Debt Strategy Consultations 2001—02

Overview

The purpose of the consultations is to obtain market views on issues relating to the design and operation of government debt programs over 2001—02, with a focus on the Treasury bill program. The following provides a brief description of the issues to be covered:

Context

• The objectives of debt strategy are to provide stable, low-cost funding for the federal government, and to maintain and enhance a well-functioning market for Government of Canada securities. A key element of the strategy is to maintain a prudent debt structure, with approximately two-thirds of the debt stock in fixed-rate instruments.
• The government will continue to support initiatives that enhance the well functioning of the Government of Canada securities market as well as the broader fixed-income market.
• Based on the Economic Statement and Budget Update released on 18 October 2000, the government will continue to annually set aside $3 billion as a Contingency Reserve. If this reserve is not needed, it will be used to pay down the public debt. Each Fall, the government will announce whether more of that year's surplus should be dedicated to debt paydown, depending on the economic and fiscal circumstances at the time.
• No major restructuring of bond programs is anticipated in the near term.
• The treasury bill program was restructured in 1997 in light of the decline in the outstanding treasury bill stock in the preceding years. Since then, the government has regularly sought views of market participants during its Fall consultations on whether further changes should be considered.
• The government is interested in views on whether changes to the treasury bill program would be beneficial as a means of maintaining and enhancing liquidity and investor interest in the program. Should changes be made to the program, they would likely be introduced in fiscal year 2001—02.
• The government will also seek input from investors in Government of Canada securities, dealers, the Investment Dealers' Association Capital Markets Committee, and other interested parties.

T-BILL PROGRAM

Context

• The outstanding stock of treasury bills has been in the range of $80—$100 billion for the past two years, down from a peak of $165 billion five years ago. It is expected to stay in a comparable range of $75—$95 billion over the two-year planning horizon.
• It is expected that the outstanding stock of bills will remain in the $75—$95 billion range over the two-year planning horizon.
• Given this context, input is sought on whether the current structure of the treasury bill program (i.e., biweekly issuance of 3-, 6-, and 12-month T-bills) should be maintained or should alternative structures be considered. Please see the attached note for additional details on context and possible options.

Issues

1. Where do treasury bills fit in the current market environment? In other words, how important is it to have a liquid Canadian treasury bill market given the available substitutes (e.g., BAX, asset-backed securities, commercial paper)?
2. What is most important for liquidity in the bill market:
   

   the total outstanding stock of bills,
   the outstanding stock of individual tranches,
   the total size of each auction, or
   the size of individual auction tranches?

3. Is some restructuring of the bill program needed now, or is the status quo still acceptable? Note that the status quo may involve biweekly T-bill tenders falling below $6 billion on a more frequent basis than has been seen this fiscal year.
4. Alternative structures to consider include:
   

   Eliminate one tranche and maintain biweekly issuance for the remaining tranches
   Move to less frequent issuance (e.g., every 3 or 4 weeks) for some or all tranches

   If a restructuring is needed, which would be the best option?

5. If one tranche were to be dropped, should it be the 6-month bill or the 12-month bill, and why?
6. If 12-month bills were dropped, would 2-year bonds (with only two benchmarks per year) provide an adequate substitute as they move down the yield curve towards maturity?
7. If one tranche were dropped, what should be considered to be the minimum/maximum size of biweekly auctions before further restructuring would have to take place?
8. The government has a strong preference for smooth issuance and maturity patterns from one auction to the next. This is an important consideration for options involving reducing the frequency of one or more tranches. How important is this to the market participants?
9. If monthly auctions were adopted for one or more of the tranches, how long should the when-issued period be?
10. Are there any other suggestions for changes in the bill program?

BOND PROGRAMS

Context

Bond issuance in recent years:

1997—98: $40 billion (no buybacks)
1998—99: $38 billion gross ($37 billion net of buybacks)
1999—00: $46 billion gross ($43 billion net of buybacks)

• Gross bond issues in 2000—01 will fall somewhat from their 1999—00 levels. One-time non-budgetary financial requirements, such as asset transfers to Canada Post and pay-equity settlements, are expected to offset to some extent the impact of continued budgetary surpluses on market debt paydown.
• Under current fiscal projections, no major restructuring of the domestic bond program is anticipated in the near term; adjustments will continue to be made in a progressive and orderly basis as required in light of the outlook for continued balanced budgets or better, and planned debt reduction.
• The current scope of the program, which is expected to remain unchanged over 2001—2002, has benchmark target ranges of $7 to $10 billion for the 2-year maturity, and $9 to $12 billion for the 5-, 10-, and 30-year maturities.
• Future fiscal outcomes may create a requirement for more significant bond program restructuring. As has been our practice in the past, any adjustments to the bond program would be made gradually in consultation with market participants.
• The annual bond buyback program has been operating at around $1 to $3 billion. In September of this year, the government announced the program was being expanded to include bonds with maturities across a wider range of the yield curve (this does not include cash-management buybacks).

Issues

Bond Program

1. Input is sought on the state of liquidity in the primary and secondary markets, including views on key reasons for any underlying problems, particularly any recent concerns and developments. In particular:
   

   Has the increase in the benchmark bond targets enhanced the level of liquidity in the Government of Canada securities market?

   Are there any additional steps that could be considered to maintain liquidity beyond the initiatives that the government is already undertaking?

2. Increasingly, the swap market and/or the agency market is replacing the U.S. Treasury curve as key references in the U.S. fixed-income market. To what extent do Government of Canada securities continue to be the foundation of Canada's fixed-income market, i.e., in providing liquidity and as fundamental pricing and hedging tools? Is the role of the swap market in Canada expanding?
3. How important is the pace of market debt reduction in the U.S. relative to Canada for Government of Canada securities?
4. The U.S. has announced its intention to eliminate the one-year Treasury bill sometime in 2001, and in minutes from the last quarterly refunding meeting, raise the possibility of the elimination of the 30-year bond and/or the reduction of the frequency of 2-year issuance. What would be the effect of these initiatives on Government of Canada securities?
5. Do market participants have views on what types of longer-term adjustments might be considered in the event that future fiscal outcomes create a requirement for more significant bond program restructuring—for example, cutting back the frequency and/or size of specific issues, changing the dating and/or maturity patterns of specific issues?

Bond Buyback Program

1. Has the expansion of the program affected participation at repurchase operations?
2. Given the current structure of the program, will the market continue to be able to absorb buybacks?
3. Should changing the parameters of the program be considered, e.g., changing the size and/or frequency of repurchase operations?
4. Should the target amounts for bond buybacks be announced on a quarterly basis?

Real Return Bonds (RRB)

1. Do market participants have views on the RRB program? What will future demand for the bonds be?

TRANSPARENCY

The government is continually examining ways to improve transparency surrounding Government of Canada debt programs and operations. Currently, information is available from a wide variety of sources, including: the Debt Management Report; the Debt Management Strategy; the Government of Canada Securities flyer; and the Bank of Canada Web site.

1. Do market participants have any views on the timeliness and information content of these sources?

Electronic Trading Systems

Input is sought on the development of electronic trading and its potential effect on the GOC/fixed-income market, including the recent CSA proposal regarding bond market transparency (i.e., the Alternative Trading System proposal).

1. Do market participants have any views on these developments?