04:31 PM EDT, 07/04/2024 (MT Newswires) -- "Well that was truly special," Warren Lovely, National Bank of Canada's Chief Rates and Public Sector Strategist said on Thursday, noting that in the second quarter, Canada's provinces collectively secured the equivalent of C$62 billion from debt capital markets, calling it "a remarkable tally, eclipsing the extraordinary fireworks of 2020:Q2."

When added to the near C$43 billion issued in calendar Q1, Lovely noted year-to-date provincial bond supply across all currencies is a "snick shy" of C$105 billion. As far as mid-year issuance tallies go, that's 3.5 standard deviations above the post-GFC trend, he noted.

"While perhaps not yet fully appreciated," Lovely said, "provincial bond issuers will be in a position to slow things down (at a time of their choosing). On a fiscal year basis, more than half of the total 2024-25 borrowing requirement was completed in the first quarter of the fiscal year -- a tremendous head start, which in some cases reflects a concerted effort to advance funding programs given the political calendar".

Lovely said international markets have contributed "mightily" to record year to date supply, a trend that remained in evidence in June, where five foreign currency trades netted the equivalent of C$6.6 billion. Notwithstanding the benefits of international supply, including supply diversion, investor diversification and sheer depth of demand, National expects a "material moderation" in the second half of the calendar year, a development that could see cross-currency basis swap spreads moving to the left.

Domestically, Lovely added, a supply moderation already looks to be taking shape. After C$15.4 billion in April and another C$12.2 billion in May, domestic Canadian dollar denominated bond issuance slowed to C$9.3 billion in June. Based on the bank's read of remaining funding needs and a likely currency split, the pace of domestic provincial supply should downshift hard in the second half, to as little as one-half of the Q2 tempo.

"As for valuations," Lovely said, "it's perhaps impressive that spreads vs. govis have held in so well in the face of such a supply onslaught. Credit a heretofore-healthy risk appetite."

"On that score," he said, "we're mindful of a gathering slowdown in the US, which could mount a challenge to credit more generally."

"No question," Lovely added, "provi valuations are most exceptional on an asset swap basis, Ontario 10s cheaper vs. OIS today than at any time in the risk-free reference rate era. If, like us, you felt 10-year swap spread were biased higher, a less forceful bond supply impulse could translate into potential ASW performance, even allowing for some suffering in overall investor risk sentiment."