Ottawa cancels ultra-long bond sale as fiscal picture improves

« They don’t need to publish this because the budget accounts are improving rapidly »

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The Government of Canada has canceled its issue of ultra-long-term bonds because it believes that its borrowing needs are diminishing while its balance sheet is improving thanks to the recovery of raw materials and the rise in inflation.

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The government said on Thursday that the bond, which was issued in 2014 as a 50-year note maturing on December 1, 2064, would see its auction announced on June 16 cancelled, catching some securities analysts by surprise. on fixed income.

Andy Nasr, chief investment officer at Scotia Wealth Management, said consultations late last year to gauge demand for the product showed there were concerns about available cash. Faced with economic uncertainty over the coming quarters, he said the wait-and-see approach of pausing the obligation now and possibly bringing it back later if warranted made sense to him.

“Given that fiscal balances have improved and we have a lot more uncertainty about where short-term rates are going compared to long-term rates, it was probably just a prudent decision to wait a bit. and wait to see where it all rests,” he said.

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« Because interest rates were at or near zero, there was this view that they were well below reasonable long-term inflation expectations or the economy’s output potential, so it made sense to lock in that funding for a very long time,” Nasr said.

He added that the economy is now in a different inflation regime and central banks are raising rates, which increases uncertainty about normalized costs of capital affecting asset prices.

« I think that’s what ripples through the financial markets: all these concerns and worries, and it also affects how people perceive 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 the government is suspending represent a fairly small share of the total bond market.

« They don’t need to release this because the fiscal accounts are improving rapidly, » he said. “What I take away is that it was not a reflection of what is happening in the bond market per se, but rather a reflection on the lack of need (for financing).

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