B10 G THE GLOBE AND MAIL | S AT U R DAY , J U N E 1 4 , 2 0 2 5 GLOBE INVESTOR | REPORT ON BUSINESS T he world is awash with gov- ernment debt – and those flood waters aren’t going to recede any time soon. Investors may want to ponder what that torrent of borrowing will mean. The most predictable effect is likely to be a sustained rise in long-term interest rates as mar- kets struggle to accommodate the vast quantities of government bonds hitting the market. To some extent, this rise has already happened. Over the past couple of years, the rates on benchmark 10-year government bonds in Canada, the United States, the United Kingdom and several oth- er developed countries have climbed steadily higher, emphat- ically ending the low-rate nirvana that existed for much of the 2010s. These higher rates are likely to endure and could go even higher. Over the long run, they will put pressure on stock prices, because higher-yielding bonds will offer an increasingly attractive alterna- tive for investors. More ominously, the burden of higher interest rates will slow eco- nomic growth. They could even cause financial crises in some countries – particularly in the U.S., where debt is clearly on an unsustainable course. To be sure, no crisis seems im- minent. Still, it’s worth under- standing why bond markets are showing flickers of anxiety and demanding substantially higher yields on government debt. The prime culprit is high and growing amounts of state bor- rowing. Government debt across the world’s advanced economies has swelled from an average of 103.6 per cent of gross domestic product (GDP) in 2019 to an esti- mated 110.1 per cent this year, ac- cording to the International Mon- etary Fund. The IMF expects the debt load to continue climbing, reaching 113.3 per cent of GDP by 2030. Those are troublesome num- bers, and what makes them even more troublesome is that govern- ments are now paying far higher interest rates on their debts than they did just a few years back. This toxic combination – borrowing more money and borrowing it at much higher rates – has sent the total bill for interest costs spirall- ing to intimidating heights. In both Canada and the U.S., the all- in cost of servicing national debt is now roughly double what it was five years ago. Surging interest payments are crimping other priorities. In Can- ada, Ottawa will spend nearly as much on interest payments this year as it does on health care. In the U.S., Washington will pay more in interest this year than it will spend on national defence. Similar trends are evident across many other advanced economies, although there are important differences among them. Canada, despite its mount- ing interest payments, still looks to be on solid fiscal footing on most measures tracked by the IMF. In contrast, the U.S., France and Japan show no signs of easing back on their debt addictions. They are expected to run massive deficits for years to come. Could that change? Maybe, but there are good reasons to think most countries will be locked into a high debt trajectory for years to come. There are simply too many compelling reasons for spending in the here and now. Consider, for instance, the need for increased military spending at a time when Israel is attacking Iran, Russia and Uk- raine are at each other’s throats and the U.S. is walking away from its role as global hegemon. Gov- ernments are right to bolster their militaries and are likely to fund much of the required spending through debt. Many countries are also likely to turn to debt to meet the needs of their aging populations. Good pensions and good health care are praiseworthy things – but they are also fiendishly expensive. On top of that, many govern- ments are feeling pressure to ad- dress housing shortages. In Cana- da, this need is particularly acute. We need $2-trillion in capital over the next five years to meet our housing needs, according to a re- cent Royal Bank of Canada report. Governments can’t and won’t fund that directly, but they will be under pressure to come through with generous tax deductions for anything housing-related. In all li- kelihood, that will stoke in- creased deficits, at least in the short term. So when does this all end? Pre- sumably when bond markets re- bel and start demanding such sky-high yields that governments are forced to retrench. The U.S., in particular, seems vulnerable. Do- nald Trump’s One Big Beautiful Bill Act will add trillions of dollars over the next decade to an al- ready massive national debt bur- den. Even there, though, markets seem surprisingly tolerant. In a report this week, Paul Ashworth, chief North American economist at Capital Economics, wrote that the risk of a U.S. fiscal crisis is ris- ing, but he argued that it is not an immediate worry. The key, in his view, is what happens to long- term U.S. interest rates. If rates keep rising, investors could lose faith in Washington’s ability to service its debt – at least without resorting to inflation, capital con- trols or other drastic measures. “We suspect that a 10-year yield of 5.5 to 6 per cent could be that tipping point,” he wrote. Fortu- nately, 10-year U.S. yields are still around 4.4 per cent. Investors, though, may want to keep a close eye on where they go over the year ahead. Why rising public debt should worry investors Higher-yielding government bonds will offer an increasingly attractive alternative to stocks IAN McGUGAN OPINION Up, up and awry The combination of rising government debt and higher interest rates are making it more and more expensive to service national debt loads. In the United States, the portion of the economy going to pay interest on the national debt has soared to its highest level in decades. (Percentage of gross domestic product devoted to federal interest payments) 2005 2010 2015 2020 1 1.5 2 2.5 3% THE GLOBE AND MAIL, SOURCE: FEDERAL RESERVE BANK OF ST. LOUIS End of an era Remember low, low interest rates? That was yesterday. Around the world, yields on benchmark 10-year government bonds have surged. They are now near their highest levels in 15 years or more. 2010 2015 2020 2025 0.0 1.0 2.0 3.0 4.0 5.0% Canada Britain U.S. THE GLOBE AND MAIL, SOURCE: FEDERAL RESERVE BANK OF ST. LOUIS T he Canada Revenue Agency told me to try again later when I logged into its My Account website, looking for information on my TFSA contribution room. That was in May, when I was researching a column headlined, “For the love of God, can someone please help CRA fix its website?” I checked several times since then and, finally, I found the information displayed on June 12. For quicker service, try an investment adviser or financial planner. Keeping track of client contribution room for tax- free savings accounts, registered retirement savings plans, first home savings accounts, registered education savings plans and registered disability savings plans is advising 101 stuff. Advisers who can’t deliver this information are not earning their fees. Readers have been sharing their stories of frustration with CRA lately, with two themes emerging. One is long or futile waits to speak to CRA representa- tives on the phone, and the other is the lack of information on how much accumulated contribution room an individual has for TFSAs. CRA said the delay in showing TFSA information resulted from the introduction of a new system where financial institutions submit data on behalf of clients who have TFSAs. Let’s not judge people who lose track of their TFSA contri- bution room. It’s easily possible if you make a withdrawal, maintain multiple TFSAs or start and then stop or tweak a preauthorized contribution to a TFSA. Getting CRA’s official tally of your contribution room is how you avoid onerous penalties for over contributions. The penalty works out to 1 per cent of the excess amount per month. I looked into TFSA penalties last year and found the average cost to a taxpayer who over-contributed was almost $1,500. CRA has always been slow to update TFSA room – num- bers reflecting contributions made during a calendar year are typically not available until April of the following year at the earliest. Advisers and planners should have a fix on your con- tribution room for a calendar year by early January. This isn’t a quickie calculation, by the way. Your accumulated room reflects total year-by-year contributions allowed by the gov- ernment, the actual amount of contributions made to all your TFSA accounts, withdrawals and amounts you then re- contributed. Good advisers earn their fees in all kinds of ways that go beyond managing your investments, including financial planning and tax minimization. Keeping you from over-con- tributing to a TFSA is not the least of these services. CRA’s delayed TFSA updates are frustrating, but a good adviser should know your limit ROB CARRICK OPINION Advisers and planners should have a fix on your contribution room for a calendar year by early January. “Valuation is at all-time highs, reflecting Dollarama’s standing as a paragon of both quality and growth,” Mark Petrie, an analyst at CIBC Capital Markets, said in a note. Anyone hoping to score a quick gain on the stock from its current level would need the confidence of Ethan Hunt, the hero in the Mission: Impossible film series, to believe that there are still some factors that the market is ignoring or that the valuation deserves to be higher than Nvidia Corp., which is most definitely not a discount retailer. Others who have been sitting on the sidelines and may be fil- led with regret over Dollarama’s stunning ascent – and can han- dle some bumps – might want to try on this argument: For a com- pany that has shown no signs of exhaustion, perhaps it doesn’t matter when you buy the stock. For one thing, profits are still rising at an impressive clip. Last year, earnings per share increased by 16.9 per cent, year- over-year. CIBC expects profits will rise 11.8 per cent this year and 11.4 per cent next year. But keep in mind that Dollara- ma executives have a habit of overdelivering. In its most recent quarter, the company reported a profit of 98 cents per share, beat- ing analysts’ expectations by a wide 14 cents, according to S&P Global Market Intelligence. What’s more, Dollarama is continuing to generate strong sales growth as it finds steady opportunities for opening new locations in Canada, where con- sumers gravitate to its well-orga- nized stores and consistent range of products. It opened 22 stores in the first quarter, with dozens more com- ing during the rest of the year, suggesting that market satura- tion on its home turf is still a ways off. Sales rose 8.2 per cent in the fiscal first quarter, also slightly higher than expectations. International expansion adds a new opportunity for growth. Dollarama owns a 60.1-per-cent stake in Latin American discount retailer Dollarcity, with locations in Colombia, Guatemala, El Sal- vador, Peru and, starting next month, Mexico. Though the target back in 2019 was to have 600 Dollarcity stores within 10 years, the cur- rent store count already stands at 644. The new target: 1,050 stores by 2031, which doesn’t in- clude Mexico. Dollarama is also gearing up for an expansion into Australia with a deal to acquire The Reject Shop Ltd., which operates a net- work of more than 390 stores that can benefit from Dollara- ma’s know-how. “We question what catalyst will emerge to cause Dollarama to falter. The value proposition seems as healthy as ever, and we see risk of earnings misses as ve- ry low,” John Zamparo, an ana- lyst at Bank of Nova Scotia, said in a note. Yeah, just about everyone agrees that the stock isn’t cheap on a valuation basis. Its stellar gains are going to make some in- vestors nervous about a rally that could fade the minute they join it. But Dollarama has cruised through economic downturns, soaring inflation and trade wars (so far), rewarding risk-takers who focused on the future rather than dwelling on the past they may have missed. Berman: Dollarama’s international expansion adds a new opportunity for company’s growth FROM B1 A Dollarama Inc. store location seen in Montreal in 2023. The company is continuing to generate strong sales growth as it finds steady opportunities for opening new locations in Canada. CHRISTINNE MUSCHI/ THE CANADIAN PRESS Over the past couple of years, the rates on benchmark 10-year government bonds in Canada, the United States, the United Kingdom and several other developed countries have climbed steadily higher, emphatically ending the low-rate nirvana that existed for much of the 2010s.