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Overall, market participants agreed that domestic borrowing programs are operating smoothly and participants have also reacted positively to potential program initiatives and adjustments that the Bank of Canada and the Department of Finance are considering for 2003/04. Most market participants: (i) are supportive of advancing the time of treasury bill auctions to the morning; (ii) agreed to more liberal use of cash-management bills and more variation in auction sizes for treasury bills; (iii) prefer an annual cycle for 10-year benchmarks; (iv) generally agreed to a reduction in 2-year auction sizes when the benchmark bond is fungible with a large outstanding bond; (v) agreed that illiquid bonds could be removed from the basket of eligible bonds in cash-buyback operations provided these bond issues remain in switch-buyback operations.

Programs for treasury bills, cash management bills, and pilot cash-management bond buybacks

Treasury Bill Program

6- and 12-month treasury bills vs. swap rates

Market participants identified several factors that could explain why 6- and
12-month treasury bills are trading at levels very close to swap rates offered by banks. Market participants mentioned that the decline in the outstanding stock of treasury bills observed since the late 1990s favoured the emergence of alternative products. Consequently, a large portion of the treasury bill market is now dominated by buy-and-hold investors. In addition, the extensive use of benchmarks to measure money managers' performance, portfolio constraints associated with money market holdings, and the growing trend towards indexing, have reduced trading activity for 6- and 12-month treasury bills. Market participants also indicated that investors seeking additional returns tend to favour more risky money market instruments. Several participants also indicated they were less sensitive to credit risk in the shorter part of the yield curve in an environment of low interest rates. Participants also indicated that a similar situation had taken place in other sovereign money markets.

Timing of auctions

Participants indicated a preference for holding treasury bill auctions in the morning. Market participants mentioned that advancing the time from 12:30 p.m. to 10:30 a.m. would encourage broader participation because liquidity tends to be better in the morning.

Settlement time

Participants had mixed views about the potential benefits of having a shorter settlement period for treasury bills. Some investment dealers preferred the current two-day settlement period, since it gives them sufficient time to distribute tenders in the marketplace. Other dealers were not opposed to a one-day settlement period. Citing lower settlement risk, investors preferred a shorter settlement period. Overall, market participants indicated that this issue was not a high priority.

Variability of auction size

Market participants did not express concerns regarding increasing fluctuations in the size of treasury bill auctions, from one auction to another, as a complement to cash-management bills for the government's cash-management purposes (see next section). Market participants agreed that fluctuations in the order of $750 million to $1 billion, compared with typical fluctuations of $500 million over the past year, would be easily manageable.

Programs for Cash-Management Bills (CMBs)

Market participants agreed to a more liberal use of CMBs to enable the government to better manage its cash balances. They indicated that issues larger than $3 billion would be feasible, but could potentially raise borrowing costs for the government. Market participants preferred that CMBs share the same maturity dates with treasury bills to maintain liquidity. Most market participants found the current one- or two-day-ahead announcement of tender size and auction date to be sufficient. Most market participants indicated that the demand for CMBs with maturities of less than one month is limited, which could potentially raise borrowing costs. For short-dated maturities, they recommended using the repo market as an alternative tool to short-dated CMBs.

Pilot Program for Cash-Management Bond Buybacks (CMBBs)

Most market participants showed a strong preference for having CMBBs after treasury bill auctions should the latter be moved to the morning. They did not raise any issues regarding the government's intention to make the CMBB program permanent.

Bond, bond buyback, and real return bond programs

Bond Program

Trade-off between current maturities and benchmark sizes

10-year benchmarks

Most investment dealers indicated a preference for keeping the current one-year cycle for the 10-year benchmark with a slightly reduced target size. A benchmark target of $10 to $14 billion was viewed as acceptable compared with the current target range of $12 to $15 billion. Dealers indicated that an annual cycle is important to ensure that the basket of eligible bonds is large enough to preserve liquidity in the futures market and to keep the sector attractive to international investors.

30-year benchmarks

Market participants preferred that the target size for 30-year benchmark bonds remain in the current range of $12 to $15 billion, even if it requires reopening the issue over a multi-year period. Market participants indicated that to maintain liquidity in the 30-year sector, benchmark size is more important than the time required to build the benchmark.

Total amount of bonds that mature on certain dates

Most participants agreed to reduce the size of 2-year auctions when the new issues were fungible with old benchmarks in order to reduce the nominal amount of bonds that mature on certain dates. A few investment dealers suggested that auction sizes remain at least at $2.5 billion, since the 2-year sector is very active for both investors and swap dealers, thus requiring a large outstanding amount of current-coupon securities.

Bond-buyback program

Market participants strongly supported the switch-buyback program and its objectives. Market participants indicated that this buyback program has helped reduce market risk and has increased liquidity in the market for Government of Canada securities.

In order to maintain or to reduce even further the turnaround time for buyback operations, almost all participants agreed that small and illiquid bonds could be removed from the basket of eligible bonds for cash-buyback operations, as long as these bonds remained eligible in switch-buyback operations. Some investment dealers suggested that the government consider over-the-counter operations to target illiquid issues.

Real return bonds

According to market participants, the bulk of demand is still for 30-year maturities, but it is difficult to know whether or not the recent increase in demand is driven by secular or temporary factors. Most market participants supported the current issuance level of $1.4 billion a year.

Other issues

Alternative Trading Systems and the Canadian fixed-income market

To date, market participants have used Alternative Trading Systems for small trades and price discovery, and continue to prefer traditional channels (telephone, broker screens) for large trades. The consensus view was that Alternative Trading Systems have not, to date, materially improved the transparency of the fixed-income market.

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