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The central bank – seen here in Ottawa on May 16, 2019 – is aiming to buy bonds based on a sector-by-sector breakdown of corporate bonds already outstanding.

The Canadian Press

The Bank of Canada is targeting around half of its $10-billion corporate bond buying program toward financial firms and energy companies, as it looks to support the investment-grade bond market and bring down the cost of financing for companies.

The program, which begins on May 26, will see the Bank of Canada buy corporate bonds on the secondary market, with TD Asset Management acting as its broker. The goal is to add liquidity to the market, narrowing the spread between corporate and government bonds and making it easier for companies to issue new debt.

There have been few details about the initiative since it was announced in mid-April. On Tuesday, the central bank released additional information about how it intends to run the program, including the model portfolio it will use to guide purchasing decisions.

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The central bank is aiming to buy bonds based on a sector-by-sector breakdown of corporate bonds already outstanding. That means it is targeting 28.3 per cent of purchases for financial institution bonds and 20.3 per cent for energy company bonds. Real estate and communications companies are the next largest targets, making up 15.4 per cent and 14.3 per cent of the model portfolio, respectively, followed by industrial and infrastructure companies.

It did acknowledge, however, that its acquisitions will likely differ from the model portfolio. “Actual holdings will depend on market conditions and what bonds are offered to the Bank through the tender offer process,” the Bank of Canada said in a statement.

To be eligible, a bond needs to have a minimum credit rating of BBB and have a remaining maturity of less than five years. Ninety-seven companies currently have debt that qualifies for the program.

The bank added on Tuesday that bonds that are downgraded to BBB-minus after April 15 will still be eligible. This could be important for energy companies, which face credit downgrades amid low oil prices.

In its annual Financial System Review published last week, the Bank of Canada warned that “the risk of credit downgrades is intensifying refinancing risks," and pointed to the energy sector as an area of concern.

“The energy sector has the most refinancing needs over the next six months ($6-billion) and faces the most potential downgrades. This sector’s ability to secure refinancing will be particularly tested with low oil prices,” the bank said.

In addition to long-awaited information about the corporate bond program, the central bank also released additional details on Tuesday about its $50-billion provincial bond program, which launched May 7.

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As with the corporate bond program, the bank is using a model portfolio to allocate purchases between different provinces and territories, this time based on a combination of bonds outstanding and the province’s or territory’s contribution to gross domestic product. Ontario and Quebec make up the largest share of the model portfolio, although the GDP-weighting means the portfolio leans toward Western provinces.

“B.C. and Alberta have larger than anticipated shares in the program," Andrew Kelvin, chief Canada strategist with TD Securities, wrote in a note on Tuesday.

“The [provincial bond] reference portfolio has a bit of a skew towards western names, reflecting their larger shares of national GDP relative to bonds outstanding,” he wrote.

To date, the bank has acquired $726-million worth of provincial bonds as part of the program, with BMO Global Asset Management acting as its broker.

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