Quebec bond yields approach parity with Ontario

Quebec is reaping the rewards of its improved finances in the bond market, lowering its long-term borrowing costs to near parity with Ontario for the first time.

The spread, or difference in yields, between Ontario’s 10-year bond maturing in June 2026 and Quebec’s securities due in September that year has dropped to less than one basis point. The spread on the two provinces’ securities due in 2045 was almost equal last month as well, down from as high as 19 basis points in 2014. In U.S. dollar-denominated bonds, the yield on Quebec and Ontario bonds maturing in 2026 was nearly even at 2.74 per cent on Wednesday.

Quebec’s pledge to post a third-straight year of surpluses and reduce borrowing in its 2017-18 budget helped lower the yield premium it offers investors, bringing it in line with its richer and more populous neighbour.

“Quebec is definitely doing the right thing,” Alex Schwiersch, who helps manage about $3 billion in fixed-income assets at Invesco Canada, said by phone. “There is potential for Quebec bonds to trade through Ontario.”

Even though both Canadian provinces enjoy the same credit grade from the three major ratings companies, investors have always demanded a slightly higher yield when lending to Quebec. That generally reflected its higher debt load relative to the size of its economy, and the province’s budget deficits.

The province is now forecasting five more years of balanced budgets, giving it room to set aside more money for debt reduction. Quebec expects to cut its debt to 52 per cent of GDP, from an expected 52.7 per cent at the end of last fiscal year. It plans to borrow $11.3 billion this year, compared with $22.7 billion in the year that ended March 31. “The reality is that we have just tabled not just a balanced budget, but a balanced fiscal framework for the next five years, and not many provinces do that,” Quebec Finance Minister Carlos Leitao said in an interview with Bloomberg TV Canada on March 29. “That does justify our very solid performance by all” our bond issues.

Quebec has also rewarded its bondholders more generously than Ontario this year as its securities have returned two per cent, compared with Ontario’s 1.8 per cent gain, according to Bank of America Corp. index data.