agencies may wait for the budget to be reintroduced,” John Braive, vice chairman at Canadian Imperial Bank of Commerce’s CIBC Global Asset Management unit, said by e-mail from Toronto today.
Ontario’s borrowing-cost advantage over lower-rated Quebec shrunk to only five basis points, the lowest spread all year, the data show. An S&P downgrade would put Ontario’s rating in line with the firm’s assessment of Quebec.
In the U.S. bond market, the drop from AA to single-A for a foreign government can mean about 1 percentage point higher borrowing costs on average, according to Bank of America Merrill Lynch Data.
“Its going to be a challenge for the province to hit their out year spending targets,” Braive said, adding that the province will need to issue more bonds as a result.