Debt Strategy Market Consultations—2002-03: Summary of Comments

In January 2002, officials from the Department of Finance and the Bank of Canada sought views of Government Securities Distributors and investors on a number of issues related to the domestic debt program as part of the development of the Debt Strategy 2002-03 and in keeping with the Government's ongoing commitment to consult with market participants. The Debt Strategy Consultations focused on recent market developments and potential initiatives geared towards enhancing liquidity and maintaining a well-functioning market for Government of Canada securities. This document provides a summary report on views received during these consultations.

Summary

In general, market participants were positive about the initiatives that the Government has undertaken in recent years. Market participants recommended that the current benchmark targets be maintained and strongly recommended that the Government continue to issue 30-year bonds. Most also felt that the Government could expand bond baskets for buyback operations. In addition, support was given to raise the ceiling for individual buyback operations. Most participants indicated that no adjustment was required to the treasury bill program. Investors and dealers are anxious to see developments of electronic fixed-income trading systems in Canada.

Bond Program

Market participants recommended that current benchmark targets be maintained and that the Government place emphasis in building new benchmarks more quickly.

There was a consensus that continued issuance of 30-year Government of Canada bonds is important, mainly due to the limited supply of alternative long-term products in Canada. Views were mixed however with regard to the frequency of issuance. Some participants favoured quarterly 30-year issuance rather than semi-annual, but others felt that the smaller quarterly auctions might threaten the integrity of the auction process.

Given the unique characteristics of Real Return Bonds, participants indicated that the liquidity of these securities is naturally lower than that of nominal bonds. They also indicated that there has been no significant change in Real Return Bonds' liquidity in the past year. They recommended that the amount of annual issuance be maintained at the current level of about $1.4 billion.

Bond Buyback Program

There was a consensus view that the Government could expand bond buyback baskets to include some older benchmark bonds and their fungibles to maintain effective buyback operations and sustain gross issuance levels, but views were mixed as to which bonds should be targeted. While some indicated that the Government should avoid some older benchmarks that are still used to price corporate and provincial bonds, many felt that current benchmarks could be used to price these securities.

Support was expressed for an increase in the ceiling for individual buyback operations to permit the Government to take advantage of favourable buyback opportunities, depending on financial requirements at the time and prevailing price levels. Participants were of the view that the Government should not be concerned about the signal associated with buying less than the maximum amount.

Treasury Bill Program

The majority of participants indicated that no adjustment was required to the treasury bill program. Participants were generally satisfied with the functioning of the treasury bill market and seem to have adjusted to a lower level of treasury bills outstanding since 1998.

Cash Management Buyback Program

Market participants are in favour of continuing the program and of combining the timing of cash management buyback announcements with treasury bill announcements on the Communication, Auction and Reporting System (CARS).

As with the regular bond buyback program, market participants support the Government initiative to raise the individual buyback operations ceiling to permit the Government to take advantage of favourable buyback opportunities. Participants also indicated that the Government should not be concerned about the signal associated with buying less than the maximum amount.

Transparency/Electronic Trading

Views were mixed on the adequacy of the level of transparency in fixed-income markets. Investors and dealers are anxious to see developments of electronic fixed-income trading systems in Canada. Some dealers expressed the view that electronic trading systems should facilitate broad-based participation in order to sustain a liquid market in Government of Canada securities.

Other

Turnaround time

There was support for further reducing turnaround time for auction and buyback operations.