Fall Consultations—2000: Summary of Comments
As it does every year during the Fall, the government sought views from market participants on a number of issues related to the design and operations of government debt programs in the next fiscal year. To allow comments to be received from a broader range of participants, the consultation documents were available on the Bank web site for the first time.
In general, participants indicated that the Government of Canada securities market is functioning well but that liquidity has diminished somewhat over the last year. The decline in the active participation of trading institutions in the Canadian market, as well as a more passive approach to investing in fixed income securities in general, were seen as main factors explaining the decline in the liquidity.
Treasury Bill Program
A focus of the Fall consultations was the Treasury Bill program. Participants were asked whether a restructuring of the T-bill program would enhance the market liquidity, under the assumption that the outstanding stock would remain between $75 and $95 billion over the two-year planning horizon, and given the current structure may involve treasury bill tenders falling below $6 billion on a more frequent basis (a minimum threshold suggested by market participants during the 1999 debt program consultations)
Almost all participants indicated their preference to maintain the status quo, believing that a major restructuring would not significantly enhance the liquidity of the market. Many were not concerned with tenders falling slightly below $6 billion on a more frequent basis.
Participants noted that the Treasury bill market is functioning acceptably in the current environment, but that liquidity was limited. In particular, institutional accounts indicated it was very difficult to buy treasury bills in any size outside of the auction process, and this has increasingly encouraged a buy and hold strategy.
Participants also reiterated the importance of the Treasury bill market within the current context. Many institutional accounts are required to invest a certain percentage of their funds in treasury bills. Government of Canada bonds having less than 15 months to maturity are used as substitutes, but are not considered available on a consistent basis.
In the event that the T-bill stock declines further, most participants preferred moving to monthly auctions of the 6 and 12-month tranches rather than eliminating a particular tranche. Participants favored this approach as various accounts have specific needs for 3-, 6-, and 12-month product. With respect to the alternative approach to eliminating a tranche, there was no consensus among dealers or accounts as to whether it should be the 6-month or the 12-month.
Participants noted that Government of Canada bonds continue to be the foundation of the fixed income market in Canada for pricing, hedging and financing. The increase in the benchmark bond targets announced in the 2000-01 Debt Management Strategy was seen to support liquidity.
However, participants noted that the long end of the yield curve is less liquid than the other sectors of the curve.Some participants indicated that the benchmark sizes should be increased further (particularly for longer-term bonds), through additional (or larger) reopenings. Participants also suggested that lending out the Bank's holdings of Government of Canada bonds would increase liquidity.
In the event of a bond program size decline, several participants indicated they preferred the maintenance of issuance across the entire yield curve, supported by a large regular bond buyback program, rather than eliminating a particular sector of the yield curve.
Real Return Bonds
Most participants noted an increased interest from clients for the product, mainly by pension funds, in part to offset long term liabilities. While most dealers acknowledged that the recent popularity of the product was helped by the recent economic environment, many thought the demand will remain strong in the future, given that the product is better understood, offers good diversification, and is now considered as a separate asset class. It was noted that actuaries are recommending them as a core holding for pension funds.
Bond Buyback Program
The widening of the range of eligible bonds in the buyback program that was announced on September 21, 2000 was considered helpful for the program. Several participants suggested the Government and the Bank continue to broaden the range of eligible bonds at the long end of the yield curve as bonds in that sector are relatively less liquid.
Most participants were in favour of more frequent buybacks (e.g. with every regular bond auction) across a wider maturity spectrum, with target repurchase amounts announced in advance on a quarterly basis. Several participants suggested the government may want to run a regular bond buyback program of a larger scope to increase client participation and promote a further consolidation of the yield curve.
All participants were satisfied with the timeliness and content of the information released on debt programs and operations. The Bank of Canada web site is seen as a very useful dissemination tool which ensures that the information is distributed widely at the same time to all participants. The reduction in turnaround time at auctions was also well received and further reductions were encouraged.