Quebec Bonds Tighten as Separatist Party Falls Short of Majority

The separatist Parti Québécois won Quebec’s election but fell short of a majority government, a result that’s boosting investor confidence in the province’s bonds.

Quebec 30-year bonds have tightened to about 7.5 basis points above the Ontario benchmark, compared with around 11 basis points prior to the election, according to data from Beacon Securities. The tighter spread indicates investors are now demanding a smaller risk premium to hold the debt.

The PQ won 59 seats in Monday’s election, five seats short of a majority as votes were split among five parties.

“Bond holders are relieved that Quebec voters kept the PQ on a long leash and that it will need to work with other parties,” said Derek Holt, head of capital markets economics at Bank of Nova Scotia. “A fragile minority will struggle to set the conditions to hold a deeply unpopular referendum on sovereignty.”

The risk with a PQ government largely comes from party leader Paul St-Pierre Plamondon’s pledge to hold an independence referendum. Polls show most Quebecers don’t want to break away, but even a slight possibility of Quebec secession can be enough to rattle bond investors. A split with Canada, one of the world’s most creditworthy sovereign borrowers, would bring significant economic and fiscal upheaval.

St-Pierre Plamondon has said government led by him wouldn’t hold a sovereignty vote until after US President Donald Trump leaves office. The PQ’s minority status means the new premier and his cabinet will have to work with at least one other party to pass laws and budgets.