Canada is on an epic borrowing spree, and that’s not good news for anyone else. The Government of Canada (GoC) new direct and guaranteed bond issuance made a big jump in March. It was the biggest monthly issuance of GoC debt since 2021, and it came ahead of the latest budget’s new proposed spending—while the economy is supposedly doing well. That’s going to be a problem.
Government of Canada Bonds
GoC bonds are how the Federal government raises capital to fund spending not covered by revenue. By itself, it’s not good or bad—even new debt, especially if there’s a market for it and the cost is lower than inflation. However, the laws of supply and demand mean it’s not always an ideal time to borrow.
If bond issuance (new borrowing) exceeds capital (lenders), the cost of borrowing rises. Not just for the GoC, but Government bonds influence all borrowing costs. Competition means the GoC will compete with other forms of credit tied to fixed income, such as fixed-rate mortgages and corporate debt. This can be problematic, especially at a time when borrowing is already expensive and Canada is struggling to attract investment.
Now, onto the data.
Canada Issues The Most New Monthly Bond Debts Since 2021
Canada’s government is tapping bond markets for debt at an unusually rapid pace. New bond issuance reached $24.5 billion in March, an increase of 22% from a month prior. It was the biggest issuance of GoC bonds since 2021, and last month was prior to the budget.
Almost Half of Newly Issued Bonds Replaced Retiring Debt
A good chunk of the issuance was to replace retired debt, or maturing bonds. The GoC retired $12.5 billion in debt in March, leaving a net increase of $11.9 billion for the period. While some only view the net increase as an issue worth nothing, the debt being retired is also occurring at a time when rates are elevated. That means the replaced debt may be at higher interest costs, a problem that Canada hasn’t seen in nearly 30-years up to the pandemic.
Canada’s Government Is Already Back To Adding Debt At A Rapid Rate
Looking at the 12-month average, the monster surge to seize the opportunity of borrowing at low rates is obvious. The idea was originally pitched as temporary debt that would be retired over time. Negative growth was briefly entertained, but followed by new debt issuance that wiped almost any of that progress.
Canadian Government Has Returned To A Borrowing Spree
The 12-month average net change in issuance of Government of Canada (GoC) bonds. Positive numbers mean new debt is accumulating.
Source: Bank of Canada; Better Dwelling.
The latest budget also proposes a significant increase in spending, likely to drive more bond issuance. At a time when investors are fleeing loonie exposure, this will apply upward pressure on borrowing costs. Canada is expected to lead on rate cuts to stimulate its economy, and lower some forms of debt financing. However, that would also be a factor working against attracting investors to more loonie exposure, not quite producing the same flood of cheap credit seen pre-2020.
