Invesco’s yield hunt leads to provincial, municipal debt

Canada’s growing $1 trillion of provincial and municipal debt may be a worry for taxpayers after the pandemic, but for global investors it’s a rare high- quality pocket of bond markets to mine for extra yield over similarly-rated securities, says Invesco.

“When you think about governments in Canada, the opportunity we think is in provincial and municipal debt,” said Avi Hooper, a senior portfolio manager at Invesco, which has $1.2 trillion under management. “Provincial debt in particular, because it’s grown so much, should be seen by global investors as an investable opportunity.”

Canada’s provinces and territories had $ 941 billion of securities outstanding at the end of June, up from $857 billion at the end of last year, while local government debt rose to $ 49.7 billion from $48.6 billion, according to federal government data. Supply is set to rise further as policy- makers move to fund historically robust borrowing plans to counter consequences of the pandemic.

Securities from the largest provinces such as British Columbia, Ontario or Quebec, as well as those from the biggest cities like Toronto or Montreal or the Municipal Finance Authority of British Columbia are the most liquid.

“A lot of global investors have been doing that,” said Hooper in a telephone interview. “But we think that’s increasingly — when we look into next year — the sort of opportunities that we think investors could look at.”

Top- rated British Columbia’s $ 5.4 billion of bonds due 2050 were quoted Monday at an equivalent spread of about 66 basis points over German government securities, according to data compiled by Bloomberg. That’s compares with a risk premium of just about 57 basis points for France’s 18.7 billion euros of 0.75- percent bonds due in 2052. The European nation holds the second- highest investment- grade rating by Fitch Ratings, and is graded one step lower by Moody’s Investors Service.

In addition to the extra yield, the performance of the loonie versus other developed country currencies may provide an additional source of the return, said Hooper, citing factors including the country’s political and economic stability.

“There’s definitely a fluidity between the policies being enacted within Canada, and our expectation is that leads to a quicker economic recovery than we might see in other parts of the world.”