‘They don’t need to issue this because the fiscal accounts are improving rapidly’
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The Government of Canada has cancelled its ultra-long bond issue as it believes its borrowing needs are declining while its balance sheet improves on rallying commodities and higher inflation.
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The government on Thursday said the bond, which was issued in 2014 as a 50-year note set to mature Dec. 1, 2064, would have its announced auction on June 16 cancelled, catching some fixed-income analysts by surprise.
Andy Nasr, chief investment officer at Scotia Wealth Management, said consultations late last year to gauge demand for the product showed there were some concerns surrounding available liquidity. Faced with economic uncertainty over the next few quarters, he said the wait-and-see approach in suspending the bond now and potentially bringing it back later if warranted makes sense to him.
“Given that fiscal balances had improved and that we’ve got a lot more uncertainty about where short- versus long-term rates are going to go, it probably was just a prudent decision to hold off a little bit and then wait to see where everything rests,” he said.
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“Because interest rates were zero or near zero, there was this view that they were well below what reasonable long-term inflation expectations were or the output potential of the economy was, so it made sense to kind of lock in that financing for a very long period of time,” Nasr said.
He added the economy is now in a different inflation regime and central banks are hiking rates, raising more uncertainty about what the normalized costs of capital affecting asset prices are.
“That’s what I think is spilling over into financial markets: all those concerns and worries, and that also affects how people perceive how they want to position their fixed-income portfolios and the 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 amount of the total bond market.
“They don’t need to issue this because the fiscal accounts are improving rapidly,” he said. “My takeaway is that it wasn’t a reflection of what’s going on in the bond market per se, but more a reflection on the lack of need (for funding).”
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