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Canadian federal bonds returned 7.3 per cent in U.S. dollar terms this year, compared with 8.7 per cent for sovereign bonds globally and 4.3 per cent for U.S. Treasuries, according to data compiled by Bloomberg.

But the reliance on foreign funding has made Canada more vulnerable to capital flight than before the financial crisis in 2008, according to a report from HSBC Holdings Plc. The country is carrying a historically high current account deficit of about 3 per cent of GDP, compared with surpluses before the crisis, David Watt, chief economist at HSBC Bank Canada, said in the report.

Housing Measures

“Right now Canada is the place to go, but that can change quickly,” Watt said by phone. He estimates Canada’s total debt swelled to 294 per cent of GDP in the second quarter and even higher in the third. “What screams out to me is that we are now heavily dependent on non-residents providing a lot of funds and what we do need is households to do more active saving.”

The government has been actively trying to get households to reduce debt, mostly by implementing new measures to cool the country’s housing market, where prices have soared in Vancouver and Toronto in the past decade. Rules introduced this month include a new stress test for buyers and closing a tax loophole used by some offshore buyers.

Those measures, while necessary, could have some unintended consequences and backfire, Aubrey Basdeo, head of Canadian fixed income at BlackRock Inc., said in a phone interview from Toronto. “If I were a policy maker, I don’t think I could sleep at night because you never know what shock you’re going to have to deal with and you have very few arrows in the quiver.”

Bloomberg.com