Investors mop up Canada federal, provincial debt

*Canadian federal debt issuance has probably peaked

*Provincial debt issuance ahead of schedule

*Canadian deficits are tiny compared with U.S. ones

By Jennifer Kwan

TORONTO, June 10 (Reuters) - Even with a record deficit, Canadian federal debt issues have probably peaked -- in stark contrast to the situation in the United States -- and provinces are also ahead of schedule in issuing new debt, according to a report released on Wednesday.

The CIBC World Markets report, "Meeting Canada's Fiscal Challenge," noted that the Canadian government is actually issuing debt less quickly than it was a year ago, while the United States is accelerating the supply of Treasury debt.

"The speaks to the outperformance that we're seeing in the Canadian bond market versus the U.S. That speaks to one of the fundamental differences between Canada and the U.S.," said report author Warren Lovely, a senior economist at the bank.

"It's a sign of Canada's superior fiscal position."

Lovely also noted lower take-up of Ottawa's Insured Mortgage Purchase Program, which was the federal government's primary answer last year to pumping liquidity into the banking sector amid the global financial crisis.

"As a result, our federal government doesn't need to borrow nearly as much," he said.

The federal government recently conceded that the economy would take longer to recover than it had expected, and it now expects a record budget deficit of more than C$50 billion ($45 billion) this tax year, up from a January estimate of C$33.7 billion.

That amounts to just above 3 percent of gross domestic product, while the estimated $1.8 trillion U.S. budget gap is equivalent to nearly 13 percent of GDP, the report said.

Ontario, Canada's most populous province, has also revised deficit projections higher, reflecting its share of a bailout of the auto sector. It expects a shortfall of C$18.5 billion for 2009-10, up some C$4.5 billion from previous forecasts.

But the combined provincial/federal deficit of C$80 billion falls short of the aggregate deficit posted after the early 1990s recession, and demand for Canadian debt remains strong.

"Strong investor demand within Canada and abroad (is enabling a surge of provincial issuance that has many governments ahead of their current borrowing program," he said.

Lovely said greater-than-expected economic weakness was now starting to be reflected in fiscal projections, but delays to changing projections was hardly the fault of the officials involved. "It's just that the economy has come off the rails much faster than anyone really would've anticipated," he said. ($1=$1.11 Canadian) (Reporting by Jennifer Kwan; editing by Janet Guttsman)