Canadian provinces brace for rising U.S. borrowing costs

Canadian provinces are bracing for rising borrowing costs as looming U.S. tariffs threaten to curb economic growth. Bloomberg reported that shrinking trade could lead to lower provincial tax revenues, potentially higher borrowing needs and lead to higher provincial debt risk premiums.

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Dominic Lapointe, director of macro strategy at Manulife Investment Management, said the impact of potential tariffs is not yet reflected in provincial debt spreads but could soon exacerbate financial challenges. Analysts including Canadian Imperial Bank of Commerce expect that even a 20 per cent tariff could widen provincial spreads on the 10-year Treasury note by as much as 12 basis points. With provinces expected to borrow about $135 billion in fiscal 2025, the additional borrowing costs could translate into about $162 million in additional interest per year.

Ontario, Canada’s largest province, recently sold C$750 million in bonds, a 60 basis point spread over the government’s benchmark. This highlights investor demand for higher premiums amid potential economic disruptions. Bloomberg Economics further emphasized that widespread tariffs could have a significant impact on Canada and Mexico, predicting that Canada’s economy would decline rapidly if a trade war breaks out.

While provinces are exploring ways to offset the impact of tariffs, such as pre-funding debt, experts agree these measures will only provide limited relief. Sameer Rehman of Bank of Montreal said Canada’s fixed-income market has shown resilience, although gradually diversifying the economy away from dependence on the United States remains a difficult task. As provinces explore increasing domestic trade, long-standing interprovincial trade barriers create additional barriers to economic adaptation.

Source: IndexBox Market Intelligence Platform