Provincial borrowing lowest since 2008

Debt issuance by Canada’s provinces declined to the lowest level in the third quarter since the collapse of global financial markets as local officials make progress on promises to close record deficits.

Canadian governments and agencies issued $19.3 billion of bonds since June, the least in any quarter since the collapse of Lehman Brothers Holdings Inc. in September 2008, when issuance slowed to $14.3 billion, according to data compiled by Bloomberg.

Provincial debt handed investors a gain of 1.4 per cent this quarter, down from 5.9 per cent a year earlier, Bank of America Merrill Lynch index data show.

Provincial governments are wrestling with record deficits as reduced growth forecasts and rising costs jeopardize revenue assumptions. Ontario revised its deficit projection this month down to $13 billion from the $15 billion forecast in March.

Ontario Finance Minister Dwight Duncan said in Calgary Thursday the province’s borrowing program for this year is smaller than he originally anticipated with the province ahead of plan on eliminating the nation’s biggest shortfall, in part because of reduced spending.

“Provincial governments in Canada are working on getting their fiscal houses in order,” Heather McOuatt, co-manager of the Bissett Bond Fund for Bissett Investment Management in Calgary, said in a phone interview. McOuatt, who helps oversee $2.7 billion in fixed-income assets, said one-third of the fund’s holdings are in provincial debt, including Ontario.

Provincial issuers including Canada Housing Trust borrowed $104 billion in 2011, the most in one year since Bloomberg started compiling the data as of 1999, in an effort to prefund maturing debt, aided by lower borrowing costs.

Last year, provincial debt gained 11.6 per cent, the most since 1997.

Provinces are “very conscious of the fiscal situation — they’ve gotten ahead of that by prefunding,” said Jonathan Lemco, principal and senior sovereign-debt analyst at Valley Forge, Penn.-based Vanguard Group Inc., which oversees about $1.9 trillion in assets. “They are trying to reduce their debt loads.”

Lemco, a native of Montreal, said he favours the debt of Quebec and has a neutral weighting in Ontario’s debt.

The 1.4 per cent gain by provincial debt this quarter compares with a return of 0.3 per cent for federal government bonds, while Canadian corporate debt returned 2.2 per cent, Bank of America Merrill Lynch index data show. Relative yields of Ontario’s bonds fell to an average 84 basis points from 96 basis points on June 30, the index shows.

Elsewhere in credit markets, Canada said it will add an extra auction of 10-year and 30-year bonds by the end of March to take advantage of interest rates at almost record lows.

The size of the bond auctions may also be increased depending on market conditions, the Bank of Canada, which handles debt-market operations for the federal government, said on its website Thursday. Offers to buy 30-year bonds back from investors for cash will be halted until end of the fiscal year, the central bank said.

The benchmark bond yield touched 1.57 per cent on July 23, the lowest level since at least 1950, according to Bloomberg and Bank of Canada data.