Canada Rolls Out Record Borrowing Plan to Fund Deficits

  • Government sees gross bond issuance rising to C$142 billion
  • Majority of sales to focus on two-, three- and five-year debt

Canada’s federal government will issue a record C$142 billion ($106 billion) of bonds next fiscal year to finance its growing budget deficit.

The amount eclipses the previous year’s record of C$135 billion, which was revised up from a projected C$133 billion. The bulk of the issuance will be in two-, three- and five-year bonds, the federal government said in its budget for the 2017-18 fiscal year released Wednesday in Ottawa.

Prime Minister Justin Trudeau’s second budget extends the policies of deficit-fueled social spending and investment in infrastructure that helped the Liberal Party come to power in 2015. While bonds have sold off globally in recent months, sending yields up amid expectations for higher growth and inflation, Canada’s borrowing costs remain historically low.

“We’re really tweaking around the edges,” Doug Porter, chief economist at Bank of Montreal, said in an interview at the budget lock up. “The big adjustment was last year and we’re not seeing any significant changes this year.”

The budget deficit in 2017-18 will increase to C$28.5 billion, including a C$3 billion risk cushion, from C$23 billion in the current fiscal year ending in March 31. Total borrowing, which includes treasury bills as well as issuance in foreign currencies, is projected to reach C$286 billion. As much as C$247 billion is required for the refinancing of existing debt.

Canada’s federal government debt will increase to C$665.5 billion, putting it at 31.6 percent of gross domestic product, where the ratio is forecast to peak this year and next. That level is still relatively low compared with other developed countries, which lets Canada boast a top credit grade at all three major rating companies.

Top Rating

“I haven’t had any concerns with rating agencies nor have I had any discussions with them,” Finance Minister Bill Morneau said last weekend in an interview in Baden-Baden, Germany. “My sense is that Canada’s very well-positioned and that the rating agencies, as they look at our situation, are positive.”

The government plans to hold 16 auctions of domestic two-year bonds and eight auctions of both three-year and five-year bonds in 2017-18. It will also auction 10-year bonds five times, 30-year bonds three times and real return bonds four times next year. March and September will see the biggest monthly issuance: it could reach as much as C$36 billion of bonds in each of the months.

Even with the majority of new issuance coming in two- to five-year bonds, the average maturity of Canada’s domestic market debt will remain stable at around 5.5 to 6.5 years “over the medium term,” according to the budget. The share of debt with original maturity of 10 years and longer is expected to amount to 40 percent over the next decade.

Yields Rising

The yield on Canada’s two-year federal government bonds rose to 0.87 percent last week, the highest since January 2015. It fell one basis point to 0.78 percent after the release of the budget on Wednesday, up three basis points this year. Canada’s five-year bond yield reached 1.32 percent last week, also the highest since January 2015. It fell two basis points to 1.16 percent on Wednesday, up five basis points this year.

Canadian government bonds returned 0.9 percent in U.S. dollar terms this year, lagging the Bloomberg Barclays Global Aggregate Treasuries Total Return Index which rose 1.9 percent.

Part of the under performance in bonds has come amid a weaker Canadian dollar. Even though it rose 0.8 percent against its U.S. counterpart this year, it lagged all 15 other major currencies tracked by Bloomberg. The loonie gained 0.2 percent to C$1.3329 per U.S. dollar on Wednesday.

— With assistance by Josh Wingrove

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