Long-End of Canadian Yield Curve Sent Soaring on Plan to Issue Record Debt

Canada’s federal government plans to issue a a record level of long-term debt in 2021, despite the decline of financing requirements.

According to the latest budget documents, the federal government is expected to issue a record $121 billion worth of bonds slated to mature in 10 years or more, marking a significant increase from the $107 billion that were issued during the 2020 fiscal year ending on March 31. The latest plan comes despite an expected bond issuance decrease of almost $88 billion to $286 billion, echoing a declining deficit and ongoing economic rebound.

The latest announcement caused yields on long-term debt to rise, as investors began to take into account the new wave of supply. The 30-year benchmark yield briefly surged above 2.07% after details of the Liberal government’s budget were revealed. Similarly, the 10-year yield soared to the highest in over two weeks.

The transition towards longer-term bonds is one of the Liberal party’s latest moves to lock in interest rates at their current lows, in support of soaring government debt. The decision also comes amid the Bank of Canada’s plans to reduce the pace of its purchases amid a strengthening economic recovery. It is expected that over 40% of the upcoming bond issuance target maturities that exceed 10 years, an increase from 29% and 15% in 2020 and 2019, respectively.

The budget document also revealed the government’s plans to reopen the 50-year issue. Within the next three years, the government’s strategy will raise the average duration to maturity from a historical average of 5.9 years to approximately 8 years. The Liberal government also addressed its debt management plan, in which it will raise $4 billion from the issuance of ultra-long bonds, as well as $5 billion from the issuance of green bonds— a first of its kind.

Information for this briefing was found via the Government of Canada. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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