The purpose of these consultations is to obtain market views on issues relating to the design and operation of government debt programs for fiscal 2002/03 and beyond.
- The fundamental objectives of the federal 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.
- The government is currently seeking views on the functioning and design of bond issuance and buyback programs and on other potential initiatives that could enhance the functioning of the market for Government of Canada securities.
- The government is seeking input from institutional investors in Government of Canada securities, primary dealers, government securities distributors, and other interested parties.
BOND-BUYBACK PROGRAM ON A CASH BASIS
The objective of the bond-buyback program on a cash basis is to maintain a liquid program for new bond issues in a fiscal surplus environment. Cash-based buybacks help maintain auction sizes, and defer the need to restructure the bond program. They also provide the government with flexibility in the management of its net bond program (defined as the amount of bonds issued at auctions and switch operations, minus the amount of bonds repurchased at buyback operations on a cash basis and through switches).
Since its introduction in the fall of 1999, the program has grown in size and allowed the government to repurchase a total of $1 billion in fiscal 1998/99, $3.3 billion in 1999/00, $2.8 billion in 2000/01, and $5.3 billion in 2001/02. Over time, the program has been expanded to include a larger number of bonds with maturities across a wider spectrum of the yield curve.
As a result of buybacks on a cash basis, the government has been able to maintain a larger gross bond program than required to meet the government's fixed-rate financing needs. The gross bond issuance was $37.9 billion in fiscal 1998/99, $46 billion in 1999/00, $39.9 billion in 2000/01, and $41.6 billion in 2001/02.
Issues for Discussion
As announced in the Debt Management Strategy 2002/03, the list of bonds eligible for repurchase was expanded to include some older benchmark bonds and their fungibles in addition to smaller, older less-liquid issues. The initiative was designed to offset the reduced availability of older issues and to facilitate the ongoing operations of the program, while maintaining a well-functioning secondary market in key maturities.
- What are your views on the trade-off between supporting a larger new issue program and maintaining off-the-run issues outstanding?
- What are your views on the liquidity of securities that have been targeted for repurchase, and on the prospects for continued market participation in a large bond-buyback program on a cash basis?
- How could the cash bond-buyback program be further adjusted to ensure that the government is able to continue to repurchase bonds?
- Should smaller, more frequent operations be considered?
- Should the list of bonds eligible for repurchase at each operation be broadened to include bonds with a wider maturity range?
- Should alternative buyback methodologies other than reverse auctions be considered?
BOND PROGRAM and PILOT BOND-SWITCH PROGRAM
The government currently maintains four nominal bond benchmarks with maturities of 2 years, 5 years, 10 years, and 30 years. The target benchmark sizes are $7 to $10 billion for the 2-year maturity, $9 to $12 billion for the 5-year maturity, and $12 to $15 billion for the 10- and 30-year maturities. New benchmarks are built through an auction followed by successive reopenings.
The length of time required to build benchmark bonds varies with the maturity sector. It currently takes 6 months to build a 2-year benchmark (two quarterly auctions), one year to build a 5-year benchmark (four quarterly auctions), a year and a quarter to build a 10-year benchmark (five quarterly auctions), and three and a half years to build a 30-year benchmark (seven semi-annual auctions).
The government launched a pilot bond-switch program in February 2002. The program allows market participants to exchange less-liquid outstanding bonds for a new benchmark bond. The switch program is intended to reduce participants' market risk and enhance overall participation in buyback operations. Switches have the potential to build benchmarks faster and to partly substitute for auction issuance. They do not, however, provide flexibility in the management of the net bond program.
The gross bond issuance plan for 2002/03 incorporates a modest amount of switches. To date, operations have gone well. Among the factors affecting the future size and scale of switch operations are the government's objectives for net bond issuance and the views of market participants.
Issues for discussion
- What are the views of market participants on allocating new bond issuance between auctions and switches? What factors should be considered in the evolution of these programs (e.g., sizes and frequencies of operations)?
- What are market participants' views on current target sizes of benchmarks and the length of time required to build new benchmarks?
- Should the target range for the 10-year benchmark be reduced in order to build the new benchmark over a one-year cycle, or should the current target size be maintained even if it takes five quarters to build the new benchmark?
- Should auction sizes be reduced given the fungibility of new issues with large outstanding issues?
- Should a reduction in the size of 2-year auctions be considered when the benchmark being built is fungible with an old 10-year bond? Would there be concerns if the amount of new 2-year bonds issued at auction was less than the current target range of $7 to $10 billion?
- Should the government issue a new 2-year bond or reopen the old issue?
- With regard to improving the flexibility of operational timing, what are market participants' views on scheduling switch operations on a day of the week other than Wednesday? What would be the preferred alternative timing for switch operations (e.g., day of the week, time of the day, and timing in the quarter)?
- Consistent with the objective of maintaining overall market integrity, the government and the Bank will be taking steps to ensure the continued integrity of the pilot bond-switch program. Specifically, the government will implement a framework for bidding limits and/or reporting of net positions.
- What are participants' views on how such a framework should be adopted in the context of the pilot bond-switch program?
- To help in smoothing the government's cash requirements and reduce peak levels of cash balances, the pilot cash-management bond-buyback program was implemented in January 2001. As of the end of May 2002, 21 operations have been conducted, with a total of $15.1 billion of bonds repurchased. Do market participants have any views on how the government could enhance this program: e.g., broadening the basket to include bonds with more than 12 months to maturity?
- As announced in the government's Debt Management Strategy 2002-2003, the turnaround time for auctions and bond-buyback operations will be further reduced to lower participants' market risk and promote participation. Current plans are for auction turnaround time to be lowered from 15 minutes to 10 minutes and for turnaround time for bond-buyback operations to be reduced from 30 minutes to 15 minutes.
- Would the benefits of further reducing the turnaround time (from what is already planned for 2002/03) for auctions and buyback operations outweigh the potential costs (such as accepting faxed bids no later than 5 minutes before the bidding deadline)?
- What are participants' views on a flexible announcement time within the target timeframe, which would allow the Bank to release the auction results as soon as they become available?
- Are there any other issues with regard to the liquidity and/or integrity of the bond and buyback programs that your institution would like to discuss?
- Are there any issues related to the treasury bill program that you would like to raise or discuss?