U.S. investors shrugged off worries about an intensifying trade war and bought US$3.5 billion worth of bonds from the Canadian government at typical valuations on Tuesday.
Canada sold notes maturing in five years at a yield of 0.11 percentage point, or 11 basis points, above US Treasuries, a risk premium similar to past deals. A year ago, Canada sold $3 billion of five-year notes at a yield of 10 basis points above Treasuries.
The pricing underscores how investors are watching the US-Canada trade war but not necessarily expecting it to hit Canada’s finances hard. The Canadian government is facing escalating tariffs from US President Donald Trump while reshaping itself.
Even if Canada undergoes a moderate economic slowdown, and the federal government spends more to support businesses or workers, its debt-to-gross domestic product ratio would be among the lowest in the G-7 group, according to Dominique Lapointe, senior director in macro strategy at Manulife Investment Management.
“In other words, there is still fiscal space to absorb a slowdown, and investors should not be wary of Canada’s credit worthiness at the moment,” Lapointe said.
Canada’s Liberal Party has chosen Mark Carney to replace Justin Trudeau as its leader, but a federal election awaits, and the government hasn’t released plans for a federal budget that typically comes out in the spring.
If provincial budgets are any guide, Canada is facing a deeper deficit and growing funding needs. US tariffs risk sending the Canadian economy into a recession while devastating specific industries, including carmaking, mining and agriculture. That has led to wider corporate bond spreads in Canada.
As a sovereign issuer, Canada has maintained the highest credit ratings available from S&P Global Ratings and Moody’s Ratings since 2002, and has the second highest rating from Fitch Ratings. The US, in contrast, has the second-highest rating at S&P and Fitch and the highest at Moody’s.
Chunzi Xu, Bloomberg News
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