BoC buys $436.5M in provincial debt
Bank is trying to restore liquidity to financial markets post-COVID-19
The Bank of Canada is speeding up its purchases of provincial bonds as all-in yields for the securities rise to the highest in more than eight months after investors positioned themselves for an economic recovery.
The central bank bought $436.5 million of bonds via its Provincial Bond Purchase Program on Tuesday, the most since the start of that effort in May, according to its website. It had planned to buy a list of 16 securities with maturities between March 2022 and September 2030, according to people familiar with a list of securities distributed to bond dealers.
“The backup in yields is reflecting the expectation of reflation,” said Maria Berlettano, head of Canadian government credit strategy at CIBC Capital Markets.
Bank of Canada announced a plan to purchase as much as $50 billion of provincial bonds early last year as part of a number of measures meant to restore liquidity to the country’s financial markets after the COVID-19 pandemic caused risk premiums to widen to record levels.
The all-in yield investors demand to hold a Canadian dollar provincial bond rose to one per cent, the highest since early June, according to Bloomberg Barclays indexes, as the Canadian government yield curve steepened with buyers betting on rising inflation as the economic recovery gains traction.
The risk premium, or the extra yield over federal government securities, is around 37 basis points, below the average of 41 basis points over the last six months.
Annual inflation in Canada accelerated to one per cent last month, the highest in almost a year, Statistics Canada reported Wednesday in Ottawa.
That trend will probably continue to accelerate in coming months and may rise to three per cent or higher in April, said Stephen Brown, senior Canada economist at Capital Economics in a note Thursday. Canadian government yields, the benchmark used to price provincial bonds, rose in recent days and the five-year touched its highest level since April on Wednesday.
Borrowing costs are picking up as some provinces such as Ontario, the world’s largest subsovereign debt issuer, expect to continue running deficits in coming years, keeping issuance at historically high levels. As of last week, the central bank held $16.9 billion of provincial bonds, or over a third of the program, which is set to expire in early May.