Why rate government bonds?

Q – Fixed-income products from Canadian governments (federal and provincial) are
rated by bond rating agencies. What I don’t understand is why they need rating at all if they always pay the interest at maturity? Does it happen that governments or utilities (such as Hydro-Quebec) do not pay the known maturity value? – M. d’A., Ottawa


A – First, a technical point. Bonds repay the principal at maturity. Interest is usually paid semi-annually.


Now to your question. The risk of a Canadian government or Crown corporation defaulting on its debt is very low. But it is not totally impossible. In fact, I seem to recall that I came across at least one case of a provincial default during the Great Depression when I was researching the subject several years ago. I can no longer find the reference, however.


You should also keep in mind that a large percentage of our bonds are sold to international investors and institutions, and they need unbiased analysis of the credit-worthiness of the issuer. A German bank won’t be familiar with the operations of Hydro-Quebec or the financial status of the government of PEI. Aindependent bond rating tells them immediately if the debt is secure or is on a risk level approaching that of a banana republic. In fact, without a rating Canadian governments would probably have to pay higher interest rates on their debt issues. – G.P.