Government bond yields are grinding towards 2023 highs - driven by a concoction of geopolitical conflict, increased barriers to trade…

… and elevated levels of government spending, which has been funded primarily through debt issuance.

Despite the recent acceleration in new debt, supply appears to be well-covered - with demand across key maturities sitting in-line with historical ranges…

… thanks in large part to hedge funds, who’ve grown into one of the most active participants in federal paper - representing over 40% of new issuance buying and ~25% of secondary market trading.

While that could create problems if yields spike higher, the current move in rates has been fairly orderly - as evidenced by auction tails that sit mostly in-line with long-term averages…

… due in part to record foreign demand for Canadian debt, which gives auction participants a channel to offload inventory and absorb heavier issuance.

With yields rising globally, we’re watching how that appetite evolves to see if the foreign bid remains durable.

Short answer: no. Despite Venezuelan imports nearing their pre-sanction levels, Canada represents nearly 70% of weekly crude imports into the US…

… which could face some pressure if substantial, multi-year investments are made to increase Venezuelan production. At its peak in 1997, the overlap with Canadian crude was modest…

… with the Gulf Coast (PADD 3) being the primary destination for Venezuela’s heavy sour crude. Today, less than 10% of Canadian product goes to this district - limiting the potential pricing impact.

While the US receives the vast majority of our oil, Canada is gradually diversifying its hydrocarbon exports…

… with the Trans Mountain Expansion improving access to Asia, which could grow if the west coast pipeline under review moves forward.

But with no infrastructure to bring oil east, the real risk coming from south of the border isn’t competing supply…

… it’s that any energy trade escalation could easily be countered by the US choking off oil flow to Ontario and Quebec.

On Monday Carney appointed Dominic Barton as Chair of Invest in Canada, prompting speculation that Chinese investment dollars will follow…

… given he previously served as our Ambassador to the country. With US tensions ratcheting up after our last China deal, anything major from an investment perspective could be problematic…

… but Carney and company have the backing at home to move forward, as evidenced by recent seat projection numbers. Let’s see what happens.

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