Okay, so Canada issued US dollar denominated bonds. Why? Do they have a trade deficit with us now and so want US dollars from the sale of the bonds? But if so they would expect a trade surplus with the US by the bonds maturity in order to pay back the face value of the bonds. Can you clarify the implications?
I see that actually Canada has a trade surplus with the US. It looks like exports make up about one third of their economy and 75% of there exports are bought by the US. I have gathered that the main reason they issued dollar bonds is because they can, meaning that U S investors want to buy Canadian debt.
Probably not a deep reason, diversification by a confident Treasury that believes in its own currency. Canada's economy is tied to the U.S.'s. As the U.S. economy recovers and U.S. interest rates drift up, issuance now will have looked smart. Historically, Canada has had to pay a significant spread over U.S. Treasuries to entice U.S. investors to buy CAD-denominated bonds to compensate for currency risk. Why not then issue in USD directly now that the yield spread is only 0.08%, and to eliminate that risk for the investors? U.S. investors are bullish on Canada in every other aspect (resource economy, strong banking, government finances sounder than ours).
Okay, so Canada issued US dollar denominated bonds. Why? Do they have a trade deficit with us now and so want US dollars from the sale of the bonds? But if so they would expect a trade surplus with the US by the bonds maturity in order to pay back the face value of the bonds. Can you clarify the implications?
ReplyDeleteI see that actually Canada has a trade surplus with the US. It looks like exports make up about one third of their economy and 75% of there exports are bought by the US. I have gathered that the main reason they issued dollar bonds is because they can, meaning that U S investors want to buy Canadian debt.
DeleteOr they expect the dollar to depreciate relative to the Canadian dollar?
ReplyDeleteProbably not a deep reason, diversification by a confident Treasury that believes in its own currency. Canada's economy is tied to the U.S.'s. As the U.S. economy recovers and U.S. interest rates drift up, issuance now will have looked smart. Historically, Canada has had to pay a significant spread over U.S. Treasuries to entice U.S. investors to buy CAD-denominated bonds to compensate for currency risk. Why not then issue in USD directly now that the yield spread is only 0.08%, and to eliminate that risk for the investors? U.S. investors are bullish on Canada in every other aspect (resource economy, strong banking, government finances sounder than ours).
ReplyDeleteCanadian minister of Finance statement at:
ReplyDeletehttp://news.gc.ca/web/article-eng.do?nid=655289
Here they say the bond issue is to "diversify Canada’s foreign exchange reserves and to meet foreign currency requirements".
They just needed some dollars.