Good Afternoon,

I heard from many of you after sending the following email. I apologize for the delay in my response. Between the volume of tax requests and recurring problems with my office computer, I simply ran out of time.

In short, this graph raised a ton of good questions.

What this graph shows is who is funding the Trudeau government’s deficit. The answer is the Bank of Canada (BoC). In fact, the BoC was buying for a minimum of $ 5 billion of bonds per week until very recently. This is a huge number. Ultimately, the BoC prints money to fund these weekly purchases. Reportedly, purchases are now in the $ 3 billion range per week.

Let's not forget that no matter what many people think, the federal government can't print money. When they run a deficit, which is obviously the case today, they finance themselves by borrowing money on the bond market. In other words, they issue new bonds (important nuance) and in return receive the funds from the sale of these bonds. Historically, federal bonds were bought by a multitude of buyers.

However, for the past year, it has mainly been the Bank of Canada that has financed the federal government’s deficit. That is not their mandate. The BoC must "promote the economic and financial prosperity of Canada". Their four main areas of responsibility are :

1) Monetary policy 

2) The reliability and soundness of the financial system

3) Designing, issuing and distributing Canadian currency notes

4) The financial management of the Canadian government.

Another interesting point is that the federal government is still financing itself in the very short term, considering interest rates.

The attached chart illustrates the type of maturity that the government is currently issuing. As you can see, it's mostly bonds with maturities of 5-years and under. Is this because there isn't really a demand for 30-year bonds? Does the market trust Canadian finances?

In any case, 10-year and 30-year bonds are mostly bought by the BoC. This is one way of the ways they try to control rates over the long term. Remember that short-term rates are already controlled by the BoC's policy rate.

The main question is, what is the Bank of Canada going to do with these bonds? When these bonds mature, they hope that other buyers will come forward to allow the federal government to refinance their debt (let's be honest, we won’t be returning to a surplus situation tomorrow morning and with that be able to pay off this debt).

Another point raised is that, to make these purchases, the BoC has issued +/- 18% of the Canadian money supply in the last year (in the US, the Fed does the same and the money supply increased by 25%). This increase will devalue the purchasing power of our dollar and thus create an environment conducive to the return of inflation.

The last point is that rising interest rates are reintroducing the notion of interest rate risk for bond investors, alongside that of credit risk.

We are living and investing in interesting times, to say the least! Later this week I will write a third and final memo on the subject.

Warmest regards,