Borrowing costs

Canadian provincial borrowing costs hit highest level since 2008

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(Bloomberg) — Borrowing costs for Canadian provinces have hit their highest level in more than a decade as rising interest rate expectations fuel fears of a global economic slowdown and weigh on over C$600 billion ($434.9 billion) of medium- and long-term securities.

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The overall return of the Bloomberg Canada Aggregate Provincial Index hit 4.33% on Tuesday, the highest since November 2008, weeks after the bankruptcy of Lehman Brothers Holdings Inc. rattled financial markets. The credit spread, or the extra yield over Canadian federal government securities, reached 76.8 basis points, the widest in more than two years.

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The cost of issuing debt is rising even as provinces reported C$200 billion in revenue above expectations in the three-year fiscal period ending March 31, 2023, according to data compiled by the National Bank of Canada. Canada, following the reopening after the confinements linked to Covid-19. Spreads are widening as some investors and analysts expect the negative effects of inflation, including rising payrolls and slowing household spending, to start hitting provincial coffers.

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“Exceptional revenue at the federal and provincial levels should be spared,” the International Monetary Fund said in its Canadian mission’s annual statement released on Wednesday. “While some room may be reserved for limited and highly targeted programs to protect vulnerable households from high fuel and food prices, more generalized spending increases should be avoided so as not to undermine monetary policy” .

For context, Ontario’s 2022-23 budget projected its borrowing costs for the year at 3.6%, according to its website. The yield curve for the world’s largest issuer of sub-sovereign debt ranges from around 4.02% for 5-year to around 4.5% for 20-year, according to Bloomberg data.

Even though borrowing costs are higher than expected at the start of this year, provinces are taking advantage of the inverted Government of Canada yield curve, the benchmark used to price bonds, to raise funds through long-term bonds.

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

(Adds IMF statement and Quebec bond sale plans.)