Summer Market Consultations 2001

Overview

• The objectives of 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. A key element of the strategy is to maintain a prudent debt structure, with approximately two-thirds of the debt stock in fixed-rate instruments.
• The Government is currently seeking views on the structure of the market in Government of Canada securities, as well as on a number of initiatives that could enhance the well functioning of this market, as well as the broader fixed-income market.
• No major restructuring of bond or Treasury bill programs is anticipated in the near term. However, to augment participation in its operations, the Government is considering modifications to the bond auction methodology, as well as to the bond buyback program.
• To help smooth the Government's cash requirements, a pilot program of cash management bond buybacks was implemented in January 2001. Certain operational issues of the pilot program are being reassessed at this time.
• The Government is seeking input from institutional investors in Government of Canada securities, Primary Dealers, and other interested parties.

BOND and BOND BUYBACK PROGRAMS

Context

• The current bond program, as announced in the Government's Debt Management Strategy 2001-2002 published in February 2001, has benchmark target ranges of $7 to $10 billion for the 2-year maturity, and $9 to $12 billion for the 5-year maturity. To promote liquidity and trading in benchmark bonds, benchmark targets for the 10- and 30-year maturities were increased to $12-$15 billion.
• To enhance transparency and participation, the Government announced last September and in the Debt Management Strategy 2001-2002 that the bond buyback program was being expanded to include bonds with maturities across a wider range of the yield curve, that operations would be more frequent, and that target volumes for each quarter would be announced with the quarterly bond schedule.

Issues

1. Bond Program Input is sought on the state of liquidity in the primary and secondary markets. In particular:

• Has the increase in the benchmark targets in the 10- and 30-year sectors enhanced the level of liquidity and trading of benchmarks? Are the benchmark targets of all bond maturities appropriate in the current environment?

1. Input is sought on the development of electronic trading systems and their potential effect on the Government of Canada fixed-income market. In particular:

• Do market participants have any views on recent developments (e.g. the expansion of CanPx and the announcement of CanDeal and CollectiveBid)?

1. The Government is seeking views on the merits of discriminatory versus uniform price auctions. Do investors and dealers see value in the uniform price auction method in terms of reducing their risk? In which maturity sector could a uniform price allotment method be implemented on a trial basis to best assess the potential in terms of participation?
2. In assessing a Government Securities Distributor's or Customer's net position at auction, the Bank currently obtains from participants relevant information about its holding of the security being auctioned according to section 3.2 of the Terms of Participation in Auctions for Government Securities Distributors.

   With the Reconstitution rule change, which took effect in February 2001, it is now possible for participants to reconstitute a stripped bond issue beyond the amount originally issued. Government of Canada bond issues sharing a maturity date with a building benchmark issue can thus be reconstituted into a benchmark security. The Government is at this time interested in participants' views as to how to best incorporate a bidder's position in a bond issue fungible with a bond being auctioned in calculating a bidder's net position.

3. Most recent reconstitution statistics about fungible issues indicate that a large proportion of these off-the-run issues have not been reconstituted into benchmarks. What are the reasons that might explain this?
4. Do market participants have views on what types of longer-term adjustments might be considered in the event that future fiscal outcomes create a requirement for more significant bond program restructuring—for example, changing the frequency and/or size of specific issues, changing the dating and/or maturity patterns of specific issues?
5. Input is sought on the state of the Real Return Bonds (RRB) market. In particular:

• Is there interest in adjusting the size of RRB auctions in favour of June/December auctions given the possibility of re-investment of coupon flows paid out on June and December 1?

Regular Bond Buyback Program

1. Has the expansion of the program announced in the Debt Management Strategy 2001-02 affected overall participation at repurchase operations? Should further changes in the parameters of the program be considered to enhance participation (e.g., changing the size and/or frequency and/or time of day of repurchase operations and/or modifying the manner in which tenders are submitted from a yield to a spread basis)? Would more than one operation per quarter in a particular sector of the yield curve help to increase participation?
2. Would reducing the target turnaround time for publication of the results of buyback operations to 15 minutes contribute to enhancing overall participation, and in particular that of institutional investors?
3. The Government is seeking views on the issues associated with conducting repurchase operations using the conversion method. Conversions (switches or exchanges), as the name implies, could offer market participants the opportunity to convert their holdings of less-liquid government securities into the corresponding benchmark bond. The transaction would be based on the yield spread against the benchmark bond.

   This could allow the Government to build larger benchmark issues, and/or achieve a given target size faster. Would this type of switch operation contribute to enhancing participation at buyback operations and promote liquidity and trading in on-the-run benchmark bonds? If investors see value in this alternative, what are investors' views on timing and pricing aspects of these types of operations?

4. There are several Government of Canada bond issues whose outstanding amount is small and below CAD $1 billion. Should targeting these small bond issues by means of an alternative mechanism such as over-the-counter purchases by the Bank of Canada be considered? Would these types of operations materially increase the level of participation and offers made for these smaller bond issues?

T-BILL and PILOT CASH MANAGEMENT BOND BUYBACK PROGRAMS

Context

• As indicated in the Debt Management Strategy, it is expected that the outstanding stock of Treasury bills will remain in the $75-95 billion range over the two-year planning horizon.
• To help in smoothing the Government's cash requirements, a pilot program of cash management bond buybacks was implemented in January 2001. The program is designed to reduce the peak levels of government cash balances needed to redeem large upcoming maturities of Government of Canada marketable bonds. This pilot program also facilitates smoothing out seasonal fluctuations in Treasury bill issuance.
• The pilot program has to date been successful in achieving its objectives. An evaluation with market participants is planned during the fiscal year to determine whether the program can become a regular part of the Government's debt management operations. Certain operational issues of the pilot program are, however, being reassessed at this time.

Issues

1. Are there any suggestions for changes geared towards enhancing the liquidity and maintaining a well-functioning Treasury bill market?
2. The Operational Framework of the Government of Canada Pilot Cash Management Bond Buyback Program indicated that the outstanding amount maturing on any given target date will not be reduced below the $6 billion threshold. What are market participants' views on the possibility of removing or significantly reducing this threshold? (This potential modification would not affect the guideline to target only those bonds that mature on dates where the total amount of bonds outstanding is greater than $6 billion.) Would this cause any serious liquidity issues?
3. Do participants like the current announcement framework? Are there any issues surrounding the timing of these announcements, both in terms of frequency and size of operations (e.g. changing from bi-weekly to monthly, adjusting amounts, not holding a cash management buyback in a particular month)?