Quebec Looks for Investors Among Draghi’s Negative-Yield Exiles

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Quebec Finance Minister Carlos Leitao
Quebec Finance Minister Carlos Leitao said, “We’ve done a couple of global bond issues and whenever we have the opportunity to do another, we will take it,” Photographer: Jacques Boissinot/The Canadian Press/AP

A selloff in global bonds is letting Quebec highlight its fiscal austerity in contrast to the central-bank largess and negative yields of the euro region.

Quebec plans to sell more debt to international investors following a 1.75 billion-euro ($1.97 billion) issue in January and a $1.6 billion transaction in October, Quebec Finance Minister Carlos Leitao said.

“We’ve done a couple of global bond issues and whenever we have the opportunity to do another, we will take it,” Leitao said in an interview Monday. “The fixed-income market being what it is, the opportunity is there for us to diversify our sources of borrowing.”

Quebec’s push into global bond markets coincides with a selloff in European debt after quantitative easing by Mario Draghi’s European Central Bank turned German debt yields negative earlier this year. Ten-year bonds of Quebec yield 2.6 percent. That compares with average bond yields for Group of Seven governments of 1.1 percent, according to Bank of America Merrill Lynch index data.

“They may be in a sweet spot where they can attract new buyers who may be rejecting negative yields in the euro zone,” Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities, said by phone from Montreal. “A central bank or a pension fund may be able to buy certain bonds that were not on the table before -- Quebec might fit into that category.”

Peerless Province

Quebec’s economy, long overshadowed by growth in oil-rich Alberta, is under an unaccustomed spotlight as the government prepares to balance its books for the first time in seven years. Quebec’s manufacturers are benefiting from lower fuel costs and a weaker Canadian dollar, even as a collapse in oil prices erodes Canada’s national income by 3 percent, according to Bank of Canada estimates. The Canadian dollar has tumbled 9 percent against its U.S. peer in the past year.

Quebec bonds are outperforming provincial peers as Leitao - - who worked with Lavoie at Laurentian as chief economist until the first quarter of 2014 -- pledges spending cuts and embarks on an austerity drive that belies the French-speaking province’s reputation as one of Canada’s biggest spenders. Quebec bonds were the best performers of Canada’s 10 provinces this year, gaining 1.95 percent compared with an average 1.6 percent in Bank of America Merrill Lynch’s Canadian Provincial & Municipal Index.

Underpinning demand for the debt of sovereign nations and so-called sub-sovereign borrowers, governments globally are growing international asset reserves, which quadrupled to $11 trillion during the decade ended in 2013, while pension fund plans balloon.

Liquidity Question

This week, Quebec reopened an outstanding issue of Canadian dollar bonds, adding C$500 million ($416 million) to a bond due 2025 to total C$2.5 billion. The bonds were priced to yield 77.5 basis points more than government-debt benchmarks.

Leitao, who had just returned from New York where he met with institutional investors, said demand for Quebec bonds remains strong among U.S. pension funds and insurance companies.

“It’s simpler and more profitable for us to do a large bond sale” in U.S. dollars “than to do three Canadian issues of C$500 million,” Leitao said. “As soon as we can do it, we will do it.”

Leitao prefers the U.S. market to Europe for now.

“It’s a question of liquidity in the bond market,” Leitao said. “Europe is in the midst of QE, so we will need to see how the dust settles over there. In the short term, I think we would favor the U.S. market until it’s become clearer what will happen in Europe.”

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