On April 24, 2024, the Government of Canada (GoC) marked a significant turn by recording the most substantial monthly debt issuance since 2021. This surge in bond market activity comes just before the announcement of new proposed spending in the latest budget, despite an economy that is supposedly doing well. This situation could prove problematic for everyone.

Government of Canada Bonds

GoC bonds are how the federal government raises capital to fund spending not covered by revenue. By itself, issuing new debt is neither good nor bad—especially if there's a market for it and the cost is lower than inflation. However, the laws of supply and demand mean it's not always an ideal time to borrow.

If bond issuance (new borrowing) exceeds the available capital (lenders), borrowing costs rise. This affects not just the GoC, but also all borrowing costs since government bonds influence the entire credit market. This competition could be problematic, especially at a time when borrowing is already costly and Canada is struggling to attract investment.

The Data at a Glance

In March, the Canadian government tapped the bond markets for debt at an unusually rapid pace. New bond issuance reached $24.5 billion, an increase of 22% from the previous month. It was the largest issuance of GoC bonds since 2021, and last month was before the budget was announced.

Replacing Retiring Debt

A significant portion of the issuance was to replace retired debt, or maturing bonds. The GoC retired $12.5 billion in debt in March, leaving a net increase of $11.9 billion for the period. While some might only view the net increase as a minor detail, retiring the debt is also occurring at a time when rates are elevated. This means the replaced debt may come at higher interest costs, a problem Canada hasn't seen in nearly 30 years up to the pandemic.

Back to Rapid Debt Accumulation

Looking at the 12-month average, the surge to seize the opportunity of borrowing at low rates is evident. The idea was originally pitched as temporary debt that would be retired over time. However, new debt issuance almost wiped out any of that progress.

The latest budget also proposes a significant increase in spending, likely to drive more bond issuance. At a time when investors are fleeing loonie exposure, this will apply upward pressure on borrowing costs. Canada is expected to lead on rate cuts to stimulate its economy and lower some forms of debt financing. However, that would also be a factor working against attracting investors to more loonie exposure, not quite producing the same flood of cheap credit seen pre-2020.