(Bloomberg) -- Canadian provinces are set to see their relative borrowing costs rise as US tariffs on goods from the country threaten to throttle economic growth.
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Shrinking trade will hurt provincial tax revenues and raise borrowing needs, said Dominique Lapointe, director of macro strategy at Manulife Investment Management. The result will probably be higher risk premiums on provincial debt, or yields relative to federal bonds, he said.
Retaliatory tariffs or export limits would increase the pain. “Tariffs are not priced into provincial spreads at the moment and are at risk of widening,” Lapointe said.
The country’s largest province, Ontario, sold C$750 million ($522 million) of bonds on Tuesday, adding on debt to an existing note due 2034. Investors demanded 60 basis points over the government benchmark to buy it. That spread remains at a similar level, according to Bloomberg indicative bid prices Wednesday. In October, the spread was wider than 70 basis points, implying that investors are less concerned about the tariff threat forcing provinces to borrow more.
Broad tariffs by the Trump administration would hurt Canada and Mexico more than other countries, according to analysis by Bloomberg Economics, and economists’ models of a trade war see it leading to a recession in Canada quickly. Most Canadian provinces rely heavily on income taxes and sales taxes for revenue; their budget deficits would widen.
Tariffs are likely to disproportionately affect Canadian government credit in the global market, leaving provinces more reliant on domestic funding, said Sameer Rehman, managing director and head of government finances at Bank of Montreal. As supply increases, investors tend to demand extra premiums to hold the bonds.
Even a 20% tariff that excludes commodities may cause provincial spreads on 10-year maturities to widen by as many as 12 basis points, according to analysis from Canadian Imperial Bank of Commerce. If that extra-wide yield were applied to the approximately C$135 billion provinces are expected to borrow in fiscal 2025, based on November estimates from CIBC, it could amount to about C$162 million of extra interest per year.
The actual number could be higher, given that government may need to borrow more as tariffs erode their balance sheets.