Foreign investors bought a record amount of Canadian debt last year, helping absorb the deluge of government bonds issued to finance pandemic support programs.
Some analysts now hope this international appetite for Canadian debt will help stabilize the bond market as the Bank of Canada pares its quantitative easing program and slows its pace of government bond buying over the coming year.
Non-resident investors bought $141.1-billion worth of Canadian debt in 2020, according to data published by Statistics Canada on Tuesday. That’s over $100-billion more than what was sold to foreign investors in 2019.
The outsized buying is partly the result of more bonds hitting the market: Federal and provincial governments sold an unprecedented amount of debt to fund pandemic relief spending, while corporate issuers took advantage of low rates to stabilize their balance sheets and refinance existing debt.
At the same time, Canadian government bonds performed well compared with other sovereign debt.
“Bond supply and international demand sort of goes hand in glove,” said Warren Lovely, National Bank of Canada’s chief rates and public sector strategist.
“The key issue is what level of yield have we needed to achieve to attract that demand? What’s encouraging is that even though bond issuance is really at unheard of levels, we have been able to procure significant and sustained international demand without having to give these bonds away,” Mr. Lovely said in an interview.
Federal debt, which accounted for $75.6-billion worth of the international sales, was in particularly high demand last spring as investors looked for a relatively safe place to park their cash.
“In the worst of the crisis, April and May, you saw foreign investors were scooping up federal government debt at an incredible pace,” Royce Mendes, senior economist at CIBC Capital Markets, said in an interview. “What that tells me is that much like 2008, 2009, when the world is in crisis, global investors want to own Canadian government bonds.”
Foreign demand for Canadian debt has coincided with strong domestic demand, as well as demand from the Bank of Canada, which is buying $4-billion worth of federal government bonds each week as part of its quantitative easing (QE) program. The goal of the QE program is to bid up the price of government bonds to lower their yield (bond prices and yields move in opposite directions), which makes borrowing cheaper across the economy.
Bank of Canada watchers expect the central bank to begin slowing its pace of weekly purchases later this spring or over the summer. The key question is whether this “tapering” will cause government bond yields to jump as demand from the Bank of Canada declines. Here, foreign demand for Government of Canada debt could play a role in stabilizing the market and keeping rates low.
“The fact of the matter is we continue to have an underlying amount of domestic investor demand, alongside international appetite for our paper, that should allow the Bank of Canada to gradually step away from the market without upsetting the apple cart,” Mr. Lovely said.
The key thing will be ensuring foreign investors remain interested in Canadian government debt. Despite a dramatic rise in Canada’s debt-to-GDP ratio, “Canada’s fiscal situation still looks very attractive to foreign investors,” Mr. Mendes said.
But global investors will be watching the coming federal budget closely for a “fiscal anchor” and other signs that the increase in spending seen in 2020 will not be permanent.
“The way the market is interpreting this is that this pile of debt that has been accumulated is one-time, pandemic-related spending, and this is not going to be some structural fiscal deficit,” Mr. Mendes said.
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