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Canada taps global demand for AAA-rated debt

Finance Minister Jim Flaherty said Thursday he is adjusting the government’s schedule of bond auctions to include more 10- and 30-year debt.


Ottawa is taking advantage of Canada's new status as a haven for international investors by increasing its issuance of longer term debt, locking in rock-bottom financing costs for decades to come.

Finance Minister Jim Flaherty said Thursday he is adjusting the government's schedule of bond auctions to include more 10- and 30-year debt, and cancelling plans to sell shorter-term securities.

The reason is that the demand for the longer term debt issued by the dwindling number of governments with triple-A credit ratings has shot through the roof, as investors seek shelter amid a shaky outlook for the global economy. That demand pushes down the yield high-quality issuers such as Canada must pay to borrow the money they need to finance their operations.

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"This is a very, very smart move," Ian Pollick, a fixed income strategist at RBC Dominion Securities Inc., said from Toronto. "It really locks in some low-cost, stable funding."

The Bank of Canada manages the federal government's debt auctions. The central bank said Thursday it would add additional sales of 10- and 30-year bonds in the fiscal year that ends March 31, 2013. The government will issue less debt with durations of two and three years.

Neither the Finance Department nor the Bank of Canada would say how much debt they intended to sell in the new auctions. Department spokesman Jack Aubry said the government's total debt issuance in the current fiscal year was expected to "remain largely unchanged" from the $97-billion announced at the time of the budget.

The yield on Canadian 30-year bonds closed at 2.3 per cent on Wednesday; the yield on 10-year debt was about 1.7 per cent. By comparison, the average yield on 10-year Canadian bonds over the previous decade was 2.24 per cent as of Wednesday, according to the Bank of Canada.

Since 2007, international investors have purchased $280-billion in bonds denominated in Canadian dollars, compared with $65-billion over the previous five years, according to CIBC World Markets.

That demand is putting upward pressure on the dollar, to the chagrin of exporters. But it's also driving down governments' borrowing costs. According to Mr. Pollick, every $1-billion in inward capital flows lowers the yield on 10-year debt by 3.5 basis points.

"Given this environment, it is both advantageous and prudent for our government to lock in additional long-term funding," Mr. Flaherty said in a statement. "These adjustments help us meet our goal of raising stable and low-cost funding to meet the financial needs of our government to best serve taxpayers."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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