Canadian governments are borrowing like a pandemic just broke out—and banks are snapping up the debt at historic levels. Statistics Canada (StatCan) data shows net issuance of government securities surged in Q2 2025, marking the biggest quarter since pandemic supports peaked. More concerning: domestic banks are absorbing the demand, a pattern rarely seen outside of looming credit risk events. The buying spree may lower short-term borrowing costs, but it’s likely fueling the record capital flight now undermining long-term growth prospects.
Canadian Government Borrowing Surges To Highest Since Pandemic
Canadian government net issuance: Quarterly change in total government debt raised through net new securities.
Source: Statistics Canada; Better Dwelling.
Canadian governments are borrowing like the country is in crisis—despite talk of austerity. Net issuance hit $71.3 billion in Q2 2025, up 53.3% (+$24.8 billion) from Q2 2024. It was the largest quarter since Q2 2021, during peak pandemic stimulus.
The federal government accounted for $38.1 billion of the total, up 346% (+$29.6 billion) from a year earlier. The jump looks extreme, but Q2 2024 was unusually low due to maturing debt, creating a base effect. Still, this quarter was on par with 2020–2021 levels, when Ottawa was funding extensive pandemic relief like CERB.
Provinces and territories weren’t exactly cutting back either. Their net issuance reached $32.6 billion—down 14.9% (-$5.7 billion) from last year, but still the fourth-largest quarter since 2019.
Canadian Banks Buy Record Government Debt—That’s A Big Red Flag
Adding to the ominous tone is the buyer: Canada’s banks. Chartered banks set a new record for federal bond purchases in Q2 2025—surpassing the all-time high set just a quarter earlier. Banks typically hold some government debt, but back-to-back records suggest this is far from routine.
The demand points to banks parking capital and hedging against credit risk. Weak private credit demand signals households and businesses are pulling back—a common precursor to slower investment. As lending shifts from the private to the public sector, growth is increasingly financed by government debt. This crowding doesn’t just reflect economic anxiety—it reinforces it. Banks are no longer intermediating private growth; they’re underwriting public borrowing.
When bond absorption depends on domestic banks, risk becomes concentrated and price signals fail. Credit spreads no longer reflect true risk, yields disconnect from inflation, and borrowing costs are artificially lowered—temporarily. That may ease financing now, but it erodes investor confidence over time. A healthy bond market depends on diverse capital providers—foreign and domestic. This shift likely deepens the record capital flight already underway, undermining confidence in Canada’s long-term outlook.