Ontario wary on rates, says bond demand firm

By Claire Sibonney

TORONTO (BestGrowthStock) – The Ontario government is concerned that rising interest rates could pressure its borrowing costs, but is confident its budget projections will accommodate them, the province’s finance minister said on Wednesday.

Finance Minister Dwight Duncan also said the Canadian province expects to look abroad for about half of the C$39.7 billion ($39.5 billion) in long-term borrowing Ontario needs to do in 2010-11, partly because of strong demand from international investors.

“People are very very bullish on Ontario and Canada,” Duncan told Reuters in an interview from New York, where he was attending investor relations meetings.

“People actually see our bonds, and Canadian instruments in general, as being a real safe haven.”

On Wednesday, Ontario priced a $2.0 billion 4.4 percent bond due 2020 at 52 basis points over mid-swaps. Duncan said the issue was increased from the $1 billion originally anticipated because of an “overwhelmingly positive response.”

The offering comes after the provincial government said on March 25 it would run budget deficits for much of this decade as it maintains stimulus spending to help offset the effects of the economic downturn.

Since then, Canadian bond yields and interest rate expectations have risen, boosted by better than expected Canadian and U.S. economic data.

Duncan said the province has built in a “robust” 4.9 percent borrowing cost in this fiscal year’s contingency plans, but recognizes the dramatic effect that a higher rate could have on the bottom line.

“Every 100 basis points adds about half a billion dollars in interest costs, so it’s a concern. But, again, so far it hasn’t materialized, but that’s something we will continue to watch very carefully,” he said.

Ontario, which posted a record budget deficit last year after three years of surpluses, plans to increase spending on infrastructure, healthcare and education to help offset the impact of the recession on its manufacturing- and export-oriented economy.

Canada’s most populous province said it will post a shortfall of C$19.7 billion in fiscal 2010-11. The government plans to reduce that each year before balancing the budget again by 2017-18, two years later than it projected last fall.

However, Duncan said last week and repeated on Wednesday that he hopes to eliminate the deficit sooner.

“We’ve set very clear targets on an annual basis and we can be judged against how we perform,” he said.

“I hope we can not only achieve them but my hope is we can overachieve, but that will depend on a whole range of circumstances.”

Besides higher interest rates, the threat of a double-dip recession or a sluggish recovery in the United States, Canada’s biggest trading partner, also cloud the province’s outlook.

Market watchers have said they would like to have seen more urgency and decisiveness by the province to cut spending and eliminate the deficit sooner, but Duncan is more optimistic about Ontario’s future.

When asked how concerned he was about another crisis in global credit markets, he said: “I’m less concerned about that now than I was a few months ago.

“The one thing that is kind of really surprising to hear is just how much people are saying that the Canadian paper, ours particularly, is the stuff people want, so I think there will continue to be access to capital markets in the quantities we need.”

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($1=$1.005 Canadian)

(Editing by Rob Wilson)

Ontario wary on rates, says bond demand firm