Provincial governments are finding borrowing costs going up as investors are pushing up the premiums they demand to hold their bonds in light of growing budget deficits and deteriorating economic fundamentals in the oil provinces.
The spread between provincial bond yields and Government of Canada bond yields have widened to levels not seen since 2009 and it is not just the oil-dependent provinces that are experiencing higher borrowing costs.
Even British Columbia, a province that has a triple-A rating that is expected to be one of the strongest provincial economies this year, is seeing yields on its bonds rise.
"Canadian provincial bond yield spreads continue to widen out versus Government of Canada bonds, with the longer-term index pushing higher to 120 bps in recent days," said Robert Kavcic, senior economist at BMO Capital Markets. "That is now creeping up on levels seen during the height of the financial crisis, when there was a wholesale (and massive) flight from risk."
Rising borrowing costs come at a time when more provincial government need to fund their budgets with debt. Eight of the 10 provinces are running deficits and 2015 was the first time in Canadian history that total debt held by provincial governments exceeded the federal government's debt.
The ratings agencies have certainly taken note. Alberta lost its top-notch rating on its debt in December after Standard & Poor's downgraded the province as it continues to reel from the oil price shock. Both Ontario and Manitoba also sustained debt downgrades earlier in 2015, with the former's downgrade coming after years of warnings about poor fiscal management in the province.
With budget surpluses still out of sight for many provinces, there could be more pain in provies to come.
"The longer-term move up in provincial yield spreads more broadly (see the trend since the mid-2000s) likely also reflects deteriorating fiscal fundamentals versus the federal government - the recent wave of negative rating action highlights that point," said Kavcic.