Doug Ford, Ontario's premier (left) and Justin Trudeau, Canada's prime minister, during a news conference at the First Ministers' Meeting in Ottawa, Ontario, Canada, on Jan. 15, 2025. — Bloomberg
OTTAWA: Canadian provinces are set to see their relative borrowing costs rise as US tariffs on goods from the country threaten to throttle economic growth.
Shrinking trade will hurt provincial tax revenues and raise borrowing needs, said Dominique Lapointe, director of macro strategy at Manulife Investment Management.
The result will probably be higher risk premiums on provincial debt, or yields relative to federal bonds, he said.
Retaliatory tariffs or export limits would increase the pain. “Tariffs are not priced into provincial spreads at the moment and are at risk of widening,” Lapointe said.
The country’s largest province, Ontario, sold C$750mil (US$522mil) of bonds on Tuesday, adding on debt to an existing note due 2034.
Investors demanded 60 basis points over the government benchmark to buy it. That spread remains at a similar level, according to Bloomberg indicative bid prices at the time of writing.
In October, the spread was wider than 70 basis points, implying that investors are less concerned about the tariff threat forcing provinces to borrow more.
Broad tariffs by the Trump administration would hurt Canada and Mexico more than other countries, according to analysis by Bloomberg Economics, and economists’ models of a trade war see it leading to a recession in Canada quickly.
Most Canadian provinces rely heavily on income taxes and sales taxes for revenue; their budget deficits would widen.
Tariffs are likely to disproportionately affect Canadian government credit in the global market, leaving provinces more reliant on domestic funding, said Sameer Rehman, managing director and head of government finances at Bank of Montreal.
As supply increases, investors tend to demand extra premiums to hold the bonds.
Even a 20% tariff that excludes commodities may cause provincial spreads on 10-year maturities to widen by as many as 12 basis points, according to analysis from Canadian Imperial Bank of Commerce (CIBC).
If that extra-wide yield were applied to the approximately C$135bil provinces are expected to borrow in fiscal 2025, based on November estimates from CIBC, it could amount to about C$162mil of extra interest per year.
The actual number could be higher, given that government may need to borrow more as tariffs erode their balance sheets.
The United States is Canada’s largest trading partner, and the countries exchange numerous resources.
Ontario and Quebec bond spreads are primarily exposed to tariffs on critical minerals and automobiles, Saskatchewan to fertiliser levies, and Alberta to energy, Lapointe said.
Prior to Trump’s initial tariff announcement, Ontario plotted out a slow-growth scenario for the next three years in which its funding needs would increase by C$18bil.
Nonetheless, “both Ontario and the broader Canadian fixed-income market have demonstrated sufficient capacity to absorb the additional financing needs,” Rehman said.
Another saving grace: Canadian provinces are in the habit of pre-funding their debt. That means some provinces already have a head start on refinancing 2025 maturities – of which there were a lot, because companies took out extra low-interest debt during the pandemic in 2020.
“Despite financial market uncertainty, we continue to see strong investor demand for Ontario bonds,” said Colin Blachar, a spokesperson for the province’s ministry of finance.
“We’ve already completed the 2024-25 borrowing programme and have begun pre-funding for next year. That leaves us better positioned to weather any volatility in the months ahead.”
Still, pre-funding would create only a minimal buffer, because spreads on existing bonds would widen in the secondary market if tariffs are implemented, said Tom Bognar, director of fixed income, currency and commodity strategy with CIBC. — Bloomberg
