08:01 AM EDT, 10/25/2024 (MT Newswires) -- The International Monetary Fund recently released a new edition of its semi-annual Fiscal Monitor and Canada was reminded that it stands among the best of a bad bunch of fiscal managers in the G7, said National Bank of Canada.

Canada is often critical of excessively loose -- and sometimes unsustainable -- budgetary management but does better fiscal discipline really count for anything, asked the bank. The answer it gives is "Yes, it does."

Over the last two decades, Canada's general government gross debt load has steadily shrunk relative to the United States, pointed out National Bank. That's coincided with

a similarly steady shrinkage of relative long-term sovereign borrowing costs.

Two decades ago, it was more expensive for the Canadian government to borrow in the long end. Today, this relationship has flipped and then some as Canada enjoys a more than 100 basis point discount compared with the US, stated the bank.

It's true that this simplistic visual analysis doesn't control for underlying policy rate differentials, but fiscal fundamentals and policy rates aren't independent either, added National Bank. A larger-than-expected fiscal impulse in the US has kept that country's growth, inflation and as such, policy rates higher than they might otherwise be.

So yes, debt matters when it comes to interest rates, it pointed out. While today's rate differential in the long end of the yield curve is historically extreme, the fiscal trajectory doesn't suggest that the gap will narrow anytime soon. Quite the contrary, according to National Bank.

The ever-higher climb in US deficits and debt, which will be accelerated by the looming change in the White House, may lead investors to demand greater and greater compensation for holding US Treasuries, noted the bank. That could see yield differentials move wider still over the coming decade.