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Canada cuts bond issuance as quantitative tightening nears

By Fergal Smith

TORONTO, April 7 (Reuters) - Canada is cutting the amount of debt it issues, including a reduction in long-term bonds, as the economy's recovery from the COVID-19 crisis bolsters the financial outlook, its budget document showed on Thursday.

Bond issuance is expected to fall to C$212 billion ($168 billion) in the 2022-23 fiscal year from C$255 billion in 2021-22, helped by a projected sharp decline in the budget deficit. The fiscal year began on April 1.

Outstanding market debt is expected to climb to nearly C$1.3 trillion from C$765 billion before the pandemic.

The plan to reduce debt issuance comes as the Bank of Canada prepares to end the reinvestment of maturing government bonds bought during the crisis. That would increase the amount of debt that investors would need to absorb, potentially raising the cost of borrowing to the government.

Analysts say that the central bank could make an announcement on shrinking its balance sheet, a process known as quantitative tightening, or QT, at a policy announcement next week.

The central bank's asset-purchase program during the pandemic has seen its government bond holdings rise to about C$420 billion, some 40% of the outstanding stock, up from about C$80 billion before the crisis.

As deficits fall, Canada's debt as a share of GDP is expected to gradually decline to 41.5% in 2026-27 from 46.5% in the fiscal year just ended. That would still leave it well above pre-crisis levels but could provide some comfort to credit rating agencies.

Fitch Ratings stripped Canada of one of its coveted triple-A credit ratings in June 2020 but S&P Global Ratings and Moody's Investors Service still give Canadian debt the highest rating.

Canada's 10-year yield has surged nearly 1.2 percentage points since the beginning of the year to touch a 3-year high last week at 2.61%, as investors bet on aggressive central bank interest rate hikes to tackle inflation.

Still, public debt charges are expected to remain at historically low levels, projected at 1% of GDP in 2022-23.

The share of bond issuance with a maturity of at least 10 years is expected to fall to 35% in the current fiscal year after it climbed to 45% in 2020-21 to help fund COVID-19-related spending, while a further C$5 billion of green bond issuance is planned after Canada's first issue of the climate-friendly debt last month.

Including T-bills and foreign currency debt, total borrowing is projected at C$435 billion, about 80% of which is refinancing of maturing debt.

Borrowing is lower than it otherwise would be because the government plans to decrease its cash balance after building it up to higher than normal levels during the pandemic.

($1 = 1.2592 Canadian dollars) (Reporting by Fergal Smith Editing by Denny Thomas and Aurora Ellis)