By Fergal Smith
TORONTO, Sept 6 (Reuters) – Strong investor demand for Canada’s recent sale of ultra-long bonds, the first in nearly three years, raises prospects for additional issuance of these bonds over the coming months, strategists and investors said.
Further issuance could help the federal government lock in cheap financing for nearly 50 years, just as interest rate increases by the Bank of Canada drive up borrowing costs for shorter-dated issues.
The central bank raised its policy rate to 1 percent on Wednesday and left the door open to more hikes in 2017, pushing the Canadian dollar and domestic bond yields sharply higher.
The hike followed a rate increase in July, which was the first in nearly seven years.
“If conditions remain attractive I wouldn’t be surprised if they issued (ultra-long bonds) again this year,” said Andrew Kelvin, senior rates strategist at TD Securities.
Canada first sold ultra-longs in April 2014 and the total issuance of that 50-year bond has climbed to C$4.25 billion, including a C$750 million offering at an auction last week.
Issuing longer-term bonds buys protection if rates rise more quickly than anticipated, Kelvin said.
Canada’s bond issuance has soared more than 50 percent over two years to a projected C$142 billion in 2017-18 as Prime Minister Justin Trudeau’s Liberal government runs budget deficits to help spur the economy, which had been hit by an oil price shock.
Canada’s appetite for longer-dated bonds comes as the United States is studying the possibility of issuing bonds with maturities of more than 30 years.
Canada is one of the few leading industrialized nations with an undisputed AAA rating, and its bonds are in high demand.
Its issue of ultra-long bonds attracted strong demand from both domestic and international investors, a government news release said after last week’s auction.
Increased issuance of so-called super-longs could be welcomed by investors such as life insurance companies and pension funds that have long-term liabilities.
“There are natural buyers,” said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management, who bought bonds at last week’s auction.
He said the success of the auction could encourage other issuers, such as Canada’s provinces, to tap the ultra-long market.
The bonds have performed well since the auction and trade almost 5 basis points below the yield on Canada’s 30-year benchmark.
The government says it is committed to reallocate short-term bond issuance towards long-term bonds in order to lock in low funding costs and reduce refinancing risk.
Potential issuance dates of ultra-long bonds in future quarters will be communicated for the first time through bond schedules posted on the Bank of Canada’s website, a Department of Finance Canada official said last week.
Canada is going to be issuing ultra-long bonds “on a more regular basis,” said Richard Gilhooly, head of rates strategy at CIBC Capital Markets.
More regular issuance could slow flattening of the yield curve, a process which tends to create distortions such as inflated asset prices.
The spread between Canada’s 2-year and 30-year yields has slumped 78 basis points since March to 89 basis points on Wednesday, its narrowest since July 2008.
Global investors’ low inflation expectations and buying of bonds by some central banks to support economic growth have helped keep a lid on longer-dated yields. “If (Canadian policymakers) believe long-term rates are artificially low, they should be issuing more there,” Gilhooly said. (Reporting by Fergal Smith; Editing by Meredith Mazzilli)