CIBC Predicts Surge in Canadian Government Bond Issuance

The Canadian Imperial Bank of Commerce (CM.N) has forecasted a significant rise in government bond issuance in Canada, projecting a 22% increase for the fiscal year 2024-25. This surge, estimated at approximately C$250 billion ($186 billion), is attributed to a mix of refinancing needs, budgetary balance, and non-budgetary expenses, despite the Finance Department's pre-funding efforts of about C$13 billion. Finance Minister Chrystia Freeland is expected to present the federal budget on April 16, which will likely reflect these changes.

Analysts at CIBC, including Ian Pollick, have noted that this level of bond issuance is unprecedented, excluding the peak pandemic years of 2020-21 and 2021-22. The increase is set to fund various financial requirements, including a projected C$38.4 billion deficit. The government has committed to fiscal restraint, aiming to prevent the deficit from exceeding the forecasted amount. However, nearly one-third of the C$156 billion in maturities due were issued during the pandemic at lower yields, posing a risk of escalating interest burdens. Furthermore, the rise in provincial deficits and federal issuance may lead to a 'crowding out' effect in the bond market, potentially affecting investor strategies.

The anticipated bond issuance also includes funding for the purchase of up to C$30 billion in Canada Mortgage Bonds. With higher interest costs and minimal progress in reducing operating expenses, there is concern that the government may increase corporate taxes to meet fiscal targets. CIBC strategists predict that the bond issuance will align with tenor estimates from the fall economic statement, with two-year bonds likely comprising 44% of the supply.