Provincial governments have found borrowing costs rising as investors are pushing in the premiums they need to carry their bonds in light of 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 which is not just the oil-dependent provinces which are experiencing higher borrowing costs.
Even British Columbia, a province that has a triple-A rating that’s likely to be among the strongest provincial economies this season, is seeing yields on its bonds rise.
“Canadian provincial bond yield spreads continue to widen out versus Government of Canada bonds, with the longer-term index pushing higher to 120 bps in recent days,” said Robert Kavcic, senior economist at BMO Capital Markets. “That is now creeping up on levels seen during the height of the economic crisis, when there is a wholesale (and large) flight from risk.”
Rising borrowing costs come at a time when more provincial government have to fund their budgets with debt. Eight from 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 government government’s debt.