Canada should follow U.S. Treasury’s lead and issue 20-year bonds, Sun Life says

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Sun Life Financial Fixed Income Portfolio Manager Randall Malcolm suggests Canada should begin issuing 20 year bonds, following the lead of the US Treasury with its own plans to do so.

Source: Financial Post

Canada should follow the U.S. Treasury’s lead and issue 20-year bonds, according to Sun Life Financial Inc.’s asset management unit.

Debt due in two decades would help Canada insulate its finances against higher interest rates down the road, but it would also allow asset managers to better pair similarly dated liabilities with government bonds. That’s the view of Randall Malcolm, Toronto-based senior managing director of fixed income at SLC Management, which oversees $227 billion (US$173.8 billion).

“We like to have liquidity in the 20-year part of the curve as we have liability-matching needs across all terms,” Malcolm said in an interview. “It makes sense for them to issue for a few reasons. The current low rates and flat curve are the first incentive.”

The U.S. said last week it’s reviving sales of 20-year bonds, a type of security the Treasury abandoned in 1986 in favour of 30-year debt. Canada currently sells 10- and 30-year bonds — the last time Canada’s Department of Finance issued 20-year bonds was in 1990, according to government data.

A 20-year Canadian bond would yield around 1.65 per cent, according to Bloomberg Valuation estimates. That’s ten basis points less than the central bank’s benchmark rate. By comparison, U.S. Treasuries maturing in 20 years would yield 2.10 per cent, or 55 basis points above the Fed effective rate.

Exploring new maturities could make sense at a time when Canada anticipates greater-than-expected deficits. Finance Minister Bill Morneau released estimates last month that showed a budget shortfall for the five-year period between 2019 and 2023 exceeding prior forecasts by about $35 billion.

“Locking in lower rates for longer terms gives Canadians greater confidence that a return to higher rates will not impact our standard of life as much,” said Malcolm. “Also, if the government is going to fund long-term infrastructure projects to spur growth, it makes sense to match the term of the funding with the life of the asset.”

However, not everyone says Canada should introduce a new maturity. Instead, the country should increase the frequency of its 10- and 30-year bond offerings, Mark Chandler, head of fixed-income research at Royal Bank of Canada, said in an interview. A press officer at the Department of Finance in Ottawa said Canada doesn’t have plans to issue a 20-year bond at the moment.