National Post (National Edition)
DO AS WE SAY, NOT AS WE DO
You can’t take advantage of low rates, but the government will.
Finance Minister Jim Flaherty may be cracking down on banks offering low rates to consumers, but his own government seems to be looking for the cheapest debt it can find.
In its Budget 2013, the government says it’s ready to pounce on “continued low historic rates” and is now assessing the potential of issuing bonds for 40 years — or even longer.
“As long-term interest rates remain near historic lows, it remains advantageous and productive for the government to continue to lock in additional longer-term funding,” the government says in the document.
Until now, the longest term for a federal government debt issue has been 30 years, but the provinces have been pushing the envelope with longer terms and now Ottawa is considering following their lead.
All this comes at a time when Mr. Flaherty has been pressing financial institutions not to get into so-called “mortgage wars” that would ultimately lead to lower rates for consumers.
Last week, Manulife Bank said it had reversed its decision to lower the rate on its five-year fixed-rate mortgage after talks with the Finance Department. Manulife had lowered the rate to 2.89% from 3.09%, before reversing itself following the government intervention.
But Ottawa itself seems to like what it sees in the longterm debt market. Just this month, New Brunswick issued $225 -million in debt at a 3.5% rate that doesn’t mature until June 3, 2065. Quebec issued debt last year that doesn’t mature until 2075.
“I think if they can go long and have guaranteed financing rates for 40 years, all the power to them,” said Doug Porter, chief economist with Bank of Montreal. He noted governments wouldn’t be able to issue the debt without the demand.
“There are a lot of natural buyers of very long-term assets like pension funds or insurance companies,” he said. “Ultimately, when you can lock in at today’s rates for that long, that’s a good thing.”
Finance officials indicated the yield curve is almost inverting — longer term rates actually being cheaper than shorter term. France has issued 50-year debt and Mexico has gone as far as 100 years out.
For 2013-2014, the government is sticking to 10-year and 30-year issues and will indicate to the market during the coming fiscal year whether it will go longer.
The only risk might be
if rates fall further, a possibility but not one most economists believe will happen.
“It’s an exceedingly unusual world we live in,” said Mr. Porter. “My only concern is if the global environment changes in a way we can’t foresee. In other words, we could go through a Japanese deflation. Not impossible. We can’t rule that out.”
Gregory Thomas, federal director of the Canadian Taxpayers Federation, wonders what it says about Canada and its future debt.
“Canada is a similar economy to Norway, Australia. We shouldn’t be in debt in 2013, let alone 2015,” said Mr. Thomas. “If the federal government is still in debt in 2053, there will have been some gross economic mismanagement between now and then.”