Ontario to Boost Short-Term Borrowing as Longer Yields Surge

Ontario plans to sell more short-term debt in the year ahead to keep borrowing costs in check amid a spike in long-term yields.

The Canadian province, which is the world’s largest sub-sovereign government borrower, plans to increase short-term debt by C$6 billion ($4.8 billion) in the fiscal year starting April 1. That’s six times its net issuance in the current fiscal year, according to budget documents released Wednesday.

The government kept unchanged its forecast for a C$33.1 billion deficit in the coming year, down 14% from the current year’s C$38.5 billion.

Ontario is increasing its reliance on treasury bills at a time when yields on longer-term bonds are rising on signs of a strengthening global economy, which investors are betting will lead to higher inflation. Ten-year provincial debt traded to yield about 2.14% Wednesday compared to 1.31% at the start of the year, according to Bloomberg data.

Ontario to Boost Short-Term Borrowing as Longer Yields Surge

“There is no doubt that our return to fiscal sustainability will take many, many years,” Finance Minister Peter Bethlenfalvy said in a prepared remarks. “My job is to ensure we make every resource available to win our battle against the virus.”

Ontario’s spending on its Covid-19 response plan is projected to be C$51 billion, spent over four years, Bethlenfalvy said, an increase from C$45 billion projected in November. It’s sending a third round of pandemic relief payments to families with children and temporarily boosting a tax credit for child care costs.

Other highlights from the province’s fiscal 2021-22 budget:

  • Average borrowing rates are projected to be 1.9%, rising to 2.4% in fiscal 2022-23 and 3.2% the year after.
  • The province forecasts growth in gross domestic product of 4% this year and 4.3% in 2022. That’s driving a modest drop in the projected 2022-23 deficit, to C$27.7 billion.
  • Total debt is expected to rise to about C$450 billion by March 31, 2022. Net debt is expected to be $439.8 billion.
  • While the government hasn’t disclosed a plan to balance its books, it is setting a so-called debt burden reduction strategy, which includes a target for net debt to GDP not exceeding 50.5%. Under the province’s baseline growth scenario, the debt will be close to that level three years from now.
  • Even under a fast-growth scenario, the budget would not be balanced until fiscal 2028. That could be delayed to 2032 under a slow-growth scenario.

©2021 Bloomberg L.P.

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