Canadian Provinces Open Bond Floodgates to Beat Rising Yields

  • Bond issuance in November was the highest since record 2012
  • Governments seek to pre-finance borrowing as yields increase

Canadian provinces have rolled out a flurry of bond sales as they scramble to lock in borrowing costs before a global-market rout intensifies.

Five of Canada’s 10 provinces sold bonds last week, raising C$2.55 billion ($1.92 billion). That boosted last month’s total to the largest for a November since 2012, according to data compiled by Bloomberg. The country’s oil-rich province of Alberta followed up its Canadian dollar issue with the sale of $2.25 billion of U.S. dollar bonds on Thursday.

The rise in last week’s issuance from Canadian provinces is to some extent seasonal: their fiscal situation is clearer as they’ve published fall budget updates while an accumulation of coupon payments and maturities of federal government bonds left investors with cash to spend. A sell-off which sliced $1.7-trillion in value from global markets in November, fueled by expectations of higher U.S. interest rates, added urgency to the sales.

“For issuers viewing the recent back-up in rates as a precursor to even higher yields ahead, there’s financial incentive to raise money in the here and now,” said Warren Lovely, the Toronto-based head of public-sector research and strategy at National Bank Financial Inc. National Bank leads a Bloomberg ranking of Canadian government bond sales for the third year running. “In a world of heightened geopolitical risks, provincial issuers have learned to jump through issuance windows when they’re open.”

Provinces pushed out sales as the Bloomberg Barclays Global Aggregate Total Return Index fell 4 percent in November, the biggest slump since the gauge’s inception in 1990. Canadian bond markets weren’t immune as investors bet Donald Trump would unleash a wave of stimulus that would fuel inflation and higher interest rates. Provincial and municipal government bond prices fell 2.5 percent in November, the worst monthly performance since 1994, according to a Bank of America/Merrill Lynch index.

Issuers Unrestricted

“People are looking at the election and looking further down the road -- I’m talking about the pipelines you see -- and they’re trying to do more fixed-income type activity in advance of what could happen potentially in the U.S. interest-rate environment,” Janice Fukakusa, chief administrative officer at the Royal Bank of Canada, the country’s largest lender, said in an interview on Nov. 30.

The window of opportunity may be closing soon with uncertainty expected to rise before central bank decisions on interest rates in Canada on Dec. 7 and the U.S. Federal Reserve on Dec. 14.

Issuers viewed last week as the last clear week to get issuance done before the meetings, said Maria Berlettano, head of Canadian government credit strategy at Canadian Imperial Bank of Commerce in Toronto. “With mid-year updates out of the way issuers are unrestricted.”

More Activity

Ontario, Canada’s most populous and most-indebted province, stuck to its plan to balance the budget next year in its fiscal update on Nov. 14, while Alberta, which grapples with a record budget gap due to a drop in crude oil prices and wildfires that swept through the province in May, announced a drop in the deficit on Nov. 28 compared with its previous report.

Ontario sold C$750 million of bonds maturing in 2048 on Tuesday, while Quebec found buyers for C$500 million of similar-maturity securities on the same day. On Wednesday, Newfoundland and Labrador followed up with a sale of C$500 million of 2048 notes, while Alberta and Saskatchewan sold C$500 million and C$300 million of 10-year securities respectively. On Thursday, Alberta took to the markets again, selling $2.25 billion of three-year bonds.

Canadian provinces and municipalities sold C$13.1 billion of local-currency debt last month, taking the total for the year to C$121.2 billion, which is C$7.4 billion short of the record 2012, data compiled by Bloomberg show.

“I would expect to see more activity over the next couple of weeks before things do quiet down heading into the Christmas break,” said Travis Shaw, vice-president for public finance at DBRS Limited in Toronto. “We are seeing rates increase so that’s probably a motivating factor to continue to access the markets.”

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