(Bloomberg) — Canadian companies are at risk of facing higher interest costs as an unintended consequence of a government proposal to eliminate the country’s C$260 billion ($195 billion) mortgage bond program, an investors’ lobby group has warned.

Most Read from Bloomberg

Prime Minister Justin Trudeau’s government is considering winding down the Canada Mortgage Bond program in a bid to reduce borrowing costs. CMBs are guaranteed by the federal government’s housing agency, giving them the highest possible credit ratings, since Canada is rated triple-A by S&P Global Ratings and Moody’s Investors Service. Despite that, the notes trade at a higher yield than Canada government bonds.

Finance Minister Chrystia Freeland’s proposal for getting rid of CMBs would force the government to issue larger amounts of debt through its regular financing program. The result may be higher federal government bond yields — widely used benchmarks to price debt securities in loonies — which in turn mean higher interest rates for companies, provincial governments and other bodies that issue bonds, the Canadian Bond Investors’ Association said in a July 5 letter sent to the Department of Finance.

“A change in the underlying GoC yields will increase funding costs for issuers and will reduce valuations of existing securities,” according to the letter signed by Peter Waite, executive director of the CBIA.

Issuers will likely be tempted to raise more debt in other currencies, he added. “We have already observed a trend of domestic issuers funding in foreign markets and this change will likely cause more issuances to be diverted outside of Canada.”

The group represents more than 50 institutional investors in Canada that collectively manage more than C$1.8 trillion in fixed-income assets, the organization said.

“This proposal to consolidate Canada Mortgage Bonds is intended to reduce borrowing costs and redirect savings to priority affordable housing programs,” a spokesperson for Freeland said. “Ongoing consultations are focused on developing an implementation plan that will ensure Canadian mortgage lenders maintain stable access to financing.”

The CMB program raises part of its funding through floating-rate notes, which are “especially important” in a rising-rate environment, the trade association said in the letter. “The reduction of FRN supply will adversely impact an already depleted space since FRN issuance has been challenged for some time.”

The finance department is consulting with market participants about the future of the CMB program. The deadline to send comments is July 14.

–With assistance from Christopher DeReza.

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.


Please enter your comment!
Please enter your name here