Although Canada boasts the lowest net debt to gross domestic product ratio among G-7 peers, it's a small fish in a sea of global savings, said TD.
Being highly susceptible to importing international financial conditions, the better debt position may not fully shield Canada from a negative turn in market sentiment targeted at countries whose fiscal houses are in more disrepair, writes the bank in a note to clients.
Specifically, elevated and rising United States borrowing needs will dominate the supply of high-quality public-debt issuance for years to come, increasing the competition and cost for other sovereign and high-quality corporate debt, stated TD.
Canada has no control over the trajectory of U.S. fiscal finances and investment demands, but it does directly absorb the market implications, pointed out the bank.
Governments should be cautious in resting on the laurels of currently having lower debt ratios than peer countries and be mindful that economic cycles don't follow straight lines, added TD. Downside surprises on growth raise the specter of greater deficit borrowing and an even faster-growing debt burden, particularly under intensifying demand for more supportive government policies on everything from affordable housing to social safety nets, to military spending, to supply chain resilience, and to clean energy alternatives.
This will be occurring against a backdrop of large and growing U.S. deficits that risk pressuring up global interest rates, leaving smaller borrowers to compete in that space by either cutting back on spending plans or paying a higher rate to attract investor funds, according to the bank.
In the competition for international investor dollars, high demands among governments also risk crowding out the needs of the private sector, ultimately impinging on competitiveness and economic growth.