In November 2008, officials from the Department of Finance and the Bank of Canada sought views from government securities distributors, institutional investors, and other interested parties on issues relating to the design and operation of the domestic Government of Canada debt program for the remainder of the current fiscal year, 2009/10, and over the medium term, including issuance related to the Insured Mortgage Purchase Program (IMPP). Representatives from Canada Mortgage and Housing Corporation (CMHC) also participated in these consultations.
As the sovereign and largest issuer of Canadian fixed-income securities, the government views consultations with market participants as an essential component of its ongoing commitment to the maintenance of a well-functioning government securities market.
Information gathered during the consultations contributed to the development of the 2009/10 debt strategy. This document provides a summary of the views received during these consultations.
Market Conditions
Market participants indicated that while liquidity in the Canadian fixed-income market has declined significantly as a result of the current global credit crisis, liquidity in Government of Canada securities has been less adversely affected. They mentioned that the ongoing deleveraging in the financial market industry has reduced participants' tolerance for risk. A decline in client participation and trading-flow diversification was highlighted, especially among hedge funds and international accounts.
Some market participants expressed concern with conditions in the interest rate swap market and suggested that the government incorporate fixed-rate swaps into its debt-management program.
IMPP Operations and Related Funding Activities
Dealers were unanimous in the view that the IMPP operations conducted by CMHC and term Purchase and Resale Agreement (PRA) operations conducted by the Bank of Canada have helped in the management of their balance sheets.
Participants' views were mixed on the need to conduct a bond auction of equal term and on the same day as an IMPP fixed-rate operation, but were unanimous in indicating that a greater share of floating-rate IMPP operations would be welcome and would help alleviate pressures in the swap market.
Dealers stressed the importance of transparency and rapid turnaround times for IMPP operations, and emphasized the benefits of improved coordination with related government bond auctions. As a result, on 22 December 2008, the Bank of Canada, on behalf of the Government of Canada, and CMHC released a calendar of IMPP operations and bond auctions for the last fiscal quarter of 2008/09.
Treasury Bill Program
Market participants agreed that the treasury bill market was functioning well in the current environment of higher issuance, and that demand was strongest in the 3-month or shorter maturities. The majority recommended that biweekly auctions be maintained, while some participants indicated that continued increases to treasury bill issuance levels could necessitate a move to weekly auctions.
Bond Program and Buyback Program
Discussions were held on benchmark sizes, current issuance patterns, and the role of the buyback program.
Participants indicated that additional issuance in the 2-year sector was possible, particularly in view of the IMPP, while some pointed out that additional issuance in longer-term bonds should be considered by the government, given the historically low yield levels. Market participants were nearly unanimous in emphasizing the importance of communicating changes to the debt strategy plan in a timely and predictable manner.
Regarding the buyback program, most participants were of the view that the buyback floor for off-the-run benchmarks should be lowered to help ease illiquidity in some issues. In response, on 22 December 2008, the buyback floor was reduced to $3 billion for all maturities to facilitate further buyback operations consistent with debt strategy objectives.