The purpose of the consultations is to obtain the views of market participants on issues relating to the design and operation of the Government of Canada domestic debt programs for fiscal year 2004/05 and beyond. These consultations focus on how to maintain stable, low-cost funding for the Government of Canada and to enhance the functioning of the market in Government of Canada securities.
- For the purpose of these consultations, government borrowing in financial markets is projected to remain around current levels.
- The government is seeking views on the treasury bill and cash-management bill programs, as well as on potential enhancements to the bond and bond-buyback operational frameworks.
- In undertaking consultations, the government will seek input from Government Securities Distributors, institutional investors, and other interested parties.
- As in previous years, a summary of the comments received will be released on the Bank of Canada Web site concurrently with the release of the 2004/05 Debt Management Strategy. 1
Programs for Treasury Bills, Cash-Management Bills, and Cash-Management Bond Buybacks
The government announced in its February 2003 Budget, and subsequently in the 2003/04 Debt Management Strategy document, a reduction of the target for the fixed-rate portion of the debt from two-thirds to 60 per cent. This target is planned to be reached over a five-year period. As a result, the outstanding stock of treasury bills is expected to grow to $120 billion by the end of 2003/04 and to continue to increase through to the end of 2007/08. As of 30 November 2003, the outstanding stock of treasury bills was $119 billion.
Cash-management bills (CMBs) complement treasury bills in the management of the government's cash balances. CMBs help minimize the level and cost-of-carrying cash balances.
Several initiatives were implemented this past summer, based on comments received during consultations with market participants held last December with respect to treasury bills and CMBs:
- CMBs were used more frequently to help treasury managers better manage the government's balances on an ongoing basis, as well as around dates of large cash outflows such as coupon payments and bond maturities. During the summer, the government issued three short-dated (seven-day) non-fungible CMBs and made more intensive use of CMBs in the autumn.
- The timing of treasury bill auctions was changed in order to encourage participation by a broader range of market participants.
- The timing of cash-management bond-buyback (CMBB) operations was changed to reflect market participants' preferences for these operations to follow treasury bill auctions.
Issues for Discussion
Treasury Bill Program
- Effective 17 June 2003, treasury bill auctions were moved, on a trial basis, from 12:30 p.m. to 10:30 a.m. to reflect market participants' preferences. Are there any issues that have arisen with respect to this new auction time? Has this modification improved the functioning of the treasury bill market? Should the government make this change permanent?
- How is the market absorbing the increase in treasury bill issuance to date? Have treasury bill trading conditions and distribution improved?
- Has the variation in treasury bill issuance of up to $1 billion from one auction to another raised any issues? How would the market respond to larger variations between auctions?
- In order to attain a 60 per cent fixed-rate share of the debt in five years, treasury bills outstanding, and consequently auction sizes, are planned to increase gradually. Is there a threshold at which weekly auctions would be preferable to biweekly auctions?
- On average, the government issues in 3-, 6-, and 12-month tranches in the following proportions: 56 per cent, 22 per cent, and 22 per cent, respectively. Should future increments to the treasury bill program be concentrated more or less heavily in any particular tranche?
- Are there any foreseeable issues with respect to the increase in the outstanding amount of treasury bills? Do you have any suggestions to improve the continued transition to a larger treasury bill program in the future?
Cash-Management Bill (CMB) Program
- Are there any issues regarding the more frequent use of cash-management bills (e.g., auction sizes and issues non-fungible with treasury bills)?
- Recently, details of CMB auctions have been announced at 10 a.m. for auction at 10:30 a.m. one or two days later. Settlement of CMBs usually occurs one day following the auction. In the past, same-day settlement has occurred on a number of occasions. During the mid- to late-1990s, if unexpected cash requirements occurred, a CMB was announced late in the day for next-day auction and settlement. Would this practice raise any issues? Normally, the government would be aware of the need for this type of CMB by 3:30 pm. How late in the day could the announcement for a next-day CMB be made?
- Are there any other comments with respect to CMBs?
Cash-Management Bond-Buyback (CMBB) Program
- Concurrent with the new timing of treasury bill auctions, which started on 17 June 2003, cash-management bond-buyback operations were moved, on a trial basis, from 10:30 a.m. to 11:15 a.m. in order to reflect market participants' preferences. Are there any comments with respect to this new time? Do market participants continue to prefer that CMBB operations be held after treasury bill auctions? Should the government make this change permanent?
- If, in the future, treasury bill auctions are conducted on a weekly basis, should CMBB operations be held on a weekly basis as well?
- Are there any other comments with respect to CMBBs?
Bond and Bond-Buyback Programs
The bond program for 2003/04, announced in the government's Debt Management Strategy document published in March 2003, has benchmark target ranges of $7 to $10 billion for the 2-year maturity, $9 to $12 billion for the 5-year maturity, $10 to $14 billion for the 10-year maturity, and $12 to $15 billion for the 30-year maturity.
Market participants indicated in the past that large benchmark sizes were important to support liquidity in government bonds. The government introduced a buyback program in 1998 to support gross issuance of bonds at a time when government borrowing requirements were declining. Switch buybacks were subsequently introduced to help build liquid benchmarks faster.
Over the past year, the government has not consistently repurchased the maximum amount during buyback operations. In that context, the government is seeking views on ways of maintaining gross issuance and therefore supporting liquidity in the domestic bond market.
Issues for Discussion
Bond Program and Regular Bond-Buyback Program
- One of the initiatives announced in the 2003/04 Debt Management Strategy was the reduction in the size of 2-year bond auctions to $2.5 billion when 2-year bond issues are fungible with another large outstanding bond. Has this reduction in auction size significantly changed the liquidity in the 2-year sector?
- Buyback operations on a cash basis in the 10-year sector have declined over the past year. To support an annual cycle for the 10-year benchmark and maintain current net issuance of 10-year bonds, the government could increase 10-year switch operations relative to 10-year bond auctions that are linked to cash buyback operations. What are your views on a reduction in auction and cash buyback amounts offset by an increase in switch buybacks to support the maintenance of an annual 10-year cycle? What should the minimum auction size be for 10-year and for other benchmark maturities?
- To maintain current gross issuance of 10-year securities, should bonds closer to the 30-year benchmark be included in the basket of eligible bonds for buyback operations in the 10-year sector?
- In August 2002, the government announced that large issues outstanding, essentially composed of older benchmarks, would not be reduced below $6 billion to help maintain their liquidity. Does the $6 billion floor continue to be appropriate for all maturities? Could the floor be reduced to increase the amount of bonds available in an environment where fewer illiquid high-coupon bonds are available for buyback operations? If so, what should the new floor be?
- Are there any other comments with respect to the design or operation of the nominal bond and buyback programs?
Electronic Trading Systems and Transparency in the Canadian Fixed-Income Market
The Department of Finance and the Bank of Canada have strongly supported improvements in the transparency and efficiency of the Canadian fixed-income market in recent years. In this regard, the government and the Bank of Canada are interested in developments related to alternative trading systems (ATSs). This set of questions is primarily aimed at the buy-side clients (investors, money managers, etc.), although other market participants are welcome to respond to questions they deem relevant.
- What are your views on the level of transparency in the Canadian fixed-income market?
- What has your experience been with ATSs? How efficient do you find ATSs to conduct transactions or to obtain price information?
- If you use ATSs for transactions, what are the normal range and the average ticket size of your transactions?
- Are there any other comments with respect to ATSs?