The Cost of the Government Bond Buyback and Switch Programs in Canada

This note examines the costs of the Government of Canada bond buyback and switch programs between 1998 and 2016. Our analysis indicates that the auction design of the buyback program was effective in retiring government debt with minimal costs resulting from bid shading in auctions and price impact. We find that the estimated cost is much less than the average bid-ask spread and the cost of similar buyback programs conducted by other countries. We also find that the variation in cost of the switch operations is largely explained by the price movement of the replacement bond in the 30-minute window between the announcement of the replacement bond price and the submission deadline of the bids. This result suggests that an auction design that decreases uncertainty around the replacement bond price can potentially reduce the variation in cost of the switch operations.