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Canada Cancels Ultra-Long Bond Sale as Tax Revenue Pours In

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·2 min read
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(Bloomberg) -- Canada unexpectedly canceled an ultra-long bond issuance, potentially terminating the maturity as a surge in revenue reduces the government’s borrowing needs.

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The Bank of Canada said Thursday that an auction of 2064 bonds on June 16 won’t happen, just as traders were waiting for more information on the sale. The decision reflects “Canada’s declining borrowing needs generally,” the bank said in market notice.

“It’s shocking,” Ian Pollick, head of fixed income, currency and commodity research at Canadian Imperial Bank of Commerce, said by email. “On a day where we were expecting to find out information about the ultra auction next week, they just killed the sector.”

Thirty-year Canadian government benchmark debt and an existing 2064 bond both rallied. The yield on the 30-year fell about 5 basis points from its level just before the announcement to 3.131% as of 4:37 p.m. in Toronto. The yield on the 2064 debt -- issued in 2014 as a 50-year note -- plunged about 10 basis points to 3.129%.

Prime Minister Justin Trudeau’s government has seen massive revenue windfalls from higher inflation and surging commodity prices, reducing the need for borrowing. Still, Trudeau’s finance minister reaffirmed the government’s commitment to the 2064 bond in her April budget.

“The announcement jibes with a decidedly upbeat fiscal narrative,” Warren Lovely, chief rates strategist at National Bank of Canada, said by email. “The Canadian economy has been throwing off an extraordinary amount of nominal income, which is helping to fill Ottawa’s coffers with unexpected revenue.”

Pollick said the move suggests the government may pare back other issuance. “That tells me more is coming, and the 10-year-sector could be the next sector to experience a reduction,” he said.

In the notice, the Bank of Canada didn’t say whether it was a permanent move. “The government will communicate any further intentions about ultra-long bond issuance should the situation warrant,” it said. An official from the Department of Finance didn’t immediately respond to a request for comment.

What Bloomberg Intelligence Says

The Government of Canada’s cancelled issuance of its ultra-long bond was driven by declining borrowing needs, its large cash balance and its aim to increase its stock of Treasury bills, we believe. The consultations last fall had noted that market participants and long-bond investors generally didn’t support additional issuance in this sector, so we were perplexed this decision didn’t come when the 2022 budget was unveiled. Trouble with liquidity and larger dislocations probably also factored into the decision. In the intermediate term, this could probably increase widening pressure on long-end swap spreads.

-- Bloomberg Intelligence strategists Angelo Manolatos and Ira F Jersey

(Updates market pricing, adds Bloomberg Intelligence note)

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