Sunday, September 8, 2019

Credit Ratings and Bond Yields

(Updated April 2020)

As the Liberal Couillard government left office in October 2018, Quebec was borrowing at lower interest rates than Ontario for the first time in history.

For the first time ever, in June 2017 Standard & Poor's rated Quebec bonds as lower risk than Ontario bonds.  


Rating Agency
Province of Ontario Bonds
Province of Quebec Bonds
Rating
Rank out of 10 Provinces
Rating
Rank out of 10 Provinces
Dominion (DBRS)
AA (low)
2nd (tied)
A (high)
5th
Moody’s
Aa3 (stable)
9th
Aa2 (stable)
3rd (tied)
Standard & Poor’s
A+ 
5th (tied)
AA- 
3rd (tied)
Sources: Rating agency websites 1 July 2020. I calculated the ranks. 
Note: Fitch also rates Ontario (AA-) and Quebec (AA-) bonds, but does not rate all Canadian provinces.

Critics discount the work of bond-rating agencies. And, there is academic evidence that rating agencies follow, rather than lead, the bond market. Bond raters may not be perfect, but their relative assessment of governments is usually accurate.

What counts is the interest rate that governments have to pay when they borrow. And, just as a low score means you are a better golfer, lower is also better for borrowers when it comes to interest rates.

Prior to the oil price collapse in 2014, interest rates on long-term bonds confirmed the DBRS and S&P ratings of Alberta bonds as the safest bet among provincial bonds in Canada with Ontario and Quebec bonds in the middle of the provincial pack. 

Now financial markets are rating Ontario Quebec bonds as safer than Alberta and Saskatchewan bonds even though those western oil province bonds have higher ratings from the agencies. 




Government Issuing Bond
Maturity Date
Yield
Canada (Federal)
6/1/2029
0.428%
Newfoundland 
4/17/2028
    1.55%
Saskatchewan
3/5/2029
1.359%
United States (US$)
8/15/2029

Ontario
3/8/2029
 1.23%
Quebec
10/1/2029
1.233%
BC
6/18/20291.19%
Manitoba
9/5/2029
1.324%
Ontario
6/2/2037
2.329%
Quebec
12/1/2038
2.358%
Manitoba
3/5/2041
2.08%
Canada (Federal)
6/1/2041
0.89%

British Columbia (BC)
6/18/2040
1.83%
Saskatchewan
6/1/2040
2.085%
Ontario
6/2/2041
      1.885%
Quebec
12/1/2041
1.888%
Source: TD Waterhouse Ask Yields 1 July 2020
Note: The wide spread between federal and provincial bond yields partly reflects investors’ greater ability to trade federal bonds. The bonds above were issued at varying rates. The yields above indicate what interest rates the governments could borrow at on 7-1-2020 for long-term bonds maturing on the dates above.   

Newfoundland bond rates had already moved well above comparable rates for Ontario and Quebec. Even when oil prices and Newfoundland government oil royalty revenues had recovered a bit, but I still said "caveat emptor" to all Newfoundland bond owners.


Government Issuing Bond
Maturity Date
Yield
Canada (Federal)
6/1/2029
2.468%
British Columbia (BC)
6/18/2029
    3.02%
Saskatchewan
3/5/2029
3.098%
United States (US$)
8/15/2029
3.06%
Ontario
3/8/2029
 3.12%
Quebec
10/1/2029
3.106%
Newfoundland 
8/27/2031      3.5%
Manitoba
9/5/20293.188%
Ontario
6/2/20373.25%
Quebec
12/1/2038
3.24%
Manitoba
3/5/2041
3.337%
Canada (Federal)
6/1/2041
2.48%
Alberta
12/1/2040
3.23%
BC
6/18/2040
3.144%
Saskatchewan
6/1/2040
3.24%
Ontario
6/2/2041      3.25%
Quebec
12/1/2041
3.23%
Source: TD Waterhouse Ask Yields in October 2018. 
Note: The wide spread between federal and provincial bond yields partly reflects investors’ greater ability to trade federal bonds. The bonds above were issued at varying rates. The yields above indicate what interest rates the governments could borrow at on 10-1-2018 for long-term bonds maturing on the dates above.   

If you think that the prospect of a provincial government being unable to make interest payments seems unlikely, so did Greek bondholders before the 2008 world financial sector crash. I certainly do not mean to suggest that any Canadian provincial government is heading for a Greek-style bond default. But, there is a chance that some provincial governments will face lower demand for their bonds.

Interesting to see that interest rates are higher in October 2018 than in July 2016.


Government Issuing Bond
Maturity Date
Yield
Canada (Federal)
6/1/2029
1.37%
British Columbia (BC)
6/18/2029
    2.22%
Saskatchewan
3/5/2029
2.43%
United States
8/15/2029
1.698%
Ontario
3/8/2029
 2.27%
Quebec
10/1/2029
2.34%
Newfoundland 
10/17/2029      2.87%
Alberta
9/20/2029
2.45%



New Brunswick
9/26/2043
3.10%
Manitoba
3/5/2041
2.90%
Canada (Federal)
6/1/2041
1.74%
Alberta
12/1/2040
2.87%
BC
6/18/2040
2.655%
Saskatchewan
6/1/2040
2.898%
Ontario
6/2/2041      2.71%
Quebec
12/1/2041
2.765%
PEI
6/27/2042
3.06%
Source: TD Waterhouse and CIBC Investors Edge Ask Yields on 15 July 2016. 
Note: The wide spread between federal and provincial bond yields partly reflects investors’ greater ability to trade federal bonds. The bonds above were issued at varying rates. The yields above indicate what interest rates the governments could borrow at on 7-15-2016 for long-term bonds maturing on the dates above.

However, interest rates in October 2018 are still below summer 2014 levels. 

 Issuing Bond
Maturity Date
Yield
Canada (Federal)
06/01/2029
2.4597%

British Columbia
06/18/2029
3.22%
Saskatchewan
03/05/2029
3.223%
Newfoundland
10/17/2029
3.425%
Ontario
06/01/2031
3.487%
Canada (Federal)
06/01/2041
2.752%
Alberta
12/01/2040
3.487%
BC
06/18/2040
3.512%
Saskatchewan
06/01/2040
3.525%
Manitoba
03/05/2042
3.582%
Ontario
06/02/2041
3.677%
Quebec
12/01/2041
3.745%
Source: TD Waterhouse and CIBC Investor's Edge Ask Yields on 07/14/2014. 

Bond market verdict on the Wynne government: Ontario bonds had the 3rd lowest yields among 10 provinces when the Wynne Liberals were defeated and left office in June 2018 with only BC and Quebec boasting lower interest rates vs. Ontario had the 6th lowest yields when the Wynne Liberals were elected with a majority in 2014 with only Quebec and the 3 Maritime provinces paying higher interest rates at that time on long-term bonds.   

Bond market verdict on the Couillard government: Quebec bonds had the 3rd lowest yields among 10 provinces when the Couillard Liberals were defeated and left office in October 2018 with only BC and Saskatchewan boasting lower interest rates vs. Quebec had the 7th lowest yields when the Couillard Liberals were elected with a majority in 2014 with only the 3 Maritime provinces paying higher interest rates at that time on long-term bonds.

Let's see if the anti-immigrant populists of the Legault government in Quebec and the anti-downtown-Toronto populists of the Ford government in Ontario can do better over the next four years.   

Monday, June 19, 2017

China Key to Unlocking NHL Olympic Hockey Boycott

For 50 years, the National Hockey League (NHL) has been struggling in vain to break through in the American television (TV) market. When Sidney Crosby won his 3rd Stanley Cup with the Pittsburgh Penguins in 2017, more Americans watched Celebrity Family Feud  than the NHL telecast in the same time slot. The next night, the National Basketball Association won the United States (US) ratings battle with an audience three times larger than the number of NHL viewers.

The Olympics account for the 5 most watched hockey games in US TV history. The NHL has never managed to turn an Olympic hockey buzz into more American viewers. No American audience for a NHL game has come close to the viewership for team USA playing an Olympic final or semi-final.

Disappointed by the impact of past Olympics on NHL ratings, Commissioner Gary Bettman decided that his league had nothing to lose by threatening to boycott the 2018 Olympics in South Korea. Bettman demanded free use of the Olympic rings logo in NHL advertising as the price of player participation at the 2018 Games. When International Olympic Committee (IOC) President Thomas Bach rejected Bettman’s condition, the NHL blocked their players from going to the 2018 Olympics.

Bettman and Bach are two alpha males locked in a stand-off. Neither will back down. 

Check out my article on prospects for ping pong diplomacy redux on the Rideau in the Ottawa Citizen:
http://ottawacitizen.com/opinion/columnists/sayeed-how-olympic-hockey-could-thaw-canada-china-trade-talks

(Update July 2020: I stand by this article based on what I knew in February 2018. Based on what has since emerged about Chinese government crimes against humanity, I am now opposed to any participation in the 2022 Winter Olympics.)

(How does this post connect to the Ontario economy and the other provinces? Canadians watching Olympic hockey in the middle of the nights and early mornings in February 2022 might have a small negative impact on productivity. That's the best I've got as an economic explanation. The sad truth is that I wanted to get this idea into circulation and I couldn't find a better outlet than my own blog. If the Chinese government releases Uyghurs imprisoned in Xinjiang, stops threatening Hong Kongers' freedoms and releases Canadians held hostage as a bargaining chip in the China-Canada dispute and you are interested in my proposal to solve the NHL-IOC impasse to salvage the 2022 Beijing Olympics, contact me at adil.sayeed@utoronto.ca)