In case you missed the news, Alberta launched a $6oo million bond issue on Monday, which sold out in a few minutes.

This is interesting on a couple of counts. First, Alberta is now a bigger debtor, mortgaging the financial future of its citizens. This should tell us something about the current ‘recovery.’ Second, despite its Triple-A rating, the province’s underwriter convinced it to offer a slight premium over rival Government of Canada bonds. So, investors snapped up the higher yield.

So what?

So the next series of GoC bonds will have to compete with the new Alberta bonds at the dealer auction. And so interest rates creep higher – a salient fact since current mortgage rates are set in the bond market.

This is what competition for capital does, and you’re just seeing the first ripples in what will be a sea of new debt issues washing over the market in the next few years. The federal government’s budget shortfall alone will be $55,900,000,000 this fiscal year, and added to that will be $29,000,000,000 more in financing for Ontario, BC, Quebec and Alberta. So the bond market will see about $85 billion in new bonds from these two levels of government alone. In one year.

This is why interest rates will be percolating, whatever the Bank of Canada does. Eighty-five billion dollars will leave investors’ hands to buy bonds only if the return on capital is both adequate and competitive.

Meanwhile there are steady indications banks will not be happy for long lending money at 2.25%, the current prime rate – the lowest it has been this century. Blog dogs have been peppering me in the last few days with copies of a letter TD Bank’s been sending out to LOC customers giving notice of a rate hike.

But these are not just any old lines of credit – instead, they are fully secured, real estate-backed LOCs which essentially pose zero risk to the bank. And it’s not just a wee rate increase, but rather a massive 44% surge in the cost of borrowing – from prime plus zero, to prime plus 1%.

Why would the bank do this now?

As some wise folks have pointed out, banks can now enjoy a government guarantee for their HELOCs by funding them using CMHC’s mortgage-backed securities program. The bad news is the money is coming from the bond market, where mortgages are also funded. And when upward pressure on bond yields is felt, bond prices drop as investors demand more of a premium to own fixed-income securities.

There is little the Bank of Canada can do about this, since its usual bag of tricks (drawdowns, redeposits, Specials and SRAs) is aimed at keeping rates in a narrow range when banks borrow from each other (which happens every night). What someone is willing to pay for a bond, Alberta, Canada, Nova Scotia or Lululemon, is another matter entirely.

The important point is that Alberta (like Canada) has the highest possible debt rating – which means it can get away with paying the lowest rate of interest, and still flog its bonds. The premium just unveiled means competing bonds with similar ratings and maturities will trade at a discount to face value. So new investors will pay less than par for existing debt, which means they buy $100 for (say) $98, effectively raising the yield to maturity.

Translation: Rates are rising. They will continue to rise. The sheer mass of new borrowings ensures it. This is whether or not the prime pops, or the central bank changes its cheap money policy. If you depend on borrowed money which comes from the bond market – like a secured line of credit or a mortgage – you should know this.

Three per cent mortgages are doomed.

Moral: Unless you own it, debt sucks. Even for a cowboy.