Spring 2007 Consultations Document

Overview

In view of the announcement in the Debt Management Strategy for 2007/08 of an increase in the issuance of Real Return Bonds (RRBs) to slightly over $2 billion, the Department of Finance and the Bank of Canada are seeking the views of institutional investors, government securities distributors, and other interested parties regarding the RRB auction plan.

Background

The Government of Canada has a strong interest in sustaining a well-functioning market for its securities and strives to maintain liquid, transparent, regular, and diversified borrowing programs. A well-functioning market supports the achievement of the government's fundamental debt management objective of keeping borrowing costs low and stable. It also benefits market participants by providing important pricing and hedging tools. The government's announced changes to RRB issuance reflect these objectives.

In recent market consultations regarding the debt strategy for 2007/08, institutional investors indicated that there is increasing demand for long-term Government of Canada securities. As announced in the Debt Management Strategy for 2007/08, issuance of 30-year nominal bonds and RRBs will increase by roughly $1 billion, with roughly equal net issuance, after regular buybacks, of 30-year nominal bonds and RRBs.

Historically, the government has issued RRBs on a quarterly basis, generally around the start of the third month of the quarter. The auction size over the past 5 years has ranged between $300 million and $450 million. In view of the planned increase in RRB issuance, the government is reviewing the RRB auction schedule to identify the most effective means of distributing the bonds and is seeking the views of market participants.

Questions for Discussion
  1. What are the benefits and risks of larger auction sizes? Should additional auctions during the year be considered?
  2. Does the size of auctions and the increase in RRB issuance affect domestic or international investor participation, or overall demand?
  3. What issues should the government consider in determining the size of RRB benchmarks and the time it takes to build a new benchmark? Is there a particular benefit in starting new RRB benchmarks near a coupon date?