In January 2004, officials from the Department of Finance and the Bank of Canada sought views from Government Securities Distributors and institutional investors on a number of issues related to the design and operation of the domestic debt program. The consultations served as input to the development of the 2004/05 debt strategy and were in keeping with the government's ongoing commitment to consult with market participants. The debt strategy consultations focused on potential adjustments geared towards maintaining a liquid and well-functioning market for Government of Canada securities. This document provides a summary of the views received during these consultations.
Summary
In general, market participants were positive about the initiatives that the government has undertaken in recent years to maintain the efficient operation of the domestic debt program. Most market participants noted an increase in the liquidity of the treasury bill market, which they attributed partly to the recent increase in treasury bill issuance. With regard to the nominal bond program, a number of market participants were concerned that a continued decline in auction size could hurt the auction process, reduce liquidity in the secondary market, and require structural adjustments to the bond program in the future. Most market participants supported the release of auction and buyback results on a best-efforts basis (i.e., when ready) in order to minimize market risk. Finally, market participants felt that the introduction of alternative trading systems had improved the transparency of the Government of Canada fixed-income market for small-size transactions. To date, investors have used alternative trading systems mainly for pricing information and for small transactions.
Treasury Bill Program
Most participants indicated that the increase in the outstanding amount of treasury bills over the past two years has been well absorbed by the market. The increase has occurred in a period of growing demand for collateral in Canadian capital markets and reduced offerings of substitutes (e.g., commercial paper). Participants noted an improvement in the liquidity of the treasury bill market, which they attributed to the larger bill supply. They also indicated that they are comfortable with further increases in the outstanding amount as the government continues to reduce the fixed-rate share of its debt.
Views varied considerably about the relative demand for the three treasury bill tranches (3-, 6-, and 12-month), and no consensus emerged on whether the government should concentrate additional issuance in any particular tranche. Most participants indicated that the biweekly frequency for treasury bill auctions is still appropriate and suggested a wait-and-see approach before considering a return to weekly auctions. Market participants were generally satisfied with the current morning timing of treasury bill auctions and cash-management bond-buyback operations. Market participants preferred that cash-management bond-buyback operations continue to follow treasury bill auctions.
The more frequent use of cash-management bills (CMBs) by the government in 2003/04 has not posed any issues for most participants. Some suggested that it may be preferable to have the maturity date of CMBs match an existing treasury bill maturity date, so that they are fungible with one another. A majority of participants were comfortable with announcements for CMB auctions late in the afternoon the day before the auction (up to about 4 p.m.), when the government faces unexpected large cash requirements.
Bond Program and Bond-Buyback Program
Comments received centered around the size of the auctions and the target size of benchmark bonds. Market participants suggested that auctions for nominal bonds are approaching their lower size limit, particularly in the 10- and 30-year maturities, and that further reductions in auction size could have a negative impact on auctions, reduce liquidity in the secondary market, and require structural adjustments to the bond program. Market participants did not indicate a desire to change the present target sizes for benchmark bonds.
Given the importance of the 10-year bond maturity for market participants (including foreign investors) and for the futures market, a large number of participants stressed the importance of maintaining a minimum benchmark size of $10 billion for the 10-year bond. Some participants reiterated their strong preference for the maintenance of an annual benchmark building cycle for issuance in this sector.
Market participants expressed broad support for both the cash and switch buyback programs as a way of helping to maintain liquidity and new issuance of Government of Canada securities. However, a number of market participants indicated that it may become increasingly difficult to conduct large-scale buyback operations in the future because of the reduced amount of eligible bonds outstanding.
Market participants generally did not favour a reduction in the $6 billion floor for the outstanding amount of older benchmarks eligible for repurchase, especially for maturities longer than five years, because it could hurt the liquidity of these bonds. Most participants favoured including longer-term bonds in the basket of bonds eligible for repurchase in 10-year buyback operations but noted that benefits could be modest because of the relatively limited availability of eligible longer-term bonds. Some participants suggested including the preceding benchmark bond (which is currently excluded) in the basket of bonds eligible for repurchase.
Some market participants suggested that the government move its bond auctions to the morning to increase and broaden participation, since liquidity tends to be better in the morning.
Electronic Trading Systems and Transparency in the Canadian Fixed-Income Market
A majority of market participants were of the view that alternative trading systems have had a positive impact on the transparency of the Canadian fixed-income market, particularly for Government of Canada bonds, but they also indicated that more transparency did not imply increased market depth. The improved transparency has benefited smaller institutional investors and the retail market in particular. Investors indicated a desire to improve the price transparency of corporate bonds.
In general, market participants have used electronic trading systems mainly for price information and for executing small transactions. Most institutional investors continue to prefer executing large transactions through traditional channels, such as direct contacts with dealers.
Other Issues
Turnaround time
Government Securities Distributors strongly supported further efforts to shorten turnaround time in the release of auction and buyback results since it would reduce their market risk and enhance the efficiency of the primary market. A majority of participants supported moving to a best-efforts basis (i.e., when ready) for the release of operation results. Some participants also supported reducing the time between cash buyback operations and auctions.