Canada Plans Record Issuance of Bonds to Fund Deficit

Date: Wednesday, January 28, 2009
Author: Alexandre Deslongchamps, Bloomberg.com

Canada plans to sell a record amount of debt this year and restart sales of 3-year bonds to finance the country’s first budget deficit in more than a decade.

Canada today forecast combined deficits of C$84.9 billion ($69.2 billion) over the next five years. The government will issue a record C$82 billion in bonds in the 2009-10 fiscal year, a 7.9 percent increase from the previous year, budget documents showed.

Canada needs to sell more debt after announcing a C$40 billion, two-year stimulus package to pull the world’s eighth- biggest economy out of recession. The government plans to re- introduce a 3-year benchmark, a maturity that had been discarded in 1997, when Canada began to record surpluses.

“I don’t think foreign or domestic investors will penalize the federal government” for issuing more bonds, Stefane Marion, chief economist with National Bank Financial, said in an interview.

Marion said there may be a “slight up-drift” in government bond yields because of the increased borrowing.

The government will boost the amount of treasury bills outstanding by 15 percent to C$223 billion in the 2009-10 fiscal year, from C$194 billion in the previous period. It will increase the average size of bi-weekly auctions for 3-month, 6- month and 1-year bills.

The Canadian currency declined 0.4 percent to C$1.2254 per U.S. dollar at 6:17 p.m. in Toronto, from C$1.2226 yesterday.

‘Flexibility’

“With private-sector issuance so low, public-sector issuance shouldn’t be a problem,” Craig Wright, chief economist at Royal Bank of Canada, said in an interview in Ottawa. “It wasn’t long ago people worried about disappearing government debt, so I think we have a little flexibility.”

Canada plans to issue C$76 billion of bonds during the fiscal year ending March 31, more than double the C$34 billion it had planned in last year’s budget. Debt sales rose after the government agreed to buy as much as C$75 billion in mortgages from commercial lenders.

“What we’re seeing is the government stepping in and replacing spending and borrowing that would have normally happened in the private sector,” Doug Porter, an economist with BMO Capital Markets in Toronto, said in an interview. “We’ve seen absolutely no serious upward pressure on long-term yields yet.”

Outstanding Debt

The total stock of outstanding debt will rise to C$592 billion next fiscal year, from C$512 billion in the year ending March 31, and C$394 billion last year.

Bond sales in the 2009-10 fiscal year will be almost four times higher than in 1999, when the government sold C$21.9 billion, according to Bloomberg data.

“The increase in issuance of government of Canada securities has been well received by the markets, due to strong demand for government securities,” according to the budget document.

The government will also add a 10-year maturity to the Canada Mortgage Bond program as it buys mortgages from banks as part of a program started last year to help institutions fund new loans to consumers and businesses.

Canada’s fixed-income market has increased to more than C$1 trillion, of which government bonds account for 24 percent, according to a report by RBC Capital Markets, a unit of Canada’s biggest bank by assets.

To contact the reporters on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net