Over the past year, foreign investors have vacuumed up the majority of Canada’s federal debt — which National Bank Financial (NBF) says positions them as a key consideration for the federal government as it prepares to fend off the negative economic effects of the U.S. trade war.
In a new report, NBF noted that foreign investors acquired a record $91 billion worth of federal debt (bonds and Treasury bills) in the most recent fiscal year (to March 31), and accounted for about 60% of the new debt issued during the period.
Overall, foreign investors now control about 35.9% of the outstanding federal debt, which is “not a majority but nonetheless far above the long-term average of 23%,” the report said.
“Clearly, elevated foreign exposure is not without risk,” the report noted, including the question of whether these foreign investors — a diverse group that includes other governments, sovereign wealth funds, pension funds, insurers and asset managers — will continue to maintain their interest in Canada’s bonds.
In fact, through the first three months of this year, foreign investors trimmed their holdings of Canada’s federal debt, NBF noted.
“To be fair, January to March was hardly a stable or ‘normal’ period for Canada,” it said. “U.S. tariff threats were flying and the Canadian dollar was being jostled (at times violently). Meantime, Canada’s own political future clouded over as leadership of the federal government transitioned and election speculation ramped up.”
More recent data suggested that foreign investors were more active in the Canadian government bond markets in April, the report said.
“So it could be that the foreign divestment registered last quarter will prove fleeting. Let’s hope so, since the federal government’s post-election plans involve running larger deficits and placing more [federal] debt with end investors,” it said — adding that it’s possible the volume of federal debt issuance will set a record in the current fiscal year.
“Given their meaningful foothold in the domestic [government bond] market, and the sheer amount of funding to be done, these investors should not be taken for granted as the PM sets off on an ambitious legislative agenda,” NBF said.
While foreign investors don’t get to vote at the ballot box, they can vote with their feet in the bond market.
“If displeased, they could stop buying and/or demand relatively fatter yields and/or steeper curves to stay involved. That in turn could make it more costly to service Ottawa’s rapidly growing debt stock. In a sense then, non-resident investors may just hold the balance of power here,” the report said.