The Canadian government plans to issue its first euro-denominated global bond in about a decade, although the amount and its duration remain uncertain, the Bank of Canada said today.
This would only be the second foreign-debt denominated bond issue by the government since early 2001. A $3-billion (U.S.) five-year bond was issued in the fall.
"The sudden return to deficits in Canada has made for a natural catalyst, and has encouraged a return to foreign-denominated issuance in an effort to keep foreigners familiar with (and thus receptive to) the Canadian product," said Eric Lascelles, chief economics and rate strategist with TD Securities Inc.
The timing of the issuance will take advantage of Canada's high credit standing in the world as evidenced by the strength in the Canadian dollar at a time when several European states are struggling financially, he said. The issuance will also have a limited effect on the foreign exchange markets because the government has said it will keep the euros paid to buy the bonds.
Foreign debt held by the Canada had shrunk to a negligible amount before the latest U.S. issue from an average $7-billion to $10-billion between 2005 and 2008. The balance of outstanding foreign debt had decreased because of bond redemptions at a time Canada was running persistent fiscal surpluses.
"The explicit purpose of the auction is to bolster Canada's foreign exchange reserves, just as the purpose of the U.S. dollar auction was to bolster U.S.-dollar reserves and meet U.S.-denominated International Monetary Fund obligations," Mr. Lascelles said.
The odds of a foreign exchange intervention by the Bank of Canada to temper the strength in the loonie are reduced as a result of the proposed issue, which will add to the foreign exchange reserves, Mr. Lascelles said. The reserves would naturally be bolstered if Canada were to intervene in the markets by selling Canadian dollars.
"This latest auction announcement .... should be viewed in the context of the entire developed world, which is in the process of generally ramping up the size of its foreign reserves and subtly shifting away from the U.S. dollar," he said.
"We project that after the anticipated auction, Canada will have about 52 per cent of its reserves in U.S. dollars and 47 per cent in euros."