The purpose of the consultations is to obtain the views of market participants on issues relating to the design and operation of government debt programs for fiscal year 2003/04 and beyond.
- Based on the outlook contained in the 2002 Economic and Fiscal Update released on 30 October 2002, government borrowing in financial markets is projected to remain near current levels. These consultations focus on how to maintain stable low-cost funding for the Government of Canada and enhance the functioning of the market in Government of Canada securities.
- The government is seeking views on programs for treasury bills and cash-management bills programs that serve cash-management purposes, as well as potential enhancements to the bond and bond-buyback operational frameworks.
- The government will seek input from Government Securities Distributors, institutional investors, and other interested parties.
Programs for treasury bills, cash-management bills, and pilot cash-management bond buybacks
The treasury bill program was restructured in 1997 in light of the decline in the outstanding treasury bill stock. Since then, the government has regularly sought input from market participants on the treasury bill program. During December 2000 consultations, most participants felt that no major adjustments were needed to the treasury bill program.
One objective of cash management is to minimize the cost of holding cash balances. Large cash balances are needed on benchmark-bond maturity dates, coupon-payment dates, and during periods in which there are larger government cash outflows. Currently, the government is examining ways to adjust the ongoing operation of programs for treasury bills and cash-management bills, to minimize the cost-of-carrying cash balances subject to maintaining well-functioning markets.
Issues for Discussion
Treasury Bill Program
- Are there any structural issues that are impeding the functioning and liquidity of the treasury bill market? Why have 6-month and 12-month treasury bills been trading at levels very close to, or flat to, swap rates offered by banks?
- In the past, some market participants have suggested that treasury bill auctions be conducted earlier in the day, for instance at 10:30 or 11:30 a.m., or another day if there is a general move to shorter settlement periods. What is the market preference?
- Currently, there is a two-day period between treasury bill auctions and settlement day. Are there potential benefits to having a shorter settlement period for the treasury bill market?
Program for Cash-Management Bills (CMBs)
- CMB borrowings take place at irregular intervals to meet the funding needs of the government. To more effectively manage its cash balances, the Government of Canada is considering a more active use of CMBs than has been used in the past:
- More frequent and flexible use of CMBs:
- The largest CMB ever issued was worth $3 billion. This amount was issued on many occasions. Are larger issues ($4 billion, for instance) viable? Would it be better to have larger single issues, or to have two smaller issues auctioned on different days?
- In the past, CMBs have been auctioned on any business day of the week but have typically matured on Thursdays in order to be fungible with treasury bills. How important is fungibility between CMBs and treasury bills? In other words, is it viable to issue CMBs that do not mature on alternate Thursdays? Would there be issues if CMBs matured on the bond-delivery day, or when the government is expecting large receipt flows?
- Would the market be receptive to more frequent use of very short-term CMBs (of a few days, or one to two weeks), rather than the usual 35 days or so?
- How much notice for CMBs is required for well-functioning auctions? Typically, a CMB Call for Tenders is released just one or two days prior to the auction. Is this interval sufficient?
- Another option would be to change the size of regular (3-, 6-, and 12-month) bills more significantly from one auction to the next. As is currently the common practice, on only a few occasions has the total auction size fluctuated by more than $500 million from one tender to the next. What sort of variation between auctions would the market deem appropriate without market disruption?
- More frequent and flexible use of CMBs:
Pilot Program for Cash-Management Bond Buybacks (CMBBs)
- CMBB operations are typically held on Tuesdays at 10:30 a.m. If treasury bill auctions are moved to earlier in the day, should CMBB auctions be held before or after the treasury bill auctions, or possibly be held on another day? Regardless of the preferred option, we would maintain the same settlement day for both operations.
- Should the government make the current pilot program for CMBBs permanent?
- Are there any other issues with respect to treasury bills, CMBs, or CMBBs?
Bond, bond-buyback, and real return bond programs
- The bond program for 2002/03, announced in the government's Debt-Management Strategy Document published in March 2002, has benchmark target ranges of $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.
- Based on recommendations received from market participants during Summer 2002 consultations, the following operational initiatives were taken.
- On 28 October 2002, the June 2012 bond was closed with $11.6 billion outstanding, to maintain an annual cycle for the 10-year benchmark.
- On 28 August 2002, the 2-year auction was modestly reduced by $500 million to $3 billion, to limit the total amount of bonds maturing on certain maturity dates while maintaining large liquid 2-year benchmark issues.
- To maintain liquid off-the-run issues, the government committed, starting 15 August 2002, to not use the bond buyback programs to reduce the outstanding amount of these large issues below $6 billion.
- Starting 25 September 2002, switch operations were conducted on Wednesdays at 10:30 a.m., instead of at 12:30 p.m.
- As announced on 25 November 2002 (effective 9 December 2002), in conjunction with the implementation of lower turnaround times for auction and buyback operations, the submission deadline for buyback on a cash basis will be advanced from 1:15 to 1 p.m.
Issues for Discussion
- There is a trade-off between the benefits of maintaining current-maturity benchmarks and the time required to reach larger target sizes. The government is seeking input from market participants on how to adjust benchmark size targets to reflect this trade-off.
- Market participants have indicated a preference for maintaining a one-year cycle for the 10-year benchmark, provided that the size is maintained above $10 billion. Going forward, the achievable size for the 10-year benchmark within a one-year time frame will be dependent on the scale and success of buyback programs. Would there be any major issues if the lower band of the benchmark target range was to be reduced to provide more flexibility to the government? If so, what would be an appropriate range?
- Are there any issues in the 30-year sector with respect to the trade-off between the size of the benchmark and the time required to achieve the target size? Should the 30-year benchmark range be similarly adjusted to reflect a shorter issuance cycle?
- One of the operational enhancements to government debt programs announced in 2002 was the reduction in the size of 2-year bond auctions when bond issues are fungible with another large outstanding bond. This decision was made to limit the total amount of bonds that mature on certain dates. Could these auction sizes be reduced further? In other words, what would be an appropriate minimum amount for a 2-year auction that is fungible with another large outstanding bond?
- Are there any other issues with respect to the design or operation of the nominal bond program?
- With the reduced turnaround time announced on 25 November 2002, it could be a challenge to conduct buyback operations with a large basket of bonds, especially if buyback turnaround time is reduced further. One possible way to accommodate the shorter turnaround time could be to remove some illiquid bonds (for example, those with less than $1 billion outstanding) from the basket of cash buybacks. How important are the illiquid bonds in the basket of eligible bonds for cash-buyback operations? How important is it that the government continue to buy back these bonds when their size is small and they trade infrequently?
- Should the government make permanent the current pilot program of bond-buyback operations on a switch basis?
- Are there any other issues with respect to the design and operation of the buyback program?
Real Return Bond (RRB) Program
- How do you expect the RRB market to evolve, in terms of liquidity and from the perspective of investor needs? Are the current annual issuance levels of around $1.4 billion appropriate? If not, what would be the alternative?
- Are there any other issues with respect to the design and operation of the RRB program?
Electronic Trading Systems in the Canadian Fixed-Income Market
The Department of Finance and the Bank of Canada strongly support improvements to the transparency and efficiency of Canadian fixed-income markets. Since 2000, we have actively helped to develop the regulatory framework for Alternative Trading Systems (ATS).
Issues for Discussion
Several fixed-income ATSs are now operational.
- What impact would ATSs have on the Canadian fixed-income market? What is your experience with current systems?