Brakes were put on new ultra-long bond offer

Ottawa holds off on issuing fresh 50-year debt

Officials discouraged Canada’s finance minister from selling further ultra-long maturity debt, and potentially locking in near-record low borrowing costs for a generation, just ahead of a surge in yields spurred by the election of U.S. President Donald Trump.

Bill Morneau was told interest-rate forecasts had been “consistently too high” and a weak global economy suggested low rates could persist, according to an Oct. 25 briefing obtained by Bloomberg through a request for records under the Access to Information Act. The report also suggested savings from the first $3.5 billion of 50-year government bonds sold in 2014 had been disappointing, though some of those findings were redacted.

The briefing shows officials were cautious about the long-term debt program, even as the wheels were in motion to issue more. An Oct. 11 announcement from the Bank of Canada, which manages the government’s debt sales, laid out rules for a potential new ultra-long auction, and an earlier annual debt strategy said another one could happen if market conditions were right. Since then the prospects for a sale have worsened considerably.

“There is some demand for these bonds, but not with the same eagerness as if interest rates were falling and it seemed like they would continue to fall,” said Aubrey Basdeo at BlackRock Inc.

Officials suggested the case for issuing long or ultralong debt was less compelling in a world where low interest rates could persist. Lower yields across different maturities since the first sales of 50-year debt made the government’s total borrowing program cheaper, the memo said. Longer-term bonds are typically more expensive to sell to investors than shorter-dated securities due to greater interest-rate risk and potential for default.

The yield on the government’s 2.75-per-cent bond due 2064 has surged 85 basis points to 2.5 per cent since the start of October and 30-year bonds about the same amount, part of a trans-border shift as expectations for faster growth and inflation in the U.S. prompt investors to abandon the relative safety of bonds in favour of higher-risk assets.

“It’s more of a flesh wound as opposed to a serious injury, sale if conditions favoured it.

There is also a natural demand for ultra-long maturity debt from buyers who need to match against liabilities due decades from now. “It’s a specialty niche in the marketplace,” said Chris Kresic, a portfolio manager in Toronto at Jarislowsky Fraser Ltd. He helps oversee a total of $38 billion in assets. “There are obviously pension plans and insurance companies that will look to hedge liabilities.”

“The Government continues to monitor the evolving market conditions and remain open to the possibility of issuing” ultra-long maturity bonds, finance department spokesman Jack Aubry wrote in emailed comments about the program. The October ultra-long auction rules announcement “didn’t constitute a commitment to issue, which remains a tactical decision.”

Historically low yields on global bonds worldwide have led Canada and other governments, including South Korea and Italy, to sell 50-year debt, betting they will save money over time when borrowing costs rise.

Finance officials signalled to Morneau that the 2014 sale of 50-year bonds didn’t live up to expectations. The sale was “originally expected to result in savings for the government based on interest rate forecasts at the time,” the department’s updated October report on debt strategy said. The next paragraph was blanked out, beginning again stating that “the lower rate environment that materialized since 2014 has resulted in significantly lower debt charges for the overall debt program.”

The latest monthly budget figures showed the costs of carrying Canada’s debt shrank to $18.5 billion between April and December of last year, from $19.8 billion in the same period in 2016.

Canada’s borrowing costs are also being held down by its status as one of just 10 countries with triple-A grades from the three leading debt-rating companies.