National Bank Financial is bullish on provincial bonds. In a research brief, the brokerage firm recommends selling energy sector bonds and buying provincial debt.

“At the risk of seeming trigger-happy, we suggest some profit-taking in the energy sector in favour of provincial bonds,” says a report from NBF analyst Paul-André Pinsonnault.

It notes that high oil prices have been good for bonds from energy firms, “On a total-return basis, energy bonds (4.02%) have outperformed provincials (3.33%) by 69 basis points so far this year,” it says.

The firm is bullish on provincials since the federal election. “During the election campaign we suggested that investors should start reducing their underweighting in provincial bonds. We thought the election outcome could prove positive for provincial finances,” it points out.

NBF notes that spreads have tightened between provincial and federal bonds since the election too, dropping from 32 bps as of May 31, to 20 bps. Also, the spread between energy company bonds to provincials has tightened 19 bps.