Holding patte[of Canadian debt securities]

Market View

Economics and Strategy

June 24, 2024 - (Vol. VIII, No. 47)

Holding pattern [of Canadian debt securities]

By Warren Lovely & Taylor Schleich

Propelled by some special factors, the federal government borrowed an outsized $48 billion in 2024:Q1 alone. On an annualized basis, that's equivalent to 6½% of GDP. Over the latest 4-quarter period, Ottawa actually outborrowed the Canadian household sector, which is a distinctly rare 'feat' for a non-recessionary period.

The feds have been borrowing more than 'normal', deficit financing, partial CMB consolidation and other special factors at play. Meanwhile, households have (understandably) opted for a more cautious stance. With a larger structural shortfall, the feds are also accumulating debt faster than the other levels of government.

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Incorporating Q1's big lift, Ottawa's net demand for funds surpassed $110 billion in the latest 4-quarter period. While far below the COVID-related peak, reported net borrowing understates how much GoC product end investors are really being asked to absorb given that the BoC continues to run assets off its balance sheet (via QT).

Domestically, a few usual suspects absorbed much of the extra GoC debt, notably banks, pension funds, insurers and mutual funds. Meantime, a diverse collection of non-resident investors combined to take down almost half of the extra GoC debt (T-bills + bonds) created in the past year-an increasingly vital sleeve of demand.

Ownership snapshots mask the fact that neither T-bills nor bonds are in a 'steady state'. T-bills have been more plentiful, with a new 1M maturity part of Canada's reference rate transition. As for bonds, BoC QT necessitates greater participation from domestic and foreign investors alike. And we're not done, BoC runoff continuing.

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Market View

Economics and Strategy

The extra GoC debt held by our banks coincides with a reduction in excess financial system liquidity, although we've yet to hit a 'choke point'. Meanwhile, the marginal GoC paper taken on by trusteed pension funds is part of a broader asset growth narrative, with the net assets of the social security system likewise expanding briskly.

Collectively, non-residents held $430 billion of GoC debt as of April, the book value of these holdings more than double the level that prevailed pre-COVID. We can't perfectly isolate for country of origin, but based on all sector/all currency trends, it seems more investors from more corners of the globe are involved in the GoC market.

On the one hand, non-resident investor interest is welcome news for a GoC market being served up net supply, particularly in bonds as BoC asset runoff remains a focus. Non-residents owned 35% of all GoC bonds as of April, the record foreign ownership share of 39% increasingly in focus. A heavy reliance on international investors is not without risk mind you, should this interest abruptly fade and/or leveraged positions get exited quickly-this latter worry recently flagged by the BoC (here).

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Market View

Economics and Strategy

Table: Detailing the ownership of C$5.33 trillion of Canadian debt securities

Market value & share of total holdings: Canadian debt securities by type of paper & holdings by detailed NBS sector (as at 2024:Q1)

Source: NBF, StatCan | Note: Canadian debt securities include issues denominated in CAD as well as securities denominated in foreign currencies; other Canadian bond sectors includes corporates, CMB, GBEs, other public sector, etc.

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