Canada provincial bonds favored as focus turns to BoC, strategists say

By Aaron Saldanha and Lisa Pauline Mattackal

(Reuters) - Canada's provincial bonds appear more attractive than sovereign debt as focus shifts from Canada's election to tightening monetary policy, with a Bank of Canada (BoC) rate hike expected as early as 2022, two senior investment strategists said.

Provincial bonds, which earn higher yields than sovereign debt, provide good diversification options for international investors, SLC Management Managing Director Dec Mullarkey told the Reuters Global Markets Forum on Tuesday.

Kevin Headland, senior investment strategist at Manulife Investment Management, echoed that view, saying the BoC's continued tapering of asset purchases amid ongoing fiscal support should result in a steeper yield curve.

"In Canada, you are likely best off in provincials that offer a better yield," Headland said.

The appeal of sovereign bonds has been driven down by Canada's burgeoning national debt, which Prime Minister Justin Trudeau's Liberals have pushed to over C$1 trillion ($781.43 billion), with budget deficits around their widest level since World War Two.

During the election campaign, the Liberals said they would hike the net tax rate on the most profitable banks and insurers.

"It remains to be seen if the government will be able to pass legislation on financials, again the reaction is somewhat positive across sectors so that tends to be a signal of how the market sees the results," Headland said. [.TO]

Overall, both Mullarkey and Headland preferred exposure to equities, favoring a risk-on stance due to factors including thin credit spreads signaling limited upside from a total return perspective.

Mullarkey said he is overweight equities, with a tilt towards value stocks at the Sun Life Financial-owned asset manager, which was overseeing C$324 billion in assets as of June 30.

"A pro-risk stance is appropriate right now given growth continues to recover," said Mullarkey, who helps direct global asset allocation at SLC.

(These interviews were conducted in the Reuters Global Markets Forum, a chat room hosted on the Refinitiv Messenger platform. Sign up here to join GMF: https://refini.tv/33uoFoQ))

($1 = 1.2797 Canadian dollars)

(Reporting by Aaron Saldanha, Lisa Mattackal and Supriya Rangarajan in Bengaluru; Editing by Divya Chowdhury and Devika Syamnath)