Provincial bond returns were positive over the past month, and roughly in-line with Canadas as broader market volatility has eased. From a year ago, long provincials are up 11.2% (total return), outperforming corporates, but slightly lagging Canadas amid the flight to quality. Long provincial spreads have steadied, down about 25 bps from their post-COVID high, helped by improved market sentiment and the Bank of Canada's purchase program.
The flight-to-quality in global markets eased over the past month, with mixed spread performance across the provinces. Most moves were relatively modest compared to those seen earlier in the COVID crisis.
In the 30-year space, Alberta outperformed (with Saskatchewan a few ticks behind) as oil prices rebounded sharply. Performance was a touch weaker in Ontario and Quebec, after those provinces benefited, on a relative basis, from the move to larger liquid names earlier in the downturn.
The Bank of Canada's Provincial Bond Purchase (PBPP) program has been very well received by the provinces. The program, along with the Provincial Money Market Purchase program, has helped maintain market functioning and contain spreads. We continue to await meaningful fiscal updates from the provinces in the coming months.
Provinces Look to Re-Open
All provinces are rolling out some form of plan to re-open their economies, though the degree differs by jurisdiction. According to the CFIB, just under one-third of Canadian small businesses were open as of May 21, up from 21% a month earlier. Alberta has, according to this measure, opened up the most (47%), with the other prairie provinces not far behind. Quebec was nearly 40% open, while Atlantic Canada was mixed (almost 45% open in New Brunswick, but Newfoundland & Labrador is reportedly the lowest in the country). Ontario is also near the low end (26%), but the province only allowed street-level retail spaces to open as of May 19, so those numbers have likely seen a bump. At any rate, turning the lights back on is clearly going to be a gradual process across the country
Budget Deficits to Widen
Combined direct provincial COVID-19 support measures look be in the $30 billion range overall, with some variance across the group. For example, Quebec has been quite aggressive with support, relative to the size of the economy, while smaller provinces, particularly in Atlantic Canada, have had to provide less.
Another factor is the deep plunge in oil prices, which adds a further impact on the producing provinces. In Alberta, for example, we can assume that royalties have effectively fallen to zero, which could carve that deficit to near $20 billion, or above 5% of GDP. Ontario, Quebec and B.C. look to be on track for shortfalls of around 2.5% of GDP, and the Maritime provinces should come in shallower.
Suffice it to say that borrowing programs have ramped up significantly, and the provincial total could run at around $150 bln this fiscal year. Calendar year-to-date, the provinces have already done $80 bln worth of issuance, roughly twice the amount seen at the same point in recent years.