The massive debt that Canada’s federal government and other governments around the world took on to face the economic and other fallout of the COVID-19 pandemic is the elephant in the room. This debt could soon become intolerably hard to service if interest rates revert to more historic levels or even escalate past those levels, as investors demand higher compensation for developing or perceived imminent accelerating inflation.
Yet, this issue does not have to be a problem. A solution is readily to hand, but as usual, the high-finance officials and their political masters shy away from using it. The solution: borrow—and refinance current and maturing borrowing—using bonds with terms that go not just beyond the (bogus) benchmark of 10 years or even the earlier benchmark of 30 years, but much, much further out.
Although not well known, the federal government, some provincial governments and even some corporations borrow far out on the term spectrum. There is even a Canada, as federal government bonds are called, trading now that does not mature until 2064—43 years from now. In the past, some bonds went even further out.
This would lock in interest rates and the government and taxpayers could be assured that this borrowing would not be subject to whipsawing by gyrations or panics in the financial markets— wars, recessions, trade disputes, export or exchange controls or even pandemics.
There would be a ready market for these very long-term bonds, of 40, 50, 60 or more years, as pension funds and life insurance companies need to match very long-term liabilities and have few viable alternatives. They are nervously compelled to consider highly illiquid investments such as infrastructure, real estate and venture capital. A big, liquid supply of low-risk income securities long term would be welcomed by institutional investors, who would likely keep the whole market dynamic and liquid.
The cost is a little more than borrowing at shorter maturities, but not, surprisingly, much more. Indeed, quotes on a long Canada (maturing on December 1, 2064) with a coupon rate of 2.75 per cent give this bond a yield of 2.011 per cent. That is not a typographical error. Ottawa can finance its horrendous pile of debt at just over two per cent. Of course, it cannot refinance all at one maturity; interest rates would rise stratospherically.
Instead, a practical course for the government would be to gradually start issuing several billion dollars of debt maturing in different years, from 30 years out, all the way to, perhaps, 100 years out. At a few billion maturing annually, the load would equal potential demand. There is another aspect to these bonds that could be attractive not just to investors, but to traders and speculators too.
Very long maturities, along with very low coupon interest rates, mean that the duration of these bonds would be very long, too. When there are even tiny changes in short- and medium-term interest rates, the change in the market value of these very long duration bonds can change dramatically, giving fast, huge profits or losses. Borrowing against these low-default risk bonds can magnify returns even more.
So, there are many reasons why a campaign of financing and refinancing at very long term and today’s ultra-low interest rates would be a successful strategy for the government. It would relieve some of the debt anxiety and fear of looming tax increases or escalating inflation Canadians may have and also answer some unaddressed demands in the investment marketplace. This could be a win-win-win.
Ottawa should embark on this now. Reversion to more normal levels of interest rates may not happen immediately. However, it is a risk this nation should not have to face when there is a feasible and pragmatic strategy of methodical long-term financial restructuring outlined here that is available and has already been pioneered. This could be the most important single financial decision made in this decade. Time is running out, but when refinanced in multiple decades of maturities, it will not be a concern.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.
Photo by Ruth Enyedi on Unsplash.