Buying the Bonds of the Canadian Government
A bond is a fiscal tool employed, by a government or corporation, to borrow funds from an investor for a certain duration (Coyle, 2002). The investor creates money through interest at a certain rate and dates. The investor receives money after the bond matures. Although the bond may be sold before maturity, it cannot be redeemed. So as, to know whether it would be safe to buy bonds of the government in Canada, we must evaluate various aspects, such as interest rates, inflation, currency, industrial sector, government finance, monetary reserves and resiliency of the bonds.
Present Tendencies in Interest Rates
The rate of interest is low, in Canada. Early this month, the Bank of Canada declared that it is upholding the rate at 1 % (Quinn, 2012, March 8). Thus, the Bank of Canada has flattened the small end of the yield curve and the total return outlook on bonds, as well as changed the entire term construction of interest rates, through reducing interest rates. Consequently, there is an increased risk of losing money in a bond fund, at present, since the rates are extremely low, unless for long-term investors. Interest rates, which are in the range of ten years, are lesser than have ever been. Nevertheless, to return them into the 5-6% range can not be an extremely dramatic change. The 1% rise in rates will make the returns on bond funds horizontal, although with no negative risk over the subsequent 1 year.
Trends on Inflation
The value of government bonds reduces when inflation rises. The inflation rate is low, in Canada. In 2011, the average consumer price change, or Canada’s inflation rate, changed to 2.231 %. Commencing 2012, the inflation rate became projected to drift between 1.9 and 2.03 % (Economy Watch, 2010). At present, inflation is beneath the Bank of Canada’s mark, and it is not likely that it will rise drastically, in the short term. This is because the Bank of Canada eased interest rates. Hence, it is safe to obtain government bonds, from this perspective.
Currency: Trends on the Canadian Dollar
When the rate of the currency is deflating, government bonds become unsafe. This is because the charge of imports and outstanding borrowings grows to be further expensive. The Canadian dollar is rising swiftly (USD/CAD outlook March 26-30, 2012). However, the abrupt increase of the dollar makes appear like a tightening. Canada may experience a new 25-point cut, since that span is obtainable and, at present, inflation is beneath the Bank of Canada’s mark. Hence, it is safe to obtain Canadian government bonds as the strong Canadian currency can aid to endure any inflation demands, in prospect.
Industrial Sectors
Industrial sectors including the transportation, finance, and utilities division have been investing profoundly in technology, equipment and machinery. As a result, new jobs have become created, thus reducing rates of unemployment and increasing consumer spending. As a result, the economy of Canada continues to stabilize, implying that obtaining government bonds, in the country, would be safe.
Government Finance
The gross domestic product increased by 0.4%, in the last quarter, following an increase of 1.0%, in the second, last quarter. Exports and consumer expenses added the most to the GDP growth, in the last quarter. The domestic demand increased by 0.5%. Canada’s GDP, in 2010, rested at US$1.330 trillion (Economy Watch, 2010). This was a 4.05% rise from the figure, in 2009. As of 2011-2016, Canada’s GDP becomes anticipated to augment yearly, by 3.66, to 4.04 % ahead of attaining US$1.665 trillion (Quinn, 2012, March 8). This will boost Canada’s position in the globe about GDP rankings.
Also, the GDP of Canada becomes expected to rise, from 2011 to 2016, by a slow, but steady rate. Canada’s GDP declined to US$37,970.90, in 2009. The following upturn, in 2011, plus the annual expansion of 2.20 -2.71 %, will make Canada’s GDP strike US$45,108.04, in 2016. Such an anticipated increase, in Canada’s GDP, demonstrates that the government is doing well economically, and chances of inflation are low. Hence, obtaining government bonds would be safe.
Federal debt attained a fresh record high of over $582 billion, as of February 2012, with the sum state debt having enlarged to $1.2 trillion, or approximately $37,000 per head (Quinn, 2012, March 8). Ontario is, particularly, endeavouring to control debt, on the provincial stage, having accrued above $250 billion, in September 2011. However, the Conservative government has promised to reposition the national budget to a surplus place in the following five years. This government has ascertained that it can reposition the budget without increasing taxes, which could create room for augmented payments on the national debt. Since the government commits itself to reposition the national budget to a surplus, inflation is unlikely to occur. Hence, obtaining government bonds would be safe.
With spending beneath the mark and the economy on the increase, the regime and its finance department find themselves with the litheness to draw a 2012 budget that reduces the deficit while supporting economic expansion. The national spending for the contemporary financial year of 2011/12 is underneath a forecasted deficit of $31 billion and is expected to arrive at $26 billion (Quinn, 2012, March 8).
Again, approximations of Canada’s economic position, in 2012, became increased lately by several of Canada’s main banks. Canada committed to boasting the lowest public segment debt concerning its economy by 2015. A report from a chief bank in Canada declares that the national government’s balance sheet is in better form than earlier estimated. This implies that the government is unlikely to experience inflation. Hence, obtaining government bonds, in Canada, would be safe, as the economy is doing well.
Since 1999, Canada owned a surplus, in the current account. Nevertheless, in the dawn of the financial crisis, Canada obtained the 7th prevalent deficit, in the globe (Economy Watch, 2010). The current account deficit, in January 2010, changed from US$6.483 billion to -US$38.075 billion (Economy Watch, 2010). A year later, the deficit augmented to – US$48.515 billion (Quinn, 2012, March 8). In 212, the deficit becomes expected to augment to -US$49.056 billion (Quinn, 2012, March 8), ahead of further decreasing. It gets estimated that the deficit will reduce to -US$26.871 billion, by 2015 (Quinn, 2012, March 8).
An examination by the Royal Bank reveals that Ottawa’s deficit for the present fiscal year could drop to $20 billion, which is lower than the projected $31 billion. Current government revenues are above the prospect and expenses are quite low. Thus, this can make the plan of eliminating the deficit, in 2016-17, authentic. From this perspective, obtaining government bonds would be safe, as the government gets expected to settle its deficit shortly.
Canada’s rate of unemployment becomes expected to develop, gradually and go back to normal heights, by 2015 (Quinn, 2012, March 8). Regardless of the strong economic expansion, in the first half of 2011, job construction reduced in the subsequent half of the year. Consequently, unemployment rates continue to be comparatively high. The rate of unemployment, in Canada, was 7.992 %, last year. This was a development from 2010’s rate of 8.292 percent. However, this figure is considerably more than the normal height. Between 2015 and 2016, the rate of unemployment may stay constant, at 6.1 percent (Quinn, 2012, March 8). Such an increase in employment level will boost the economy of the state and reduce the chances of inflation. Therefore, obtaining government bonds will be safe.
Canada has low inflation rates. Canada’s inflation rate remains fairly steady and well-fixed in the Bank of Canada’s prepared target of 1-3 %, despite the irregularities, in 2009, 1998 and 1994, where inflation fell below 1 %. The Canadian Chamber of Commerce explains that lofty employment, powerful currency, modest salary increments, and a noteworthy output gap will persist to help endure any inflation demands, in prospect. Therefore, obtaining government bonds will be safe.
Monetary Reserves
The official, international reserves, for Canada, increased to $3.419 billion last month. Foreign currencies, gold and other fiscal assets summed up to $69.795 billion, an increase from $66.376, in January 2012 (USD/CAD outlook March 26-30, 2012). Last month, the regime did not report any official intervention, in the foreign currency market. The sum of outstanding Canada bills was reduced to $2.208 billion, in February.
The foreign currency reserves, at the end of February, comprised deposits of $806 million, unique drawing rights $9.083 billion, securities $55.618 billion, gold $193 million ad reserve situation, in the International Monetary Fund, $4.095 billion. Currency constitution of securities and deposits, at the end of February, comprised Euro $20.198 billion, Yen $420 million and U.S. dollars $35.806 billion. Hence, there may be reduced chances of the Canadian government experiencing inflation, which makes government bonds safe.
The Resiliency of Bonds
A negative return in bonds has never occurred as the Bank of Canada is on hold or easing. Hence, investors can not experience negative returns in the coming 6-12 months. In case the price of a bond declines, it will be preparing to capitulate further. A person who has lost money in bonds has to compensate for that loss, eventually, via high capitulating bonds. In every three-year phase, in the long term, bonds have constantly had a positive yield. When bonds become negative stocks grow to be positive, and the other way round (Coyle, 2002). A rise in rates, currently, could draw both asset classes downwards. However, this is not likely to happen as the rate of interest remains low.
The Canadian government is the principal player in the Canadian bond market. Besides the ordinary treasury bills, they provide real return bonds. This bond secures investors from inflation as it gets indexed alongside the consumer price index. In this case, the investors obtain extra money to maintain the pace.
Besides, bonds of Government, in Canada, give attractive returns and become wholly guaranteed by the national government. Canadian government bonds become deemed as the safest Canadian investment obtainable with a period above one year. They reimburse a guaranteed, permanent level of interest returns up to maturity, wherein the whole face value gets reimbursed.
Even when one holds his investments to prime-age, the Canadian Government bonds are entirely marketable and may be sold in any period.
In summary, buying government bonds, in Canada, is safe as growth has been healthy in latest years, incomes and employment have been increasing, and inflation is modest and stable. Besides, plans to reduce government budget deficits are underway, and the public debt of the state economy has been decreasing. In addition, as part of a significant reformation attempt by the private segment, firms have been investing profoundly in technology, equipment and machinery.
Buying Securities of Companies which primarily or exclusively do Business in Canada
A bond issued to investors, by a corporation, to, raise funds for activities of expansion, operating, or performing business becomes called a corporate bond (Choudhry, 2004). The bond attains maturity at a definite date, in prospect, and pays a token (interest) on the primary total over that phase. At first, a bond gets sold at par and its worth increases or decreases in reaction to a range of actions and conditions. So as, to know whether it would be safe to buy securities of companies that primarily or exclusively do business in Canada, we must evaluate various aspects, such as inflation, interest rates, sector changes, as well as industrial production and diversification.
Inflation
The inflation rate is low, in Canada. The worth of corporate bonds increases when inflation decreases. In cases of disinflation, which is a fall in inflation, the worth of corporate bonds rises. Hence, it would be safe to buy securities (bonds or equities) of companies that primarily or exclusively do business in Canada, as corporate bonds are likely to increase.
Interest Rates
The rate of interest is low, in Canada. Early this month, the Bank of Canada declared that it is upholding the rate at 1 % (Quinn, 2012, March 8). The worth of corporate bonds reduces when standard interest rates rise, and conversely, the value augments when interest rates fall. Since the Canadian government has committed to maintaining the interest rates at a low rate of 1%, corporate bonds in Canada are likely to increase the value. Hence, it would be safe to buy securities (bonds or equities) of companies that primarily or exclusively do business in Canada.
Sector Changes
Corporate bonds fall into the industrial, transportation, finance, or utility division. Economic sectors, in Canada, are investing profoundly in technology, equipment and machinery. Because of the new developments or growth, there are positive changes, in the economic segment of the corporate bonds, leading to an increase in the price of the bonds. Hence, it would be safe to buy securities (bonds or equities) of companies that primarily or exclusively do business in Canada.
Since these sectors are continuously developing and enhancing their products and services, consumer demand remains high. Also, income is high because the new emerging industries are creating employment. Thus, the value of corporate bonds continues to increase, in Canada.
Industrial production and Diversification
A boost, in industrial production, demonstrates that the economy is expanding. The diversified industrial segment comprises a wide array of corporations in financial services, consumer & industrial products and services, communications, forest products and utilities. Last year, the Issuers of diversified industries summed to 715. Last year, industrial production in Canada grew by 0.7 %. Industrial production assesses transformations in yield, for the industrial segment of the economy, which includes mining, manufacturing, and utilities. 0.7 % is a suitable industrial growth rate (Quinn, 2012, March 8). It demonstrates that prices, of commodities, are likely to be stable. Consequently, the value of corporate bonds is likely to increase.
Investing in a manufacturing plant to either export the product or sell the output in the domestic market
For a firm to invest in a manufacturing plant, in any country, it must consider factors such as employment rates, interest rates, exchange rate system, political stability of the government, and stability of the local currency, economic infrastructure, banking system, current account deficit, racial issues, currency restrictions, tariffs and quotas, the balance of trade, independent monetary policies and access to capital markets. So as, to determine whether it would be safe to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market, we shall examine all these aspects.
Exchange Rate System and Trade-Weighted CAD Index
Canada has a floating exchange rate system. The significance of a floating currency for Canada comes from the need of aiding the economy in absorbing various effects of external shocks. A floating exchange rate may, as well, aid to absorb some of the forces arising from massive capital flows and easing any crucial economic modification, in a globe where capital moves freely across state boundaries. When the value of a currency declines outstanding borrowing, and the cost of imports grows to be further costly. In floating rates, a central bank sets monetary policy, and the exchange rate becomes allowed to glide on autopilot.
The floating rate regime is a liberated market system, whereby conflicts amid monetary policies and exchange-rate can not occur. Hence, a balance of payments predicament does not happen with this mechanism. Therefore, it would be safe for firms that either want to sell their products domestically or export them since conflicts amid monetary policies and exchange-rate can not occur.
Also, Canada mainly trades with the US. Therefore, the USD-CAD exchange rate contains a weight of 80% (USD/CAD outlook March 26-30, 2012). The trade-weighted exchange rate, of a nation, is a median of its joint rates with its trading allies, weighted by the quantity it trades with each of these states. The gauge captures the impact of currency variations on the competitiveness of a nation’s exports, as when rates are high, exports become costly. Therefore, it would be safe, for firms interested in exporting their products, to invest in the Canadian market as the trade-weighted index of Canada is high, implying that its exports would have a high value.
Balance of Trade
Canada, in January of 2012, accounted for a trade surplus equal to 2.1 billion CAD. Global trade forms a significant fraction of the Canadian economy. Exports sum to almost 45% of the nation’s GDP (USD/CAD outlook March 26-30, 2012). The US is its main trading partner, forming over 54% of imports and 79% of exports. Canada imports vehicles, machinery and equipment, chemicals, electronics and electricity (Quinn, 2012, March 8). Canada is among the developed countries that export energy. A firm wanting to invest in the Canadian market, to sell its commodities, domestically, would benefit much by investing in any of these areas of Canadian imports, as it would obtain a ready market.
Current Account Deficit
The current account deficit of Canada condensed, in the last quarter of 2011, on high export. The current account deficit is the discrepancy between how much a state invests and how much it saves. In case, the outflow of global transactions is more than revenues created by global transactions, the deficit gets compensated through borrowed money. When the money entering a nation goes into prolific investment, then the state will have the ability to reimburse the foreign debt. In case, it gets used for user products and lifestyles the deficit will persist to augment. Canada, in the 2010/11 fiscal year, accounted for a regime budget deficit equal to 2.1% of the Gross Domestic Product.
According to the European Union, government deficits should not surpass 3% of GDP. The merchandise exports in Canada augmented by 3.2% while imports reduced by 0.8% (Quinn, 2012, March 8). Consequently, Canada’s trade balance with the globe shifted to a surplus of $1.1 billion, in November, from a deficit of $487 million, in October. Thus, the merchandise trade deficit, in Canada, becomes balanced. A merchandise trade deficit occurs when the procurement of imports into the state surpasses the sale of exports transferred to other states. Hence, the deficit of Canada obeys this requirement. Thus, it would be safe, for firms interested in exporting their products, to invest in the Canadian market as the current account deficit is stable.
Employment Rates
The rate of unemployment, in Canada, is at 7.4%, a decline of 0.2% from last year’s rate (Quinn, 2012, March 8). Hence, investors can have confidence in the economic state of the nation, and they can begin selling assets or renewing loans.
Interest Rates
Interest rates, in Canada, are low. Hence, asset values are increasing while the number of purchasers available to acquire inexpensive financing rises. Hence, it would be safe for firms to invest in the Canadian market, as there is an increase in national consumption expenditure because individuals do not get worried about their jobs.
Economic Infrastructure
The Government of Canada dedicates itself to collaborating with all stakeholders, to build a durable plan for public infrastructure in Canada. This noteworthy commitment exploits the strong basis established over the preceding five years. The Building Canada Plan is financed by many projects, in the nation, like public transit and green energy initiatives, bridge and road work, water and wastewater system enhancement, culture and sports. Hence, it would be safe to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market as there is an apt economic infrastructure.
Stability of Banking System
The system of banking, in Canada, is solid. The virtual stability of Canada’s banking segment became recognized after the 2008 financial crisis, as Canada did not encounter bank failures (Bordo, 2011 May 13). Canada’s banking system got reported as the soundest, in the world. This is because Canadians get served by a few, large banks with outlets in each corner of the state. Hence, it would be secure to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market as the country does not experience bank failures, implying that any fluctuations in the economy would not affect the business of the plant significantly.
Access to Capital Markets
The capital market in Canada gets liberalized. Also, Canada is enhancing property rights. When a state liberalizes capital markets and enhances property rights, it draws investment capital from other states (Jenkins & Longworth, 2002). Such investment results to further economic expansion. Corporations, of all dimensions, can create capital in Canada, varying from large public offerings to small Private placements. Hence, it would be safe to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market.
Stability of Government
Canada’s structure of government may be regarded as a federal system of government and a constitutional monarchy. Queen Elizabeth II is the head of state, for Canada. The Federal Court of Appeals and Federal Court Trial Division influence issues like immigration and patents rights. Canada is a politically established state. Canada ranks 11 out of 167, in the democracy index. This implies that issues like government coups, which affect business transactions, are not likely to occur, in the country. Hence, it would be safe to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market.
Independence of Monetary Policy
A flexible exchange rate enables Canada to have a sovereign and open monetary policy. This would enable a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market with no hurdles in exchange rates (Jenkins & Longworth, 2002).
Currency Restrictions
Canada restricts persons entering or leaving with $10,000 (CAD) or extra, in a foreign currency, as well as, stocks/ bonds, securities, coins and foreign or domestic banknotes. This is likely to limit the finances of an alien manufacturing firm, as fiscal mobility becomes restricted.
Tariffs and Quotas
Canada commits to a six-step diminution plan of Tariff rates, for most commodities. With the execution of the WTO accord, actions like quantitative and import prohibitions on certain products became substituted by tariff-rate quotas. Thus, it would be safe to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market, as there are no strict, export restrictions.
Racial issues
Although the country welcomes racial multiplicity, racial minorities and fresh immigrants undergo noteworthy limitations including racial hurdles to social inclusion and fiscal mobility. Therefore, foreigners wanting to invest, in Canada, might be challenged by racial hurdles to social inclusion and fiscal mobility.
In conclusion, this sovereign analysis reveals several things. First, it would be safe to buy the bonds of the government, in Canada. This is because the Canadian economy is experiencing healthy development. The interest and inflation rates are low, while currency rates and industrial sectors are growing. Besides, income and employment have been increasing and plans to reduce government budget deficits are underway. Second, it would be safe to buy securities of companies that primarily or exclusively do business in Canada. This is because the Inflation rate is low, in Canada, and the worth of corporate bonds increases when inflation decreases.
Similarly, low-interest rates increase the value of corporate bonds. The Canadian government has committed to maintaining the interest rates at a low rate of 1%, corporate bonds in Canada are likely to increase. Besides, economic sectors are investing profoundly in technology, equipment and machinery. Consequently, there are positive changes, in the economic segment of the corporate bonds, leading to an increase in the price of the bonds. In addition, prices are stable, which leads to an increase in the value of corporate bonds.
Thirdly, it would be safe to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market. This is because capital markets in Canada become liberalized. Also, conflicts amid monetary policies and exchange rates can not occur as Canada has a floating exchange rate system, which allows a sovereign and open monetary policy. Besides, investors can have confidence in the political and economic state of the country. The system of banking, in Canada, is solid. Furthermore, actions like quantitative and import prohibitions on certain products became substituted by tariff-rate quotas, with the execution of the WTO accord.
Conversely, foreign manufacturing plants, in Canada, may experience difficulties, as racial minorities and fresh immigrants encounter racial hurdles to social inclusion and fiscal mobility. However, since this is the only limitation, we conclude that it would be safe to invest in a manufacturing plant, in Canada, to either export the product or sell the output in the domestic market.
References
Bordo, M. (2011). Canada’s banking experience shows concentration can improve stability. The Economist. Web.
Choudhry, M. (2004). Corporate bonds and structured financial products. Amsterdam Boston: Elsevier Butterworth Heinemann.
Coyle, B. (2002). Government bonds. Canterbury: Financial Pub.
Economy Watch (2010). Canada economy. Web.
Jenkins, P. & Longworth, D. (2002). Monetary policy and uncertainty. Bank of Canada Review, 3-10.
Quinn, G. (2012). Bank of Canada keeps its benchmark interest rate at 1%.BloombergBusinessweek. Web.
USD/CAD outlook March 26-30. (2012). Web.
