March 19, 2019 / 8:51 PM / 5 months ago

Canada sees 20 percent jump in bond issuance as deficit climbs

OTTAWA, March 19 (Reuters) - Canada said on Tuesday it would issue nearly 20 percent more bonds in the coming fiscal year to help the Liberal government fund its spending programs, ahead of an October election.

The federal budget, presented on Tuesday, projected the deficit would widen to C$19.8 billion ($14.86 billion) in 2019-20 from a forecast C$14.9 billion for the current fiscal year ending March 31.

To help finance the wider deficit and maturing bonds, Canada plans to issue C$119 billion of bonds in 2019-20, up from an estimated C$100 billion in 2018-19, the government’s Debt Management Strategy said.

Canada is one of the few countries with an undisputed triple-A credit rating, so its bonds are greatly sought after by international investors.

The stock of T-bills, the government’s other major funding vehicle, is projected to rise for a second straight year, to C$151 billion from the C$131 billion estimated at the end of 2018-19, the document said.

The greater stock of T-bills, which are often used as collateral for short-term borrowing in money markets, would enhance the liquidity of the sector.

Bond issuance has been C$100 billion or higher since the Liberal government’s first budget in 2016-17 as the Liberals ran deficits to boost Canada’s economy. Issuance was C$93 billion in 2015-16.

The Debt Management Strategy, which sets out the government’s borrowing plans for the coming fiscal year, was released with the federal budget.

Still, debt-to-GDP, the government’s preferred anchor for fiscal stability, is projected to decline to 30.7 percent in 2019-20 from 30.8 percent in the current fiscal year, with further declines seen through 2023-24.

Also, Canada’s borrowing costs have declined since October as the market shifted from expecting further rate hikes from the Bank of Canada, which has tightened 125 basis points since July 2017, to seeing potential for a rate cut as data showed a slowdown in the country’s economy.

The 10-year yield was trading on Tuesday at 1.725 percent, which is below the central bank’s policy rate of 1.75 percent and nearly its lowest since June 2017.

The number of 10-year auctions planned for the coming fiscal year was reduced to four from five, which could boost the size of each auction.

A cut in the number of planned real return bond auctions to three from four could shift some issuance to nominal bonds. Real return bonds have returns that are linked to inflation.

There were no plans to issue ultra-long bonds, which were last sold in 2017. ($1 = 1.3322 Canadian dollars) (Reporting by Fergal Smith; Editing by Denny Thomas and Peter Cooney)

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