MNI: Canada Finance Dept Cautioned on Big Long-Term Bond Sales

Canadian finance department staff late last year cautioned against outsized sales of long-term debt, a strategy the government backs as a way of making record deficits to tackle the pandemic more affordable, according to a briefing document obtained by MNI on Wednesday.

Lopsided sales of long-term debt could eventually strain other parts of the market, according to a 38-page briefing dated Dec. 22 for Deputy Minister Michael Sabia, who took over as the department's top official earlier that month. But four months later, Finance Minister Chrystia Freeland presented record deficits and a debt plan that talked of doubling the share of long-term bond sales.

"Over-issuing in long sectors would, over time, require substantial reductions or shutting down of short-term sectors, which could impair market well-functioning," said the briefing, part of an annual debt management strategy review that came during the longest gap without a full budget in Canadian history.

"The Bank of Canada currently expects rates to remain low until 2023, which suggests the Government can maintain its progressive approach to lock in more of its debt into long-term issuances. However, the debt strategy needs to remain flexible to adjust to any unexpected shocks," the report said. BOC Governor Tiff Macklem has since advanced guidance on a potential rate hike to the second half of 2022 from some time in 2023.

NEW STRATEGIC DIRECTION

Parts of the finance documents were blacked out citing exemptions to freedom of information law, including six entire pages and two paragraphs with titles about "locking in" more long-term debt. The exemptions relate to Canada's economic interests and advice to a minister or cabinet.

Freeland's predecessor Bill Morneau began a shift to longer-term bond sales saying that move would lock in record low interest rates, a view that has since been affirmed by Freeland and Prime Minister Justin Trudeau. The Liberal government has also pointed to Canada's strong finances before the pandemic and top marks from bond rating firms as evidence of a sound fiscal plan.

Minister Freeland's office and the finance department didn't immediately provide comments on the documents when requested earlier today by MNI.

The department's memo noted the previous annual debt strategy had already proposed record long-term bond sales, CAD106 billion of 10-year and 30-year securities. The government had also "provided strategic direction" to guide the plan for the 2021-22 fiscal year on "shifting issuances more toward long-term bonds," a potential re-opening of a 50-year security and selling the first ever green bond.

BUYERS REMAIN EAGER

Those options are largely being realized. The current strategy calls for doubling the share of annual long-term bond sales and raising the government's average term to maturity to a four-decade high. The strategy also said that if market conditions change for long-term debt, the government can shift back to treasury bills.

Investors have remained eager buyers. Global government bond yields including Canada's have been at or near historical lows during the pandemic as investors seek the safest assets, though rising recently on signs the U.S. Federal Reserve is prepared to talk about eventual tightening of monetary policy.

Some investors have expressed more concern that the BOC's QE program is buying up too much of the government debt stock, leaving overall supply too low rather than too high.