One of the world’s biggest sub-sovereign borrowers has gone quiet in the debt market.
The province of Ontario hasn’t sold bonds since June 1, a few days ahead of an election that ended 15 years of Liberal Party rule. This 70-day drought is almost a month longer than the pause that followed Ontario’s prior change in 2003, according to National Bank of Canada. The result will be a flood of sales from Ontario in the fall that may weigh on performance, said Ryan Goulding, a fixed-income analyst at Vancouver-based asset manager Leith Wheeler Investment Counsel Ltd.
“Even with the break in issuance they are just back to being on pace, so no real panic there yet, but they certainly will need to start their regular issuance of roughly a deal a week,” said Goulding. “We could end up with a significant amount of provincial credit supply in the next couple months that I really don’t think that credit markets are prepared for.”
It’s been a rough year for Canadian bonds as a whole as four interest rate increases by the Bank of Canada since the middle of 2017 pushed short-term yields up to the highest in almost a decade. Ontario’s bonds have lagged provincial peers.
The province’s debt fell 0.9 per cent this year, lagging a Bloomberg Barclays index covering Canadian local authorities, which is down 0.7 per cent. Federal government bonds have dropped 0.1 per cent in the same period, while corporate bonds returned 0.2 per cent.
Provincial spreads have been gradually tightening since the end of June to reach an average of 62 basis points over federal bonds on Thursday, down six basis points from this year’s high reached in April, according to the provincial bond index, in which Ontario accounts for a 39.5-per-cent weight.
Goulding said Leith Wheeler is underweight Ontario and provincial bonds in general, arguing there’s more potential for spreads to move wider after the recent tightening that was supported by the lack of new debt supply.
Ontario sold $750-million of securities maturing in 2049 in its latest foray into the domestic debt market. That helped it complete 37 per cent of its long-term borrowing program of $31.7-billion for the 2018-19 fiscal year ending March 31, according to data on the website of the Ontario Financing Authority.
That means the province will need to borrow $20-billion over the next seven months, although that number could change as the new government may tweak the size of the borrowing target. It set up a commission to look into provincial finances and ordered an audit of spending under the previous administration. Ontario is also due to release a first-quarter update on its finances on or before Aug. 15.
“We are confident about the performance of Ontario bonds on the market,” the province’s Finance Ministry said in an emailed comment. “The government is committed to fiscal transparency and accountability and details about the province’s debt and borrowing programs are presented quarterly.”
Ontario is a “tremendously efficient issuer” and shouldn’t have trouble raising larger amounts in debt markets, said Warren Lovely, National Bank’s head of public sector research.
“I’m not losing a lot of sleep over Ontario’s ability to complete its borrowing program,” he said. “They have demonstrated the ability to raise significant amounts of money in domestic and international markets.”
In a show of strength from early February, when a plunge in equities and a spike in volatility rattled investors worldwide, the province priced a total of $4.15-billion of bonds in two separate transactions in the U.S. and Canadian debt markets on the same day.