11:34 AM EDT, 04/04/2024 (MT Newswires) -- Long provincial returns were negative in the past month as Government of Canada (GoC) bond yields moved higher, and spreads widened by about 6 bps, said Bank of Montreal (BMO).

The economy continues to show improved momentum into early 2024, while a pair of soft inflation reports should leave the Bank of Canada (BoC) on track to begin easing in June, although there's not a lot of urgency at the moment. The provincial budget season is now complete, with larger deficits and bigger borrowing programs the major theme, wrote the bank in its Provincial Credit Watch for April.

Over the past six months, long provincials are still outperforming GoCs, although just by a few basis points; and they are still outperforming by almost four ppts over the past year, stated BMO.

Long provincial spreads were wider across jurisdictions over the past month as the 2024 budgets were all rolled out, pointed out the bank.

Alberta outperformed, and is one of only two provinces (along with New Brunswick) to project a surplus this fiscal year. Higher oil prices are also helping to tighten spreads versus Ontario and British Columbia. Quebec lagged in the past month and now trades slightly back of Ontario again (at the widest end of the three-year range) alongside a deeper deficit and longer path back to balance.

The FY24/25 budget season is complete, and the theme has been deeper deficits and chunky borrowing requirements. Indeed, provincial governments have seen their fiscal path deteriorate after significant improvement through 2023. The combined provincial budget deficit is on track to widen to C$28 billion (0.9% of gross domestic product, or GDP) in FY24/25 from C$10.6 billion in FY23/24.

The pressure is coming on multiple fronts. Revenue growth, which has been robust thanks to the post-pandemic economic recovery and high inflation, has cooled notably amid very sluggish GDP growth. The provinces underestimated growth in 2023 leading to upside surprises, but they have had to downgrade 2024 growth assumptions -- though they have now gone too far on the latter, added BMO.

Meantime, program spending growth is strong at nearly 6%, partly reflecting upward pressure on public-sector wages, while interest costs are on the rise. Not to be outdone, torrid population growth is stressing infrastructure, necessitating large capital spending programs.

Total provincial borrowing requirements will top C$130 billion in FY24/25, the largest on record outside the peak pandemic year. That will leave the increase in net debt at more than C$65 billion in the coming fiscal year, a record annual increase and more than twice the underlying budget deficit.