Alberta's got fiscal problems? Bond investors don't seem to mind much.
Despite all the rhetoric about the government's finances in such a rough environment for Canadian crude, Alberta's 10-year bonds still trade at the tightest spread to the federal benchmark, and they haven't seen a drastic selloff since Premier Alison Redford sounded the alarm on her provincial coffers.
If Alberta tried to issue new 10-year bonds today, indicative spreads suggest their spread to Canada's would be about 75 basis points. British Columbia's would be a little bit larger, and Ontario's would be about 10 basis points higher than Alberta's.
There are a few factors at play here. For the longest time Alberta wasn't active in the bond markets and only started issuing again a few years back. For that reason, there's a limited supply of its bonds, and that prevents people from shorting because they're scared of not being able to cover their positions.
Alberta also remains AAA-rated, the only province in Canada to garner this award, which is a big deal in the bond world.
But no doubt there's reason to be worried. The province said its rainy day Heritage Fund reserves are falling, and Canadian energy prices are indeed deeply discounted. Ontario is also showing a bit of promise these days, recently announcing that its deficit is $2.9-billion lower than forecast one year ago.
In fact, bond investors' preference for Alberta's debt over Ontario's hasn't been as strong in the past few weeks. Back in September Alberta's 10-year spreads were about 22 basis points tighter than Ontario's. Today they're only about 10 basis points tighter, according to CIBC World Markets.
But the fact remains investors are happy to own Alberta bonds, and that means the government can borrow easily if it so pleases.
(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
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