Ontario going dark in bond market, sets up slew of fall sales

Credit markets might not be prepared for increased provincial credit supply, analyst says

One of the world’s biggest subsovereign borrowers has gone quiet in the debt market. The province of Ontario hasn’t sold bonds since June 1, a few days ahead of an election that ended 15 years of Liberal Party rule. This 70-day drought is almost a month longer than the pause that followed Ontario’s prior change in 2003, ac- cording to National Bank of Canada.

The result will be a flood of sales from Ontario in the fall, said Ryan Goulding, a fixed-income analyst at Vancouverbased asset manager Leith Wheeler Investment Counsel Ltd.

“We could end up with a significant amount of provincial credit supply in the next couple months that I really don’t think that credit markets are prepared for,” he said.

It’s been a rough year for Canadian bonds as a whole as four interest rate increases by the Bank of Canada since the middle of 2017 pushed short-term yields up to the highest in almost a decade. Ontario’s bonds have lagged provincial peers.

The province’s debt fell 0.9 per cent this year, lagging a Bloomberg Barclays index covering Canadian local authorities, which is down 0.7 per cent. Federal government bonds have dropped 0.1per cent in the same period, while corporate bonds returned 0.2 per cent.

Provincial spreads have been gradually tightening since the end of June to reach an average of 62 basis points over federal bonds on Thursday, down six basis points from this year’s high in April, according to the provincial bond index, in which Ontario accounts for a 39.5 per cent weight.

Ontario sold $750 million of securities maturing in 2049 in its latest foray into the domestic debt market. That helped it complete 37 per cent of its longterm borrowing program of $31.7 billion for the 2018-19 fiscal year ending March 31, according to the website of the Ontario Financing Authority.