Debt Strategy Consultations 2002-03

December 2001

Overview

The purpose of the consultations is to obtain market views on issues relating to the design and operation of government debt programs for fiscal year 2002-03 and beyond.

• Given the outlook contained in the 2001 Budget released 10 December 2001, the debt program is projected to continue to operate at current levels and no major change in debt program structure is envisioned at this time. The Government is focusing on how to maintain and enhance the functioning of the market in Government of Canada securities.
• The Government is currently seeking views on the structure of the market in Government of Canada securities, and on a number of initiatives that could enhance the well functioning of this market, as well as the broader fixed-income market.
• The fundamental 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 has been to maintain a prudent debt structure, with approximately two-thirds of the debt stock in fixed-rate instruments.
• The government will also seek input from Primary Dealers, institutional investors and other interested parties.

BOND and BOND BUYBACK PROGRAMS

Context

• The bond program for 2001-02, as announced in the Government's Debt Management Strategy published in February 2001, has benchmark target ranges of $7 to $10 billion for the 2-year maturity, $9 to $12 billion for the 5-year maturity, and $12-$15 billion for the 10- and 30-year maturities.
• During Summer 2001 Consultations, market participants recommended that current benchmark targets be maintained and not increased. The general view was that bigger is better, but that a trade-off exists between the benefits of larger benchmarks and the time required to reach the larger target sizes.
• To reduce participants' market risk and thereby potentially enhance overall participation, the Government announced last September, following Summer Market Consultations 2001, the intention to implement trial buyback operations on a switch basis. Details of the switch pilot program were announced by the Bank of Canada on 18 December 2001.

Issues for Discussions

Bond Program

• Should the Government change the current structure of the bond program?
• Are the current benchmark targets appropriate?
• In the context of the elimination of 30-year issuance by the U.S. Treasury, what are market participants' comments on the importance of a 30-year bond in Canada? Has market liquidity changed recently? Some market participants have suggested more frequent issuance. What are your views?
• For the last three fiscal years, the Government's Real Return Bond (RRB) issuance has been around $1.5 billion per fiscal year, a program size which is balanced against the desire to maintain liquidity in other bond offerings.
• How is the market functioning?
• Should the government make any adjustments to the program?

Bond Buyback Programs

To facilitate interest in ongoing operations of bond buyback programs, enlargement of the basket of bonds for repurchase is under consideration.

• Are there concerns about including old benchmarks and fungible bonds in the basket?

A target amount of bonds to buyback is announced with the quarterly bond schedule and a maximum repurchase amount for each operation is announced a week prior to the operation. In order to take advantage of favorable market conditions, offset low interest at other operations and achieve the quarterly objective, occasionally buying more than the announced maximum amount is under consideration.

• Would there be concerns if occasionally the Government purchases more then its announced target amount (e.g. no more than 125% of the announced target)?

T-BILL and PILOT CASH MANAGEMENT BOND BUYBACK PROGRAMS

Context

• The treasury bill program was restructured in 1997 in light of the decline in the outstanding treasury bill stock in the preceding years. Since then, the government has regularly sought views of market participants during its Fall and Summer consultations on whether further changes should be considered.
• During December 2000 consultations, most participants were of the view that no adjustments were needed to the treasury bill program. They indicated that most dealers and investors had adjusted to lower levels of the stock of treasury bills outstanding than in the past.

Bill Program:

• Are there any structural issues that are impeding the functioning and liquidity of the treasury bill market?

Pilot Cash Management Buyback Operation:

• Do you consider the Pilot CMB as a success?
• Are there any issues relative to announcement, timing and size of operations?
• As per regular Bond Buybacks, are there concerns about the Government using flexible maximum target amount?

Transparency and Efficiency of the Canadian Fixed Income Market

The Department of Finance and the Bank of Canada strongly support improving the transparency and efficiency of Canadian fixed income markets. In 2001, we have actively participated in the development of the recently-approved Alternative Trading System (ATS) rules. Canadian Securities Administrators' request for public comment on CanPX's application to be data consolidator is expected to be published by the Ontario Securities Commission shortly.

• What are market participants' views on the current level of fixed income market transparency?
• What are the prospects for the development of electronic trading systems? How will they affect market efficiency and liquidity?

Others:

• Are there any suggestions for improving the dissemination of information via the Department of Finance or the Bank of Canada Web sites?