Provincial governments have found borrowing costs rising as investors are pushing within the premiums they have to hold their bonds considering growing budget deficits and deteriorating economic fundamentals within the oil provinces.
The spread between provincial bond yields and Government of Canada bond yields have widened to levels not seen since 2009 that’s not just the oil-dependent provinces which are experiencing higher borrowing costs.
Even Bc, a province with a triple-A rating that is apt to be one of the strongest provincial economies this season, is seeing yields on its bonds rise.
“Canadian provincial bond yield spreads still widen out versus Government of Canada bonds, while using the longer-term index pushing higher to 120 bps in recent days,” said Robert Kavcic, senior economist at BMO Capital Markets. “That’s now creeping on levels seen throughout the height in the financial crisis, if you find a wholesale (and huge) flight from risk.”
Rising borrowing costs come at any given time when more provincial government have to fund their budgets with debt. Eight in the 10 provinces are running deficits and 2015 was the very first time in Canadian history that total debt held by provincial governments exceeded the us government government’s debt.
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The ratings agencies have certainly taken note. Alberta lost its top-notch rating on its debt in December after Standard & Poor’s downgraded the province since it is constantly across the reel in the oil price shock. Both Ontario and Manitoba also sustained debt downgrades earlier in 2015, while using former’s downgrade coming after a period of warnings about poor fiscal management inside the province.
With budget surpluses still from sight for a lot of provinces, there might be more pain in provies to come.
“The longer-term progress in provincial yield spreads more broadly (understand the trend because the mid-2000s) likely also reflects deteriorating fiscal fundamentals compared to authorities – the present wave of negative rating action highlights that time,” said Kavcic.
