Ottawa cancels ultra-long bond sales as fiscal balance improves

‘They don’t have to spend this because the tax bills are improving quickly’

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Canada’s government has canceled ultra-long bond issuance because it believes its credit needs are declining, while its balance sheet is improving due to rising commodities and higher inflation.

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The government said Thursday that the bond, which was issued in 2014 as a 50-year note due to mature on December 1, 2064, would cancel its announced auction on June 16, surprising some fixed-income analysts.

Andy Nasr, chief investment officer at Scotia Wealth Management, said consultations late last year to gauge demand for the product showed some concerns about available liquidity. Faced with economic uncertainty in the coming quarters, he said the wait-and-see attitude to suspend the bond now and possibly bring it back later, if warranted, makes sense to him.

“Given that fiscal balances had improved and we have a lot more uncertainty about where short-term versus long-term interest rates will go, it was probably a prudent decision to delay a bit and then wait and see where everything rests,” he said. he.

Nasr said governments will try to lock in funding when interest rates approach historic lows. Before the pandemic, overnight interest rates were below two percent since the global financial crisis in 2008 prompted central banks to cut interest rates.

Other governments are also flirting with bonds with maturities of 30, 50 and 100 years. Last January, for example, Germany raised two billion euros with a 100-year issue and France followed with a 50-year bond.

Ultralong bonds also took off in Latin America, as Mexico offered a 50-year bond in 2021, and Argentina managed to raise $2.75 billion in a 100-year bond in 2017. a return of 7.9 percent, according to the Wall. Street news.

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“Because interest rates were zero or near zero, they were thought to be well below reasonable long-term inflation expectations or the economy’s output potential, so it made sense to have that funding for a very long time,” Nasr said.

He added that the economy is now in a different inflationary regime and central banks are raising rates, creating more uncertainty about what the normalized cost of capital is affecting asset prices.

“That’s what I think is spilling over into the financial markets: all those worries and concerns, and that also affects how people view how they want to position their fixed income portfolios and institutional demand and everything else,” Nasr said.

Michael Heydt, senior vice president, Global Sovereign Ratings, at DBRS Morningstar, said the ultra-long bonds that the government is suspending represent a fairly small portion of the total bond market.

“They don’t have to spend this because the tax bills are improving quickly,” he said. “My conclusion is that it wasn’t necessarily a reflection of what’s going on in the bond market, but more a reflection of the lack of need (for funding).”

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