Canada Ramps Up Bond Supply to 7-Year High to Aid Economy

  • August sovereign-debt sales seen climbing to C$15 billion
  • Government boosts issuance to fund Trudeau fiscal stimulus

Canada faces its heaviest month of debt issuance in seven years as the government takes advantage of borrowing costs near record lows to stimulate the country’s stalling economy.

The nation will auction around C$15 billion of bonds in August, the largest monthly supply since 2009, according to National Bank of Canada and Royal Bank of Canada estimates. The yield on two-year securities sold Wednesday at the first of this month’s four bond offerings was 0.513 percent, about 40 basis points below its five-year average.

Canada, which boasts the highest grade at all three major rating companies alongside Denmark, Norway and Luxembourg, is benefiting from forces abroad that drove sovereign bond yields to record lows this year on speculation that global economic growth is slowing. Prime Minister Justin Trudeau’s fiscal boost, aimed at ramping up benefits and investing in infrastructure, should help almost double Canada’s annual pace of growth to 2.2 percent in 2017, according to central bank projections from July. Strategists say the government shouldn’t have problems finding buyers as it expands bond sales.

“This is the fiscal stimulus coming into full force,” Stefane Marion, chief economist and strategist at the National Bank of Canada, said by phone from Montreal. “You see a lot of uncertainty elsewhere, and there aren’t many countries with a triple-A rating and positive yields.”

Central Banks

Global central banks that are also struggling to prop up growth are helping drive demand for Canadian bonds, said Mark Chandler, head of fixed-income research at RBC Capital Markets in Toronto. Japanese and German 10-year yields are below zero after central banks in both regions adopted negative rates. The Bank of England expanded its asset-purchase program last week, with U.K. 10-year yields falling to record lows Tuesday.

Canada’s government is hoping fiscal stimulus will help lift the economy, which has expanded by 1.2 percent since May 2014, the slowest two-year pace outside a recession in at least six decades. Until recently, the country typically mustered growth of least 5 percent over two years. Disappointing data on Canada’s trade and its job market increased prospects policy makers will need to add even more stimulus if things don’t improve.

The Bank of Canada, which holds bond auctions on behalf of the government, found buyers for C$3.9 billion of two-year securities on Wednesday, increasing the total of bonds sold in the fiscal year 2016-2017 that began on April 1 to C$46 billion. The government plans to sell C$133 billion of bonds in the fiscal year, about 30 percent higher than the previous record set in 2009 after the global recession.

Bond Yields

The yield on Canada’s 10-year government bond slid below 1 percent on Wednesday to trade at 0.99 percent, its lowest intraday in almost a month and approaching the record 0.91 percent low reached in February. It is down from 1.39 percent at the start of this year. The Canadian dollar has risen 6.1 percent against the U.S. dollar in 2016, the third-best performance among G-10 currencies after the yen and Norwegian krone.

“From a traditional Keynesian point of view, it’s what you want to see the government do: borrow at a difficult time to help the economy,” Jason Parker, Toronto-based head of Canadian debt research at Bank of Montreal’s BMO Capital Markets unit, said by phone. “As low as the rates might seem, they’re actually providing positive yields.”

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