March 28, 2012 / 12:12 AM / in 6 years

Ontario to favor home bond market, wary of Europe

TORONTO (Reuters) - Ontario will look to the local Canadian-dollar bond market to meet most of next year’s funding needs, but expects to borrow less at home than the 81 percent it did this year, the chief executive of the Ontario Financing Authority said.

Gadi Mayman, speaking ahead of the release of the provincial budget on Tuesday, said Ontario was able to easily tap the local market to fund 81 percent of the 2011-12 borrowing requirement due to a strong international appetite for Canada’s high-flying currency, the country’s sound fiscal reputation and higher yields than federal debt.

The province said its long-term public borrowing need for the current fiscal year was C$34.9 billion ($xx billion), a decrease of C$100 million from the estimate last spring. Borrowing needs for subsequent years have also drifted down from previous estimates due to lower deficits.

Still, Mayman acknowledged the province’s vulnerability to global risks.

“What keeps me up at night in the financial markets is … Europe and while Europe is for the moment looking fine I just worry about what goes on with that and whether it has any contagion effects in international markets,” he said.

“To a large degree we follow global sentiment, it’s a very integrated global marketplace and there’s no place to hide anymore, so if things go very badly wrong in Europe there’s no doubt it will have an impact on us.”

The province aims to borrow at least 70 percent at home in 2012-13, closer to historical levels of three quarters, but that will depend on market conditions, and in particular where it’s least expensive for the province to borrow.

Ontario - the world’s seventh largest non-sovereign borrower - issued 59 percent of its debt in the domestic market in 2010-11 and 51 percent in 2009-10 near the height of the global financial crisis.

Mayman said the average cost of borrowing in 2011-12 was 3.2 percent over an average term of 13 years. The big bump in borrowing in the domestic market this year also led to the longer than usual duration, which usually falls between 10 to 13 years. He said there was a healthy appetite for longer-term issues from institutional investors such as life insurers, pension plans and other asset managers.

He expects the cost of borrowing in 2012-13 to average 3.4 percent, up slightly from this year, but still much lower than the historic average

Mayman noted that domestic issues are easier to manage, as they don’t have to swap foreign currencies back to Canadian dollars. They also allow for longer duration, which the province prefers.

For global bonds in other currencies, he said next year’s mix will look similar to this year’s, with the largest denominations in U.S. dollars, followed by euro and yen.

Mayman said the province is not interested in issuing popular inflation-protected bonds, because they are in effect “expensive floating rate money”.

Editing by Jeffrey Hodgson

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