Canada Yields Jump on Financing Plans for $254 Billion Deficit

Yields on Canada’s long-term debt jumped after the government of Justin Trudeau said it will issue of flood of new bonds to finance a record budget deficit.

The yield on Canada’s 30-year bond spiked to 1.095% as of 4:01 p.m. Toronto time compared with about 1.026% before the release of the government’s fiscal snapshot Wednesday, Bloomberg data show. It was the biggest sell-off for the 30-year since March. The 10-year yield moved as high as 0.573% from about 0.54%.

The federal government plans to sell C$106 billion ($78 billion) of 10-year and 30-year bonds in the fiscal year that ends March 31, according to budget documents released Wednesday. That’s more than six times the C$17 billion of such bonds it sold last year as the government fights the recession caused by the Covid-19 pandemic.

“Given the historic level of issuance in the 10-year and 30-year sectors, the government will consult regularly with market participants and make appropriate adjustments, if necessary, to maintain well-functioning markets,” the government said.

Canada Yields Jump on Financing Plans for $254 Billion Deficit

Ten-year and 30-year bonds are expected to rise to 18% and 8% of gross issuance, from 11% and 3% previously.

Asked about ultra-long debt like 50-year and 100-year bonds, Finance Minister Bill Morneau told reporters the government will continue consulting markets to consider options, without specifically commenting on the question.

In total, the government expects gross bond issuance of C$409 billion. The total bond stock is projected to increase 53% to C$915 billion.

Record Borrowing

Canada is boosting issuance of longer-range debt as its grapples with a budget deficit that may reach a record C$343.2 billion, or 15.9% of the country’s gross domestic product, the government said Wednesday. That’s a larger budget gap than the 11.8% recently projected by the Parliamentary Budget Officer.

Ottawa’s debt-to-GDP ratio will rise to 49.1% -- the highest since 1999 -- compared to 31.1% at the end of March.

“The government is taking a prudent approach to financing the deficit by significantly increasing long-term bonds to lock in funding at historically low interest rates,” the government said in the document. “This will ensure Canada’s debt remains affordable and sustainable for future generations and less vulnerable to increases in interest rates.”

Ontario’s 10-year bond yields widened around 2 basis points to 1.326% as the world’s largest sub-sovereign bond issuer faces higher competition from the federal government to lure investors. That may prompt provinces to turn to international debt markets, said Ryan Goulding, fixed-income manager at Leith Wheeler Investment Counsel Ltd., which manages about C$21 billion.

“Expanding the international investor base without being able to market globally could be a challenge as they are unable to travel to market globally” due to pandemic restrictions, said Goulding.

The federal treasury also plans to increase its issuance of short term debt. Outstanding Treasury bills are expected to rise 94% to C$294 billion compared to C$152 billion at the end of March.

©2020 Bloomberg L.P.

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