Quebec: Leveraging the Weak Dollar

Includes: FXC, UDN, UUP
by: Streetwise Blog

By Andrew Willis

In the wake of successful U.S. dollar bond offerings from the federal government and Ontario, fixed income analysts predict the province of Quebec will soon tap American investors for the first time this year.

The federal finance department did its first U.S. dollar-denominated bond issue in a decade back in August, raising $3-billion (U.S.). Desjardins Securities noted in a report on Wednesday that Ontario has borrowed a total of $11.6-billion (Canadian) on foreign markets so far this year, or 48% of all its financing.

Quebec, which is expected to borrow a total of $7 billion this year, has been relatively quiet outside the domestic markets, with three Euro-denominated medium-term note offerings for a total of $2.6-billion. Desjardins said in a report on the provincial bond market: “Rumors surrounding a new U.S. dollar-denominated global deal by the province of Quebec were swirling by the end of last week, but failed to materialize.”

Issuing debt in U.S. dollars at a time when the American currency is falling in value works to the advantage of domestic borrower, which will eventually pay down that debt by tapping Canadian tax payers. At a time when every province is running relatively large deficits, currency moves can help reduce borrowing costs.

Quebec has the luxury of borrowing from a position of relative strength. The province has already sold enough bonds thsi year to fund its spending. Desjardins’ research shows the province has issued $8-billion of debt.

Ontario has the largest unfilled financing program, as it still needs to borrow $15.2 billion. The province's total financing requirement this year is $39.2 billion.

Other provinces that are expected to sell more debt include B.C., which is expected to borrow another $3.4 billion, while Nova Scotia needs $1.9 billion and Manitoba requires $1.8 billion. Saskatchewan, Alberta and New Brunswick are each expected to borrow $1 billion in the coming months to fund their deficits.