An oportunity to add to Canadian bond holdings has arisen recently as spreads have weakened in Canadian Provincial bonds, says BCA Research.
Since March, spreads between Provincial bonds and Government of Canada bonds have widened, partially on account of heavy springtime provincial bond issuance. Provincial Budget restraint has also contributed, as concerns about some of the provinces; commitments arose.
Fitch, citing some of these concerns, cut its credit rating outlook for Ontario to negative. Even with these concerns at the provincial level coupled with uncertainty from European sovereign risk, which are both adding to the widening of spreads, default risk among provincial bonds is for all intents and purposes, zero.
It is worthwhile to consider that during the 90s, the provinces learned important lessons about restraint, and they will find the means to address it.
Voters, of the conservative persuasion will press the provinces to move forward on tightening.
Verdict: BCA favours provincial bonds vs. Government of Canadas, and suggests the current weakness in spreads as an opportunity to increase holdings.
