OTTAWA, April 16 (Reuters - Canada expects to raise bond issuance by 12% in the current fiscal year as it borrows more to finance a budget deficit and purchases debt that helps provide funding for mortgage lenders, a budget document showed on Tuesday.

Canada is among a handful of countries whose sovereign debt is still rated 'AAA' by at least two of the top three ratings agencies but some analysts say that increased debt issuance by federal and provincial governments could raise the risk of a downgrade and add to upward pressure on borrowing costs.

Canada projected a C$39.8 billion deficit for the current fiscal year, 1.3% of gross domestic product, and additional deficits in future years. The fiscal year began on April 1.

Bond issuance is projected to rise to C$228 billion ($165 billion) in 2024-25 from C$204 billion in 2023-24.

Canada pays less to borrow than does the United States as investors bet that a slowdown in inflation will lead to the Bank of Canada cutting interest rates before theFederal Reserve. Still, Canada's 10-year yield touched its highest intraday level in five months on Tuesday at 3.810%.

Public debt charges have climbed from the historical lows of recent years to a projected 1.8% of GDP in 2024/25. The share is expected to stabilize at about that level in the coming years.

All of the increased debt issuance will need to be absorbed by the market so long as the BoC continue with its quantitative tightening (QT) program, which it expects to do until 2025.

Under QT, the BoC lets the bonds it bought to support the economy during the COVID-19 pandemic roll off its balance sheet without replacement as they mature.

Much of the additional bonds would come from long-term issuance. Canada plans to raise the share of debt it issues with a maturity of 10 years or more to 33% from 30% in2023-24.

Treasury bill (T-bill) issuance is expected to decline to 54% from 57% as a share of total supply, with the stock of T-bills edging up to C$272 billion from C$267billion.

Canada will begin, in May, issuing 1-month T-bills to support the Canadian money market's transition from Bankers' Acceptances where issuance will be discontinued following the cessation of the Canadian Dollar Offered Rate (CDOR) in June.

Adding to its borrowing requirement, Canada has begun in recent months buying up to an annual maximum of C$30 billion in Canada Mortgage Bonds (CMBS) in a bid to support stable cost-effective funding for mortgage lenders.

CMBs are bonds issued by the national housing agency to fund the purchase of mortgage backed securities.

Outstanding market debt is projected to increase to C$1.441 trillion from C$1.375 trillion in 2023-24. It was C$765 billion in 2019, before the pandemic.

(Reporting by Fergal Smith, editing by David Ljunggren)

($1 = 1.3823 Canadian dollars) Keywords: CANADA BUDGET/DEBT