National Bank of Canada : Holding pattern

Market View

Economics and Strategy

June 24, 2024 - (Vol. VIII, No. 47)

Holding pattern [of Canadian debt securities]

By Warren Lovely & Taylor Schleich

Ask a frequent flyer and they're apt to tell you a 'holding pattern' is a period of little to no progress; the equivalent of going in circles or flying nowhere fast. But there's another 'holding pattern' we tend to key on, related to the ownership (or holding) of Canadian debt. And here, the recent trend (or pattern) has been anything but static.

Leveraging a collection of recent data (i.e., economic accounts,

national balance sheet/financial flows, international transactions/investment positions, government finance statistics, BoC assets and liabilities) this Market View puts the stock and flow of Canadian debt context. We isolate where fresh debt is coming from and how/where/by whom related securities are being absorbed. There's a particular focus on the one sector/issuer demanding more funding than any other of late: the Government of Canada (GoC).

A collection of domestic investors are increasing their holdings of GoC debt, helping to balance a well-supplied market. We're thinking of our banks, trusteed pension funds, insurers, and mutual funds,

amongst others. Some of these domestic sectors still look to have some 'dry powder', which is somewhat comforting given that Ottawa's net financing needs remain non-trivial (and objectively larger than what underlying economic conditions argue for).

Without minimizing domestic investor support/subscription, when it comes to GoC debt absorption, we could perhaps assign the primary assist to non-residents. Whether domiciled in the U.S., Europe, the Middle East, Asia or elsewhere, foreign investors have collectively swallowed $75 billion of GoC bonds and T-bills in the latest 12 months alone (to April). That's almost double the amount of cash required to finance the federal government's annual deficit.

Deep and broad international demand has eased the adjustment to ongoing BoC QT, even if a more pronounced non-resident footprint creates its own source of potential risk (should foreign attitudes really break against us and/or related leverage get seriously reined in).

Chart 1: Feds outborrow other sectors, incl. households…

Net demand for funds: Cdn non-financial sectors (latest 4Q)

120	C$bln			2024:Q1
100		10.4
Chart 3		2023:Q4
80	48.2			2023:Q3
60				2023:Q2

40

20

0

Fed gov't

Households

Other gov't

Non-fin'l corp

Source: NBF, StatCan | Note: Non-fin'l corp includes GBEs

Chart 2: … which is pretty rare outside of recessions

Relative demand for funds: GoC vs. Cdn households

1. Fed gov't less households:

1. %-ptsof GDP (4Q avg, AR)

10

8

6

4

2

0 -2-4-6-8

-10-12

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

Source: NBF, StatCan | Note: Difference in net demand for funds (all sources)

Propelled by some special factors, the federal government borrowed an outsized $48 billion in 2024:Q1 alone. On an annualized basis, that's equivalent to 6½% of GDP. Over the latest 4-quarter period, Ottawa actually outborrowed the Canadian household sector, which is a distinctly rare 'feat' for a non-recessionary period.

Chart 3: Feds borrow more than normal (households the opposite)

Net demand for funds: GoC & Cdn households (2024:Q1 vs. long-term trend)

Chart 4: Ottawa takes on more debt than other Cdn gov'ts

Relative debt burden: GoC vs. other levels of Cdn gov't

18

14

10

6

2 -2-6

Gov't of Canada

% of GDP, AR

2024:Q1:

$48.2B (QR)

6.5% (AR)

Min

-2SD

-1SD

Avg

+1SD

+2SD

Max

12

10

8

6

4

2

0

Cdn Households

% of GDP, AR

2024:Q1: $10.4B (QR) 1.4% (AR)

Min

-2SD

-1SD

Avg

+1SD

+2SD

Max

20	%-pts of GDP	% of GDP	60

15		Gap: GoC vs. other govt (L)					50
	GoC debt (R)
10		Other gov't debt (R)						40
5										30
0										20
-5										10
-10										0
2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024

Source: NBF, StatCan | Note: Bars based on 25Y period, excl. 2020 due to COVID

Source: NBF, StatCan | Note: Based on quarterly book value of debt securities o/s

The feds have been borrowing more than 'normal', deficit financing, partial CMB consolidation and other special factors at play. Meanwhile, households have (understandably) opted for a more cautious stance. With a larger structural shortfall, the feds are also accumulating debt faster than the other levels of government.

1

Market View

Economics and Strategy

Chart 5: The net supply of GoC debt has stepped up…

GoC net borrowing (all sources)

400 C$bln

350	(4Q sum)	COVID-related
	funding surge

300

250

200

150

100

50

0

2019

2020

2021

2022

2023

Source: NBF, StatCan | Note: Based on quarterly net financial market summary

111.7 (Chart 6)

2024

Chart 6: … even more so after controlling for BoC QT

Net issuance of GoC T-bills & bonds, incl. change in BoC holdings (latest 4Q)

100	C$bln		76
80
63
60	48	42	42
40
		21

20		0
0
-20			Absorbed by end investors,
-40			latest 4 quarters...
GoC T-bills		T-bills: C$63bln (Chart 7)
-60
GoC bonds		Bonds: C$118bln (Chart 8)
-80	-71
All sectors	Domestic	Non-residents
	Bank of Canada
			excl. BoC

Source: NBF, StatCan | Note: Based on market value of net financial flows to 2024:Q1

Incorporating Q1's big lift, Ottawa's net demand for funds surpassed $110 billion in the latest 4-quarter period. While far below the COVID-related peak, reported net borrowing understates how much GoC product end investors are really being asked to absorb given that the BoC continues to run assets off its balance sheet (via QT).

Chart 7: Who has absorbed the extra GoC T-bills?

Chart 8: No shortage of GoC bonds available to end investors

Net investment in GoC T-billsby major sector/investor type (latest 4Q)

Net investment in GoC bondsby major sector/investor type (latest 4Q)

Non-residents

Non-residents

Banks

Trusteed pension plans

Insurance

Banks

Mutual funds

Mutual funds

Governments

Insurance

Other fin'l

Governments

Social Security

Absorbed by end investors,

Social Security

Absorbed by end investors,

Households

latest 4 quarters...

Households

latest 4 quarters...

GoC T-bills: C$63bln

GoC bonds: C$118bln

Non

-fin'l corp

Non-fin'l corp

Trusteed

C$bln

Other fin'l

C$bln

pension plans

-5

0

5

10

15

20

25

-10

0

10

20

30

40

50

Source: NBF, StatCan | Note: Based on market value of net financial flows to 2024:Q1

Source: NBF, StatCan | Note: Based on market value of net financial flows to 2024:Q1

Domestically, a few usual suspects absorbed much of the extra GoC debt, notably banks, pension funds, insurers and mutual funds. Meantime, a diverse collection of non-resident investors combined to take down almost half of the extra GoC debt (T-bills + bonds) created in the past year-an increasingly vital sleeve of demand.

Chart 9: Breaking down ownership of larger GoC T-bill stock

Snapshot of GoC T-billownership by major investor type (2024:Q1)

GoC T-bills		Non-res	BoC
		23%	0.0%
	Gen gov't		HH &
		non-fin'l corp
9%
	6%
		Ownership
		share of
	Other	C$265bln
fin'l corp	(Market value,	Banks
20%	2024:Q1)	19%

Ins & pen

23%

Source: NBF, StatCan | Note: Based on market value of assets by NBS sector(s)

Chart 10: Holding pattern of Canadas will continue to evolve

Snapshot of GoC bondownership by major investor type (2024:Q1)

GoC bonds

Non-res

33%

	Ownership		BoC
	share of		25.4%
Gen gov't	C$1,039bln
(Market value,
6%
2024:Q1)
Other
fin'l corp		Banks
9%		HH &
	Ins & pen	7%
	non-fin'l corp
	17%		2%

Source: NBF, StatCan | Note: Based on market value of assets by NBS sector(s)

Ownership snapshots mask the fact that neither T-bills nor bonds are in a 'steady state'. T-bills have been more plentiful, with a new 1M maturity part of Canada's reference rate transition. As for bonds, BoC QT necessitates greater participation from domestic and foreign investors alike. And we're not done, BoC runoff continuing.

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Market View

Economics and Strategy

Chart 11: Balance sheet evolution at Canadian banks

Select financial assets of Cdn chartered banks
400	C$bln
350
300		Ccy & deposits
250
	GoC securities
200
150
100
50
0
2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024

Source: NBF, StatCan | Note: Market value to 2024:Q1

Chart 12: Assets of Canadian pension funds expand(ing)

Composition of financial assets of Cdn trusteed pension funds*
4.0	C$tln		Oth fin assets	Equity/IFs
3.5
		Fgn debt		Oth Cdn debt
3.0
		GoC debt
2.5
2.0
1.5
1.0
0.5
0.0
2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024

Source: NBF, StatCan | Note: Market value to 2024:Q1; separate from social security

The extra GoC debt held by our banks coincides with a reduction in excess financial system liquidity, although we've yet to hit a 'choke point'. Meanwhile, the marginal GoC paper taken on by trusteed pension funds is part of a broader asset growth narrative, with the net assets of the social security system likewise expanding briskly.

Chart 13: Non-residents build up positions in GoC debt

Chart 14: Deep and broad foreign investor participation

Non-resident holdings of GoC debt (CAD-denominated issues only)			Non-resident holdings of Cdn debt by country of origin (Apr-24)
450	C$bln																									0
400
		Bonds														Cdn mmkt: C$152bln
350
		T-bills																67					17	6	1	8
300
250																				US		UK			Other Europe
200																				Japan		Other OECD	All other
150																		Cdn bonds: C$2.0tln
100																			42			18		20	4	6		10
50
0
2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	0%	10%	20%	30%	40%	50%	60%	70%	80%	90%	100%

Source: NBF, StatCan | Note: Book value to Apr-24

Source: NBF, StatCan | Note: Book value as at Apr-24; refers to all sectors & currencies

Collectively, non-residents held $430 billion of GoC debt as of April, the book value of these holdings more than double the level that prevailed pre-COVID. We can't perfectly isolate for country of origin, but based on all sector/all currency trends, it seems more investors from more corners of the globe are involved in the GoC market.

Chart 15: BoC QT requires others to step up

Distribution of holdings of GoC bonds by major investor type
100%
90%											Non-residents
80%
70%					Other domestic
60%
50%
40%									Pension/insurance
30%
20%								Banks						BoC
10%
0%
1994	1996	1998	2000	2002	2004	2006	2008	2010	2012	2014	2016	2018	2020	2022	2024

Source: NBF, StatCan | Note: Based on market value to 2024:Q1

Chart 16: The growing foreign footprint in GoC bond market

Non-resident ownership share of GoC bonds, incl. NBF projection to Dec-24

38 % of total o/s

36
34
32
30
28
26
24
2019	2020	2021	2022	2023	2024

Source: NBF, StatCan, BoC | Note: Based on book value to Apr-24 plus NBF simulation

On the one hand, non-resident investor interest is welcome news for a GoC market being served up net supply, particularly in bonds as BoC asset runoff remains a focus. Non-residents owned 35% of all GoC bonds as of April, the record foreign ownership share of 39% increasingly in focus. A heavy reliance on international investors is not without risk mind you, should this interest abruptly fade and/or leveraged positions get exited quickly-this latter worry recently flagged by the BoC (here).

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Market View

Economics and Strategy

Table: Detailing the ownership of C$5.33 trillion of Canadian debt securities

Market value & share of total holdings: Canadian debt securities by type of paper & holdings by detailed NBS sector (as at 2024:Q1)

	Cdn
	debt
Holdings (C$bln, market value)	securities
Total all sectors	5,331.1
Domestically held (incl. monetary authority)	3,284.7
Households & non-profit institutions	97.9
Corporations	2,810.7
Non-financial corporations	110.7
Financial corporations	2,700.1
Bank of Canada	279.7
Chartered banks & quasi-banks	551.7
Insurance & pension funds	932.6
Life insurance business	220.1
Segregated funds of lifecos	29.8
Trusteed pension plans	581.7
Property & casualty insurance	101.0
Total other private financial institutions	662.3
Financial gov't business enterprises	273.8
General governments	376.1
Federal general government	16.6
Other levels of general government	254.9
Provincial & territorial governments	206.5
Local governments	48.4
Social security funds	104.6
Non-residents	2,046.4
	Cdn
	debt
Distribution of holdings by security type (%)	securities
Total all sectors	100%
Domestically held (incl. monetary authority)	62%
Households & non-profit institutions	2%
Corporations	53%
Non-financial corporations	2%
Financial corporations	51%
Bank of Canada	5.2%
Chartered banks & quasi-banks	10%
Insurance & pension funds	17%
Life insurance business	4%
Segregated funds of lifecos	1%
Trusteed pension plans	11%
Property & casualty insurance	2%
Total other private financial institutions	12%
Financial gov't business enterprises	5%
General governments	7%
Federal general government	0%
Other levels of general government	5%
Provincial & territorial governments	4%
Local governments	1%
Social security funds	2%
Non-residents	38%

Canadian short-term paper

All Cdn	Gov't of	Other
ST paper	Canada	sectors
716.3	265.1	451.2
532.2	204.9	327.3
8.5	1.2	7.4
430.9	180.2	250.7
69.1	15.5	53.6
361.8	164.7	197.1
0.0	0.0	0.0
91.8	50.1	41.7
109.0	61.7	47.4
16.8	10.9	5.9
4.2	0.9	3.2
74.6	41.7	33.0
13.5	8.2	5.3
150.9	46.1	104.8
10.0	6.8	3.1
92.8	23.6	69.2
0.4	0.0	0.3
72.9	23.5	49.3
62.0	23.4	38.6
10.9	0.1	10.8
19.6	0.0	19.6
184.2	60.3	123.9
Canadian short-term paper
All Cdn	Gov't of	Other
ST paper	Canada	sectors
100%	100%	100%
74%	77%	73%
1%	0%	2%
60%	68%	56%
10%	6%	12%
51%	62%	44%
0.0%	0.0%	0.0%
13%	19%	9%
15%	23%	10%
2%	4%	1%
1%	0%	1%
10%	16%	7%
2%	3%	1%
21%	17%	23%
1%	3%	1%
13%	9%	15%
0%	0%	0%
10%	9%	11%
9%	9%	9%
2%	0%	2%
3%	0%	4%
26%	23%	27%

Canadian bonds

All Cdn	Gov't of	Provincial	Local	Other
bonds	Canada	gov'ts	gov'ts	sectors*
4,614.7	1,038.9	932.2	64.7	2,578.9
2,752.5	697.7	711.9	55.7	1,287.2
89.3	15.7	19.3	14.7	39.6
2,379.8	621.8	591.6	34.8	1,131.7
41.6	8.3	3.1	0.0	30.1
2,338.3	613.5	588.5	34.8	1,101.6
279.7	263.8	9.2	0.0	6.7
459.9	73.7	150.0	7.0	229.2
823.6	180.3	319.2	22.7	301.4
203.3	17.3	58.6	14.9	112.5
25.6	5.9	8.2	0.0	11.5
507.1	126.9	227.2	7.8	145.1
87.6	30.2	25.1	0.0	32.2
511.4	83.2	106.1	5.0	317.0
263.8	12.5	4.0	0.0	247.3
283.3	60.2	101.1	6.2	115.9
16.3	7.8	0.2	0.0	8.2
182.0	36.1	60.6	5.3	80.1
144.5	32.0	49.6	0.3	62.6
37.5	4.1	11.0	4.9	17.5
85.1	16.3	40.3	0.9	27.5
1,862.2	341.2	220.3	9.0	1,291.7
	Canadian bonds
All Cdn	Gov't of	Provincial	Local	Other
bonds	Canada	gov'ts	gov'ts	sectors*
100%	100%	100%	100%	100%
60%	67%	76%	86%	50%
2%	2%	2%	23%	2%
52%	60%	63%	54%	44%
1%	1%	0%	0%	1%
51%	59%	63%	54%	43%
6.1%	25.4%	1.0%	0.0%	0.3%
10%	7%	16%	11%	9%
18%	17%	34%	35%	12%
4%	2%	6%	23%	4%
1%	1%	1%	0%	0%
11%	12%	24%	12%	6%
2%	3%	3%	0%	1%
11%	8%	11%	8%	12%
6%	1%	0%	0%	10%
6%	6%	11%	10%	4%
0%	1%	0%	0%	0%
4%	3%	6%	8%	3%
3%	3%	5%	1%	2%
1%	0%	1%	8%	1%
2%	2%	4%	1%	1%
40%	33%	24%	14%	50%

Source: NBF, StatCan | Note: Canadian debt securities include issues denominated in CAD as well as securities denominated in foreign currencies; other Canadian bond sectors includes corporates, CMB, GBEs, other public sector, etc.

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Market View

Economics and Strategy

Economics a nd Stra te g y

Montre a l Office

514-879-2529

Stéfane Marion	Matthieu Arseneau
Chief Economist and Strategist	Deputy Chief Economist
[e-mail]	[e-mail]
Kyle Dahms	Daren King, CFA	Jocelyn Paquet
Economist	Economist	Economist
[e-mail]	[e-mail]	[e-mail]
Alexandra Ducharme	Angelo Katsoras
Economist	Geopolitical Analyst
[e-mail]	[e-mail]

Toronto Office

416-869-8598

Warren Lovely

Chief Rates and Public Sector Strategist

[e-mail]

Taylor Schleich

Rates Strategist [e-mail]

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