Canadian provinces’ borrowing costs reach highest since 2008


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Borrowing costs for Canada’s provinces touched the highest in over a decade as rising interest rate expectations fuel concerns of a global economic slowdown and weigh on over $600 billion worth of mid- and longer-term securities.

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The all-in yield of the Bloomberg Canada Aggregate Provincial Index reached 4.33 per cent on Tuesday, the highest since November 2008, weeks after the failure of Lehman Brothers Holdings Inc. roiled financial markets. The credit spread, or the extra yield over Canada federal government securities, reached 76.8 basis points, the widest in more than two years.

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The cost to issue debt is rising even as provinces reported $200 billion of better-than-expected revenues over the three-year fiscal period ending March 31, 2023, according to data compiled by National Bank of Canada, on the back of the reopening after the COVID-19 lockdowns. Spreads are widening amid some investor and analyst expectations that the negative effects of inflation — including higher wage bills and slowing household spending — will start to impact provincial coffers.

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“Revenue windfalls at both federal and provincial levels should be saved,” the International Monetary Fund said in its Canadian mission’s annual statement released Wednesday. “While some space could be made for limited and highly targeted programs to buffer vulnerable households from high fuel and food prices, more generalized spending increases should be avoided so as not to undercut monetary policy.”

For context, Ontario’s 2022-2023 budget projected its borrowing costs for the fiscal year at 3.6 per cent, according to its website. The yield curve of the world’s largest sub-sovereign debt issuer runs between around 4.02 per cent for the five-year and about 4.5 per cent for 20 years, according to Bloomberg data.

Even as borrowing costs run higher than was projected early this year, provinces are taking advantage of the inversion of the Canadian government yield curve, the benchmark used to price bonds, to raise cash via long-term bonds.

Quebec plans to issue new bond maturing in December 2055 after its existing bond due in two years “reached an optimal size of $11.5 billion,” a spokeswoman for the province’s government said in an email Wednesday confirming a Bloomberg News report.


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