The Teflon Maple Leaf: TD Securities

Eric Lascelles, TD Securities' Chief Economics Strategist, points out that the Canada has the highest sovereign debt ratings in the world, in his latest report, "The Teflon Maple Leaf."

Lascelles points to several key areas:

• A peek at the latest sovereign credit default swap data reveals that Canada is now regarded as quite possibly the world's safest sovereign country in terms of the solvency of the country's government.
• On the surface, this seems surprising given how closely Canada is linked into the U.S. economy and into commodity prices, and how both of those two erstwhile pillars have recently crumbled.
• But a closer look reveals that there may be some method to the market's madness - Canada is indeed in a remarkably good position by several metrics, which we pursue in this piece. 

• We should begin by noting that we believe Canadian bonds should continue to underperform the U.S. because sovereign debt concerns have not played a major role in the market to date, and because Canada's economic prospects are somewhat better than in the U.S. and so less rate cutting will be needed.
• However, should the market begin to differentiate between countries based upon their debt-to-GDP ratios and other measures of fiscal pressure, Canadian bonds would ultimately be a winner in that contest. At present, there is little evidence that this is happening - case in point, both Japanese and U.S. debt continue to be happily purchased, yet the Japanese debt burden is extremely high and the U.S. debt burden is growing quickly. Nor do we necessarily expect this to change. But should the market grow more fickle about what it buys, there could be a quick reversal and this would prompt us to favour Canada over the U.S. in bonds.
• Third, throughout the credit crunch, Canadian bonds have been less volatile than in the U.S., and this speaks in no small part to the relatively more stable fiscal and economic foundations in Canada. We expect this trend of relative stability to continue.

The Teflon Maple Leaf, October 31, 2008, Eric Lascelles, TD Securities Inc.