Foreign investors including pension funds, insurance companies and hedge funds are buying Canada\u2019s federal bonds in record amounts, easing the cost of funding Prime Minister Mark Carney\u2019s expensive nation-building projects but potentially introducing more volatility to Canada\u2019s debt market.<\/p>\n
The most recent data for Government of Canada bonds shows that foreign investors purchased $27.7-billion in April, a record monthly total, while their share of the bonds outstanding climbed to an all-time high of 43 per cent. Among Group of Seven sovereign debt markets, only France and Germany, backed by the euro\u2019s status as a major reserve currency, attract a higher foreign stake. <\/p>\n
Carney has committed to investing over $280-billion in the next five years on infrastructure, defence and housing as well as on measures to enhance productivity, much of which is expected to be financed in the bond market. A wider investor base could increase the chances of keeping borrowing costs in check.<\/p>\n
Rob Carrick: Mr. Carney, can you share your plans for government spending, taxing and cutting?<\/a><\/p>\n \u201cI regard the broader buyer base as a positive development, which has helped the Canadian government fund relatively large bond programs without unduly raising borrowing costs,\u201d said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities. The move into Canadian bonds, despite lacklustre economic growth, reflects confidence in Canada as part of a shrinking band of countries whose bonds receive a triple-A credit rating. Among the big-three agencies, Moody\u2019s and S&P Global give Canada the top rank, while Fitch rates Canada\u2019s bonds AA+.<\/p>\n The Bank of Canada adding global investment banking powerhouse Goldman Sachs to the list of Canadian government securities distributors could also increase participation by foreign investors, including hedge funds. Hedge funds buy almost 50 per cent of GoC bonds at auction in some maturities and represent about 30 per cent of the volume of trades between dealers and clients in the secondary market, according to the BoC. The central bank has worried that a sudden unwinding of the leverage that hedge funds employ could be a risk to financial stability.<\/p>\n Another potential risk is an abrupt exit from the market by foreign buyers, a dynamic that France endured during a period of political uncertainty in 2017. Investors are also diversifying away from U.S. Treasuries, according to a report last month by the Institute of International Finance that suggests that U.S. government debt increasingly looks to be on an unsustainable path.<\/p>\n Amazon to raise $14-billion in record-setting Canadian corporate bond offering<\/a><\/p>\n