Debt reduction is a cornerstone of our economic policy. In our long-term economic plan, Advantage Canada, we set out to create a Canadian Fiscal Advantage by eliminating the total government net debt in less than a generation, by 2021.
Like ordinary Canadian families, our government knows the importance of paying off the mortgage or making regular credit card payments.
We firmly believe that it would be irresponsible to pass this national debt onto future generations. Canadians have an obligation to pay for the overspending of previous governments. After all, we are the ones using those services and infrastructure today.
To date, we have made tremendous progress on the debt reduction front.
This year, our government plans to reduce the federal debt by $10 billion, bringing total debt reduction since 2005–06 to over $37 billion. This is the equivalent of $1,570 for each man, woman and child in Canada.
Our government is committed to reducing the national debt by a further $3 billion in 2008–09 and $3 billion each year thereafter.
Thanks to this approach, our goal of reducing the debt-to-GDP (gross domestic product) ratio to below 25 per cent will be achieved by 2011–12, three years ahead of the original target date, marking the lowest debt burden since the late 1970s.
This is significant for Canadian individuals, families and businesses, as lower debt means less interest and lower taxes.
Under our Tax Back Guarantee, we are giving Canadians a direct stake and a direct benefit in how we manage government finances on their behalf. We are dedicating all interest savings from the shrinking federal debt to further reduce personal income taxes.
The total value of tax relief provided under the Tax Back Guarantee will rise to $2.5 billion by 2012–13.
Our government’s commitment to tax relief, to focused spending and to further debt reduction is unwavering. We will continue to manage government finances prudently and responsibly in order to make our strong economy even stronger and ensure a prosperous future for generations to come.
The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
Ottawa, December 2007
This edition of the Debt Management Report provides a detailed account of the Government of Canada’s borrowing and cash operations for fiscal year April 1, 2006 to March 31, 2007.
It provides a comprehensive report on the environment in which the debt is managed, the composition and changes in the debt during the year, and the implementation of planned borrowing operations and initiatives set out in the 2006–07 Debt Management Strategy, published in April 2006. Reference tables containing statistics on the operation of debt programs are provided at the end of the report.
The information contained in this report is designed for a range of interested parties and to ensure transparency and accountability in Government of Canada borrowing and cash management activities. Information on the management of the foreign reserves is provided in a separate report, the Report on the Management of Canada’s Official International Reserves. The Debt Management Strategy, the Debt Management Report and the Report on the Management of Canada’s Official International Reserves are tabled annually in Parliament and are available on the Department of Finance website at www.fin.gc.ca.
Federal Debt Management
Management of the federal debt involves two major activities: actively managing the portion of the debt that is borrowed in financial markets; and investing part of the proceeds of borrowing in liquid assets until needed for operations. At March 31, 2007, the market debt was $418.8 billion, composed of marketable bonds, treasury bills and cash management bills, retail debt, foreign currency debt and Canada Pension Plan (CPP) bonds. The Government held $21.2 billion of domestic cash balances.
|Payable in Canadian currency|
| Marketable bonds
(fixed-rate bonds with 2-, 5-, 10- and 30-year maturities
and Real Return Bonds with 30-year maturities)
| Treasury bills and cash management bills
(zero-coupon securities with 1-day to 12-month maturities)
| Retail debt
(Canada Savings Bonds and Canada Premium Bonds)
|Payable in foreign currency|
| Marketable bonds and foreign currency notes
(fixed-rate bonds, Canada notes and Euro
| Canada bills
(zero-coupon securities with 1- to 9-month maturities)
|Total market debt||418.8|
|Liquid Financial Assets|
|Short-term deposits with financial institutions||21.20|
|Note: Numbers may not add due to rounding.|
This document is structured as follows:
In 2006–07, the level of federal indebtedness continued to decline. On a full accrual basis, the federal debt, or accumulated deficit, was reduced by $14.2 billion to $467.3 billion, down $95.6 billion from its peak in 1996–97. Similarly, the federal market debt, composed of marketable bonds, treasury bills and cash management bills, retail debt, foreign currency debt and CPP bonds, was reduced by $8.5 billion to $418.8 billion, down $58.1 billion from its peak in 1996–97.
Public debt charges were $33.9 billion, up $0.1 billion from fiscal year 2005–06, reflecting an increase in the average effective interest rate on the stock of interest-bearing debt. In 2006–07, they were $15.5 billion lower than their high reached in fiscal year 1995–96. Public debt charges as a percentage of budgetary revenues have plummeted from a high of 37.6 per cent in 1990–91 to 14.4 per cent in 2006–07.
Adjustments in the level of treasury bill and net bond issuance continued the process begun in 2003–04 of reducing the fixed-rate share of the debt from two-thirds to a target of 60 per cent. The fixed-rate share fell from 62.5 per cent to 61.9 per cent over the course of the year. The stock of treasury bills, including cash management bills, increased by $2.5 billion to $134.1 billion, while the stock of marketable bonds declined by $3.7 billion to $257.5 billion.
The main challenge in managing the federal debt in recent years has been to support the maintenance of a liquid, well-functioning government securities market as a source of stable low-cost funding in the face of declining borrowing requirements. To this end, debt operations during the 2006–07 fiscal year continued to focus on the liquidity of new issues and outstanding benchmark bonds. Gross issuance of new 5-year bonds was reduced to take advantage of fungibility (i.e. the ability to combine different bonds that share the same maturity date) to help support liquidity in all maturities.
The Government announced in Budget 2007 that it plans to meet all of the domestic borrowing needs of the Business Development Bank of Canada, Canada Mortgage and Housing Corporation and Farm Credit Canada through direct lending to these Crown corporations, beginning in 2008. Prior to this change, these Crown corporations obtained funding directly through the capital markets, under their own name. The Government’s own debt program will be adjusted to accommodate the additional need for funds.
In 2007, amendments were made to the Financial Administration Act (FAA) regarding the Government’s borrowing activities to provide greater transparency and accountability, and increase flexibility to meet future borrowing needs, particularly with respect to the consolidation of Crown borrowings.
Notably, the existing $4-billion statutory non-lapsing limit on borrowing authority was replaced with a more flexible, simplified and streamlined framework that consolidates the borrowing authority into one general provision, under the authority of the Governor in Council.
The amendments also provided for enhanced disclosure on anticipated borrowing and planned uses of funds through the Debt Management Strategy; enhanced disclosure requirements on actual borrowing and uses of funds compared to those forecast through the Debt Management Report; and detailed information on outcomes provided in the Public Accounts.
The period within which the Debt Management Report must be tabled was also shortened from 45 to 30 sitting days following the tabling of the Public Accounts.
The added flexibility provided by these amendments to the FAA will facilitate more efficient, responsive and prudent financial management.
The liquidity of the domestic debt market is a function of program design and public confidence in its integrity. The Investment Dealers Association of Canada (IDA) Policy No. 5, Code of Conduct for IDA Member Firms Trading in Wholesale Domestic Debt Markets, originally introduced in 1998 and developed jointly with the Bank of Canada and the Department of Finance, is the formal code of conduct for dealing practices in wholesale domestic debt markets. Revisions were made to the Policy in early 2006 to further strengthen integrity in the trading of Canadian fixed-income securities and thereby to encourage liquidity and efficiency, promote public confidence and encourage the maintenance of active Government of Canada securities trading and lending.
Responsibility for strategic planning and the operational management of the market debt and liquid assets, including the foreign exchange reserves, which are collectively termed "funds management," is jointly borne by officials at the Department of Finance and the Bank of Canada. The Bank of Canada acts as fiscal agent for the Minister of Finance in issuing debt, investing funds and conducting other market operations.
The oversight of activity is carried out through the Funds Management Committee (FMC), which comprises senior management from the Department of Finance and the Bank of Canada. The FMC advises the Minister of Finance on policy and strategy, oversees the implementation of approved policy and plans, and reviews performance outcomes.
The FMC is supported by the Risk Committee (RC), whose mandate is to oversee and advise on risk management policy and to report to the FMC on financial risk positions. The Financial Risk Office at the Bank of Canada provides analytical support to the RC in this role and is responsible for monitoring and regularly reporting on the financial performance and position of certain financial assets and foreign-currency-denominated derivatives, including market, credit, operational, liquidity and legal risks.
In order to inform future decision making and to support transparency and accountability, different aspects of the Government of Canada’s treasury activities are reviewed periodically under the Department of Finance’s treasury evaluation program. The program’s purpose is to obtain periodic external assessments of the frameworks and processes used in the management of wholesale and retail market debt, cash and reserves as well as the treasury activities of other entities under the authority of the Minister of Finance (see the Section "Program Reviews and Evaluations" in Part II and Annex 1).
For additional details on the governance framework, see the Funds Management Governance Framework at www.fin.gc.ca/treas/Goveev/TMGF_-eng.asp.
Management of Government of Canada funds encompasses issuance of debt, management of liquidity, and investment of financial assets. All funds management activities are conducted in view of overarching principles.
In addition, distinct objectives and principles have been established within the financial asset and liability management function pertaining to the management of domestic debt and cash, foreign reserves, and retail debt.
Domestic Debt and Cash Management Objectives
The fundamental objective of domestic debt and cash management is to raise stable and low-cost funding to meet the operational needs of the Government of Canada.
An associated objective is to maintain a well-functioning market in Government of Canada securities, which helps to keep debt costs low and benefits a wide array of domestic market participants.
Domestic Debt and Cash Management Principles
In pursuit of these objectives, the Government of Canada manages its activities according to a set of principles.
Since the annual debt-servicing cost represents 15 per cent of total federal expenses, effective management of the federal debt is important to all Canadians. This section provides an overview of the context within which debt management decisions were taken in 2006–07.
The federal debt consists of the total liabilities of the Government of Canada (gross debt) minus financial and non-financial assets. The following diagram illustrates the relationships between the components of the federal debt, based on the 2006–07 fiscal year.
For accounting purposes, gross debt is decomposed into: market debt, which is issued and outstanding in financial markets; value adjustments to market debt (for the foreign exchange value of swap liabilities and the net of unamortized premiums and discounts of new issues and buybacks); capital leases; and other liabilities. Other liabilities comprise liabilities held outside capital markets and include obligations to public sector pension plans as well as accounts payable and accrued liabilities and allowances.
Financial assets comprise cash on deposit with the Bank of Canada, chartered banks and other financial institutions, accounts receivable (including tax receivables), foreign exchange accounts, and loans, investments and advances.
Non-financial assets comprise tangible capital assets, inventories and prepaid expenses.
In 2006–07, the federal debt, or accumulated deficit, was reduced by $14.2 billion to $467.3 billion. Similarly, the federal market debt was reduced by $8.5 billion to $418.8 billion (see Table 1).
Change in Composition of Federal Debt
|Market debt value adjustments||-1.1||-2.5||-4.3||-6.1||-4.7|
|Pension and other liabilities||178.3||180.9||179.8||179.9||185.1|
|Accounts payable and
|Less: financial assets||139.5||149.1||155.4||165.6||181.9|
|Less: non-financial assets||54.2||54.8||54.9||55.4||56.6|
|Federal debt (accumulated deficit)||505.3||496.2||494.7||481.5||467.3|
|Note: Numbers may not add due to rounding.|
The budgetary surplus of $13.8 billion recorded in 2006–07 was the federal government’s 10th consecutive surplus. Federal debt stood at $467.3 billion at the end of 2006–07, down $95.6 billion from its peak of $562.9 billion in 1996–97. The federal debt-to-GDP ratio is 32.3 per cent, down from its peak of 68.4 per cent in 1995–96 (see Chart 1). As announced in the 2007 Economic Statement, the Government plans to achieve a debt-to-GDP ratio of 25 per cent by 2011–12, three years ahead of the original target.
Public debt charges were up $0.1 billion to $33.9 billion from 2005–06, and represented 5.7 per cent of interest-bearing debt, up 0.1 per cent from 2005–06, reflecting higher average effective interest rates on the stock of interest-bearing debt. However, public debt charges as a percentage of GDP declined to 2.3 per cent in 2006–07 from 2.5 per cent in 2005–06 (see Charts 1 and 2).
Public debt charges as a percentage of budgetary revenues have been decreasing in recent years, falling from the peak of 37.6 per cent in 1990–91 to 14.4 per cent in 2006–07. In other words, the Government spent just over 14 cents of every revenue dollar on interest payments on the public debt in 2006–07 (see Chart 2).
For additional information, see the 2006–07 Annual Financial Report of the Government of Canada at www.fin.gc.ca/purl/afr-eng.asp.
The key budgetary reference point for debt management is the financial source/requirement, which measures the difference between cash coming in to the Government and cash going out. This measure is affected not only by the budgetary balance but also by the Government’s non-budgetary transactions.
The budgetary balance is presented on a full accrual basis of accounting, recording government liabilities and assets when they are incurred or acquired, regardless of when the cash is paid or received. Non-budgetary transactions comprise changes in federal employee pension accounts; changes in non-financial assets; investing activities through loans, investments and advances; and other transactions (e.g. changes in other financial assets and liabilities and foreign exchange activities). Non-budgetary transactions also include adjustments made to convert the Government’s financial statements from full accrual to cash accounting.
In 2006–07, the budgetary surplus of $13.8 billion and a net requirement of funds from non-budgetary transactions of $5.2 billion produced a financial source of $8.5 billion. This compares to a financial source of $6.8 billion in 2005–06, $6.6 billion in 2004–05 and $7.6 billion in 2003–04 (see Chart 3).
The share of the domestic debt market occupied by Government of Canada securities has declined since 1996. At December 31, 2006, Government of Canada treasury bills represented 35 per cent of total short-term securities, down from 60 per cent in 1996. This decline in market share was largely offset by the growth of asset-backed commercial paper, whose share increased from 4 per cent to almost 30 per cent over that time period.
While the paydown of Government of Canada debt explains part of this decline in market share, the main reason is the significant overall growth of the fixed-income market. According to the Bank of Canada, outstanding short-term domestic securities have increased from $226 billion in 1996 to almost $360 billion in 2006. Similarly, outstanding domestic bonds have increased from $656 billion in 1996 to $1,105 billion in 2006 (see Charts 4 and 5).
At December 31, 2006, Government of Canada bonds represented 24 per cent of total bonds outstanding, down from almost 50 per cent in 1996. Over that time period, the market share for corporate paper increased from 13 per cent to 24 per cent, and the share for term securitizations increased from 3 per cent to 16 per cent.
There are two types of market debt: domestic debt, which is denominated in Canadian dollars, and foreign currency debt (see Chart 6).
Funding in Canadian dollars is done through both wholesale and retail channels. Wholesale funding is conducted through issuance of marketable securities, namely nominal bonds, Real Return Bonds and treasury bills, including cash management bills. These securities are sold via auction. Retail funding is raised through sales of Canada Savings Bonds and Canada Premium Bonds to Canadian residents.
Foreign currency debt is used to fund Canada’s foreign exchange reserves, which are held in the Exchange Fund Account. At March 31, 2007, foreign currency debt accounted for 2.5 per cent of total market debt, and was composed of Canada bills, notes, bonds and Euro Medium-Term Notes. Foreign reserve assets are also funded by cross-currency swaps of domestic obligations. At March 31, 2007, 7.3 per cent of domestic market debt had been swapped into foreign currencies. In total, including the effect of cross-currency swaps, foreign obligations represented 9.8 per cent of market debt.
A detailed description of Government of Canada market debt instruments is available at www.fin.gc.ca/invest/instru-eng.asp.
Table 2 shows the change in the composition of federal market debt at March 31, 2007, by domestic and foreign currency debt programs. Domestic debt fell by $4.7 billion while foreign currency debt declined by $3.7 billion. Further details on the changes in programs and indicators of debt management operations and activities can be found in Part III.
Change in Composition of Federal Market Debt, 2006–07
|April 1, 2006 Outstanding||March 31, 2007 Outstanding||Change|
|Foreign currency debt1||14.1||10.4||-3.7|
|Total market debt||427.3||418.8||-8.5|
|Note: Numbers may not add due to rounding.
1 Liabilities are stated at par value using March 31, 2007 closing exchange rates.
The 2006–07 Debt Management Strategy, published in April 2006, set out an action plan for the management of the debt and cash balances for the 2006–07 fiscal year (for more information, see the 2006–07 Debt Management Strategy at www.fin.gc.ca/toc/2006/dms06-eng.asp).
The first part of this section provides information on the total amount of borrowings relative to borrowing authority. The second part describes in more detail actions taken within the borrowing authority framework, organized around two key debt strategy objectives: raising stable, low-cost funding and maintaining a well-functioning government securities market. A summary of the plan and actions taken can be found at the end of this section.
Authority to borrow in financial markets is provided by Part IV of the Financial Administration Act (FAA), which authorizes the Minister of Finance to issue securities and undertake related activities, including entering into financial contracts and derivatives transactions.
Amendments were made to the FAA in 2007, including a requirement for greater transparency and enhanced disclosure regarding the Government’s borrowing activities. The purpose of this section is to fulfill this requirement.
Borrowing authority is obtained from the Governor in Council through an Order in Council (OIC). The OIC on borrowing authority for the 2006–07 fiscal year specified that the maximum aggregate principal amount of money that the Minister of Finance was authorized to borrow was $210 billion. This amount is based on the debt strategy plan outlined in the 2006–07 Debt Management Strategy, plus a margin for flexibility as part of prudent debt management.
In 2006–07, the aggregate principal amount of money borrowed was $174 billion, well below the $210-billion threshold, because a margin for flexibility is required for ongoing prudent debt management and for the refinancing of maturing debt (see Table 3).
Aggregate Principal Amount of Money Borrowed, 2006–07
|Issued in Canadian currency|
|Real Return Bonds||1.6|
|Treasury bills and cash management bills1||134.1|
|Total issued in Canadian currency||169.3|
|Issued in foreign currency2|
|Foreign currency bonds||0.0|
|Euro Medium-Term Notes||0.0|
|Total issued in foreign currency||4.7|
|Total principal borrowed||174.0|
|1 Estimated peak of the stock during the year.
2 Foreign currency debt issued stated using March 31, 2007 closing exchange rates.
Achieving the objective of raising stable low-cost financing involves managing the Government’s exposure to changes in interest rates and their impact on borrowing costs (interest rate risk). This section highlights the actions taken to manage interest rate risk.
The Government’s interest-bearing debt is made up of a mix of short- and long-term debt, with a maximum maturity of just under 35 years. There is generally a trade-off between cost and risk in the selection of which tenors to issue. Borrowing costs of longer-term instruments tend to be higher but are fixed for the period of the loan, therefore reducing the risk of having to refinance at higher interest rates. On the other hand, borrowing costs of shorter-term instruments tend to be lower on average but are fixed for shorter periods, therefore increasing the risk of having to refinance the debt at higher interest rates. Under the debt strategy, the balance between fixed-rate (longer-term) and floating-rate (short-term) debt in the market debt structure is managed over time to keep debt-servicing costs stable and low.
The main operational target used to manage the debt structure is the fixed-rate share, which measures the proportion of all government interest-bearing debt that does not mature or need to be repriced within one year relative to the total amount of interest-bearing debt. In the February 2003 budget, the Government announced its intention to reduce the fixed-rate share target from two-thirds to 60 per cent by the end of fiscal 2007–08.
The decision to lower the fixed-rate share took into account the positive economic and fiscal developments in Canada in recent years. Financial simulation modelling indicated that a 60-per-cent fixed-rate share would result in lower borrowing costs, on average, under a large number of potential interest rate scenarios, without compromising debt-cost stability.
The fixed-rate share declined from 62.5 per cent to 61.9 per cent over the 2006–07 fiscal year. The stock of outstanding treasury bills, including cash management bills, which are floating-rate debt, increased from $131.6 billion to $134.1 billion in 2006–07, while the stock of outstanding marketable bonds, which are fixed-rate debt, declined from $261.1 billion to $257.5 billion (see Chart 7).
A well-distributed maturity profile ensures a controlled exposure to changes in interest rates over time and provides liquidity across different maturity sectors.
In 2006–07, debt issuance plans continued to emphasize the distribution of borrowing across three treasury bill maturities (3, 6 and 12 months) and five bond maturities (2-, 5-, 10- and 30-year nominal bonds and 30-year Real Return Bonds).
The maturity profile of outstanding Government of Canada bonds has evolved over time and is well distributed across each of the maturity sectors (see Chart 8). The increase in the stock of long-dated bonds is primarily due to a larger supply of Real Return Bonds and an increase in the inflation adjustment.
A well-functioning wholesale market in Government of Canada securities is important; it benefits the Government as a borrower as well as a wide range of market participants. For the Government as a debt issuer, a well-functioning market attracts investors and contributes to keeping funding costs low and stable over time. For market participants, a liquid and transparent secondary market in government debt provides risk-free assets for investment portfolios, a pricing benchmark for other debt issues and derivatives, and a primary tool for hedging interest rate risk.
In 2006–07, the following actions were taken to promote liquidity in Government of Canada securities:
The total amount of gross new benchmark bonds issued in 2006–07 was $33.4 billion, about $2 billion more than the plan set out in the 2006–07 Debt Management Strategy. The volume for bond buyback operations was $9.8 billion, above the planned range of $7 billion to $8 billion. The increase in gross issuance was made possible by the stronger-than-expected bond buyback operations owing to favourable market conditions. The net amount of bonds issued in 2006–07 (gross issuance net of buybacks) was approximately $23.6 billion, in line with the amount originally planned in the 2006–07 Debt Management Strategy (see Table 4).
High-Level Overview of Annual Bond Program Operations
|Real Return Bonds||1.4||1.4||1.4||1.5||1.6|
|Total gross issuance||43.7||40.8||36.9||33.9||33.4|
|Note: Numbers may not add due to rounding.
Source: Bank of Canada.
The regular bond buyback program is conducted on a cash as well as a switch basis. Buybacks on a cash basis are "reverse auctions," where off-the-run bonds offered to the Government are exchanged for cash. Buybacks on a switch basis are also "reverse auctions," but involve the exchange of off-the-run bonds for the current building benchmark.
The cash management bond buyback (CMBB) program, through which a portion of the outstanding bonds maturing in up to 12 months are repurchased prior to their maturity, helps manage cash requirements by reducing the high levels of cash balances needed for key coupon and maturity payment dates (such as June 1, September 1 and December 1). This reduces the market impact of the otherwise high cash levels needed for those dates. The purchase of bonds through the CMBB program in 2005–06 and 2006–07 reduced the amount of bonds maturing in 2006–07 by 35 per cent.
As a result of actions taken to promote liquidity in Government of Canada securities, there are now fewer small, illiquid high coupon bonds and more large and liquid old benchmarks compared to 2000. Since 2000, the number of individual bonds outstanding has been reduced from 71 to 49 at March 31, 2007, while the average size per maturity date has increased from $5 billion to just over $6 billion (see Table 5).
Impact of Debt Management Activities on Profile of Outstanding Bonds
|Nominal Bonds||Real Return Bonds||Total|
|Total bonds outstanding
|Average size per maturity
date ($ billions)
|Number of bonds
|Number of maturity
coupon rate (%)
|Sources: Bank of Canada and Public Accounts of Canada.|
The Government announced in Budget 2007 that it planned to meet all of the borrowing needs of the Business Development Bank of Canada (BDC), Canada Mortgage and Housing Corporation (CMHC) and Farm Credit Canada (FCC) through direct lending to these Crown corporations, beginning in 2008. This initiative came as a result of an evaluation report submitted by an external evaluator in September 2005, which recommended further review of the potential costs and benefits of consolidation of Crown borrowing activity with the Government’s own borrowing program (for more information, see Review of Borrowing Framework of Major Federal Government-Backed Entities at www.fin.gc.ca/toc/2005/MFGBE-eng.asp). This recommendation was adopted and follow-up analysis was undertaken in consultation with the Crown corporations.
The consolidation of Crown borrowing activity will not affect federal debt or total government net debt, since increased federal borrowing will be matched by additional assets in the form of loans to the Crown corporations.
The Government’s own debt program will be adjusted to accommodate the additional need for funds. Under the new arrangement, BDC, CMHC and FCC debt issued prior to consolidation, as well as any debt issued by these Crowns in 2007, will remain outstanding in the marketplace. The Minister of Finance will continue to approve all Crown borrowing plans within the context of annual corporate plan approvals. Crown corporations will continue to be responsible for the governance and management of their treasury functions, including decisions about how much to borrow from the Government of Canada.
Amendments to the Financial Administration Act, which recently came into force, provide for greater transparency and accountability regarding the Government’s borrowing activities and increased flexibility to meet future borrowing needs, particularly with respect to the consolidation of Crown borrowings.
The liquidity of the domestic debt market is a function of program design and public confidence in its integrity. The Investment Dealers Association of Canada (IDA) Policy No. 5, Code of Conduct for IDA Member Firms Trading in Wholesale Domestic Debt Markets, originally introduced in 1998 and developed jointly with the Bank of Canada and the Department of Finance, is the formal code of conduct for dealing practices in wholesale domestic debt markets.
Ongoing vigilance is required to maintain the integrity of the trading in Canadian fixed-income securities and thereby to encourage liquidity and efficiency, promote public confidence, and support the maintenance of active Government of Canada securities trading and lending.
On June 2, 2006, the IDA, at the request of the Bank of Canada, required primary dealers of Government of Canada securities to provide information on inventory positions for the 10-year Government of Canada benchmark issue. This action was prompted by conditions in the repo market for the 10-year Government of Canada benchmark issue.
A review of the Net Position Reports and information derived from financial markets indicated that there were insufficient grounds to warrant the Bank requesting the IDA to conduct an investigation (to view the announcement, see Net Position Reports—Formal Recommendation from the Bank of Canada, available at www.bankofcanada.ca/en/notices_fmd/2006/not070906.html).
As in past years, market participants were consulted as part of the process of developing the debt strategy. Views were sought on the liquidity and efficiency of the Government of Canada securities market. In addition, market participants’ views were requested on certain operational aspects of domestic debt programs.
Overall, the main messages were that the Government of Canada securities market is functioning well and adapting to an environment of declining borrowing needs. Transaction costs were said to have fallen, partly as a result of the growing use of electronic trading systems.
Given the views received, no major adjustments to debt programs or operations were considered necessary in the short run. Market participants noted a need to supplement liquidity in certain sectors, and were supportive of measures to ensure that bond issuance can be maintained over time.
More details on the subjects of discussion and the views expressed during the consultations can be found at www.bankofcanada.ca/en/notices_fmd/index.html.
Regular assessments of treasury management frameworks and programs are undertaken as part of good governance and management of the debt program.
Review of the Receiver General Cash Management Program
KPMG LLP was engaged in the winter of 2005–06, through the treasury evaluation program, to conduct a review of the Receiver General (RG) cash management program (see the Report on the Evaluation of the Receiver General Cash Management Program at www.fin.gc.ca/efa-cfc/Report2006-eng.asp). The review examined the effectiveness of the cash management program in fulfilling the core objectives of ensuring that the Government has sufficient cash available at all times to meet its operating requirements, while maintaining effective low-cost borrowing under an appropriate risk control framework.
The report submitted by KPMG LLP concluded that the RG cash management program is effective in providing sufficient cash balances to meet the Government’s needs. It also found that Canada’s cash management program compares well against other sovereign cash managers. With respect to the design of the framework, recommendations made to the Government included adjustments which could encourage greater participation in the RG auctions, and suggestions for alternative treasury management tools to enhance cash management effectiveness. The merits of the recommendations are being considered.
Review of the Exchange Fund Account
An external evaluation of the Exchange Fund Account (EFA) was completed during 2006–07, which focused on the EFA portfolio structure, investment guidelines, asset eligibility, performance measurement metrics and reporting (see Evaluation of the Exchange Fund Account at www.fin.gc.ca/efa-cfc/EFA2006-eng.asp).
The evaluation process involved a comparison of the EFA’s investment framework with the general investment practices of similar large, public sector institutional investors. The evaluation concluded that Canada’s policies and practices compare well with the practices of other peer institutions, and that the EFA is being managed prudently, effectively and with due regard to the three key objectives of liquidity, capital preservation and return enhancement.
The recommendations presented in the evaluation centred on expanding asset classes to enhance return, subject to maintaining the focus on the key objectives. Of note, an analysis was conducted to evaluate the benefits of including securitized investments, such as asset-backed commercial paper, but concluded the legal risks associated with these securities, and in particular the structure of their pools, were too high relative to the incremental return earned. For more information on the review, see the Report on the Management of Canada’s Official International Reserves, available at www.fin.gc.ca/toc/2007/oir07_-eng.asp.
Active participation in auction and buyback operations by a diverse group of market participants helps achieve the key objective of raising stable, low-cost funding. Initiatives to enhance the bidding process have been undertaken to broaden participation over the past few years.
Lower turnaround times have enhanced the efficiency of the auction and buyback process and encourage participation by reducing the market risk for participants. In consultations on the development of the debt strategy, market participants have indicated their satisfaction with these changes.
Turnaround times have fallen significantly in recent years, from an average of 45 minutes in 1997–98, to an average of close to 2 minutes for treasury bill and bond auctions and an average of close to 3 minutes for buyback operations in 2006–07 (see Table 6).
Average Turnaround Times for the Release of Auction Results
|Treasury bill and bond auctions||2:35||2:00||2:08|
|Source: Bank of Canada.|
The Bank of Canada targets an average turnaround time of less than 3 minutes for auctions and less than 5 minutes for buyback operations. Similarly, maximum turnaround times are 5 minutes for auctions and 10 minutes for buyback operations.
Turnaround times have been on a "best efforts basis" since April 6, 2004 (see Charts 9 and 10). A technical problem was experienced at one cash management bill auction during 2006–07 (see the spike in Chart 9). Although the guideline for maximum turnaround time was exceeded, no market impact was noted.
The following summary reports on the planned initiatives, their purpose and actions taken through 2006–07, as outlined in the Debt Management Strategy published in April 2006 (for more information, see the 2006–07 Debt Management Strategy at www.fin.gc.ca/toc/2006/dms06-eng.asp).
Gradually reduce the fixed-rate share of the debt from two-thirds to 60 per cent by 2007–08.
|Plan||Intended Result||Actions Taken|
|Continue to reduce the fixed-rate share of the debt towards the 60-per-cent target.||Achieve lower debt charges, while continuing to prudently mitigate the risk to the budget framework.||The fixed-rate share was reduced from 62.5 per cent to 61.9 per cent over the 2006–07 fiscal year.|
|Increase the size of the treasury bill program from $131.6 billion in 2005–06 to approximately $135 billion to $140 billion in 2006–07.||The stock of outstanding treasury bills and cash management bills increased by $2.5 billion from $131.6 billion to $134.1 billion, consistent with the move to a lower fixed-rate share of the debt. The stock of bills is just below plan given the size of the debt paydown.|
|Issue about $31 billion of bonds in 2006–07, about $1 billion less than in 2005–06. Due to large bond maturities and continued bond buyback operations, the bond stock is expected to decrease by some $6 billion.||Facilitate market adjustment to changes in the bond and treasury bill programs.||$31.8 billion of nominal bonds were issued. The stock of outstanding nominal bonds declined by $5.6 billion to $230.9 billion. Real Return Bond issuance for 2006–07 was $1.6 billion, increasing the stock of outstanding Real Return Bonds to $26.5 billion.|
|Reduce the size of the bond buyback program, with a planned level of between $7 billion and $8 billion, roughly $1 billion less than in 2005–06.||Make the transition to sustainable bond programs and preserve liquidity in outstanding issues.||Due to favourable market conditions, a total of $9.8 billion in outstanding bonds were repurchased through the 2006–07 regular bond buyback program: $4.7 billion on a switch basis and $5.1 billion on a cash basis.|
|Maintain a stable maturity profile by continuing to issue in all sectors of the curve and by using the cash management bond buyback (CMBB) program to reduce large maturities.||Limit the need to refinance a large portion of debt in any given period.||Average term to maturity was stable at above 6.5 years. Issuance in all sectors of the curve was as planned.|
|$8.2 billion of bonds were repurchased through the CMBB program. The 2005–06 and 2006–07 CMBB operations reduced the amount of bond maturities in 2006–07 by 35 per cent on average.|
Domestic Debt Programs
Objective: Maintain diversified sources of funding and a well-functioning market.
|Plan||Intended Result||Actions Taken|
|Continue regular issues of nominal bonds in four maturity sectors, treasury bills in three maturity sectors and a long-dated index-linked bond.||Keep costs low and mitigate funding risk by diversifying borrowing across investor segments, instruments and maturities.||Issuance schedule and maturities of past years were maintained in treasury bills, nominal bonds and Real Return Bonds.|
|Forgo the 2-year bond auction in the fourth quarter of 2006–07.||Facilitate a reduction in gross bond issuance to lower the fixed-rate share of the debt while maintaining liquidity in that sector of the yield curve.||The reduction in gross bond issuance in the 2-year sector was achieved.|
|Change the dating of the 5-year benchmark maturity to June 1 from September 1 to make the new benchmarks fungible with old 10-year benchmarks, allowing the 5-year auction in the fourth quarter to be eliminated.||Facilitate a reduction in gross bond issuance and maintain adequate liquidity in that sector as well as for other key bond maturities.||The dating of the 5-year benchmark maturity was changed, and a reduction in gross bond issuance in the 5-year sector was achieved.|
|Maintain current new issuance benchmark target sizes for non-fungible 2-, 5-, 10- and 30-year bonds.||Maintain a liquid market for on-the-run issues and building-benchmark issues.||Benchmark bond target ranges were achieved for non-fungible issues.|
|Continue to borrow on a pre-announced basis and provide timely notices of government policy decisions.||Maintain transparency and efficiency.||The issuance schedule was announced prior to the start of each quarter and maintained.|
|For regular buybacks, lower the minimum amount of outstanding benchmark bonds below which buyback operations will not be conducted from $6 billion to $5 billion in all maturities.||Increase the amount of bonds eligible for repurchase at buyback operations.||The minimum outstanding amount for buyback operations was reduced to $5 billion.|
|Target average turnaround times of less than 3 minutes for auctions and less than 5 minutes for buyback operations. Reduce maximum turnaround times from 10 minutes to 5 minutes for auctions and from 15 minutes to 10 minutes for buyback operations.||Enhance the bidding process and participation while reducing risk for market participants.||In 2006–07, turnaround times on a best efforts basis averaged about 2 minutes for auctions and 3 minutes for buybacks. A technical problem resulted in one cash management bill auction turnaround time exceeding the maximum target time; however, no market impact was noted.|
|Evaluate the merits of consolidation of some or all of the borrowing by major government-backed entities into government debt programs.||Ensure the borrowing framework used by the Government is effective and efficient.||The Government announced in Budget 2007 that it planned to meet the borrowing needs of three Crown corporations (BDC, CMHC and FCC).|
|Continue research and consultations with market participants and regulators on the transparency of the market for Government of Canada securities.||Support an appropriate level of transparency in the Government of Canada securities market.||Debt strategy consultations took place in 2006–07. A summary of comments received from interested parties can be found earlier in this document in the section entitled "Market Consultations" as well as on the Bank of Canada website.|
Objective: Improve the cost-effectiveness of funding foreign reserve assets.
|Plan||Intended Result||Actions Taken|
|Continue to use cross-currency swaps as the primary source of reserve funding.||Keep the cost of carrying reserve assets low.||Cross-currency swaps remained the principal means of funding the foreign exchange reserves. Fifty-one cross-currency swaps were executed in 2006–07 totalling $5.8 billion.|
|Implement a new investment regime and new short-term asset classes.||Improve the risk/return profile of the portfolio.||Investments in new short-term asset classes, including certificates of deposit and highly rated traditional commercial paper, stood at $0.9 billion at the end of 2006–07.|
Part III is divided into three main sections: indicators of the outcomes of domestic debt program operations, indicators of cash management activity, and indicators of reserves funding. It also provides information on the distribution of holdings of Government of Canada securities.
Outcomes are typically the product of many factors. As a result, the measures may not directly reflect the impact of specific government debt management policies, but serve as useful metrics to help interpret and understand the results and context of debt management initiatives.
Measures of outcomes in the area of domestic debt management can be divided into two groups: those associated with the debt issuance process (the primary market) and those dealing with post-issuance trading (the secondary market).
Measures of a well-functioning securities market include the degree to which auctions in the primary market are well bid and the level of liquidity and trading in the secondary market. In 2006–07, treasury bill and bond auctions continued to be covered and well bid. Primary dealers, a core group of government securities distributors that maintain a certain threshold of activity in the market for Government of Canada securities, played the dominant role at auctions, winning more than 94 per cent of bonds offered, except in the case of Real Return Bond auctions, where customers won, on average, 25 per cent of the bonds on offer.
The secondary market for Government of Canada securities continues to experience healthy trading volumes and turnover ratios that compare favourably to previous years and to those of other countries. In 2006–07, primary dealers also played a major role in secondary markets, with the top 10 participants accounting for about 98.5 per cent and 94.2 per cent of the turnover of treasury bills and bonds respectively.
Gross bond program issuance in 2006–07 was $31.8 billion (including issuance through switch buybacks), about $0.6 billion lower than the $32.4 billion issued in 2005–06. Gross issuance consisted of $10.3 billion in 2-year bonds, $7.8 billion in 5-year bonds, $10.4 billion in 10-year bonds and $3.3 billion in 30-year bonds (see Reference Table VIII for more information on bond auctions). In 2006–07, $22.1 billion of nominal bonds matured. Taking into account gross issuance, buybacks and maturities, the stock of outstanding nominal bonds declined by $5.6 billion during the fiscal year to $230.9 billion at March 31, 2007 (see Table 7).
Change in Composition of Federal Market Debt, 2006–07
|April 1, 2006||Receipts/
|March 31, 2007||Change|
|Payable in Canadian currency|
|Real Return Bonds||24.5||2.01||0.0||26.5||2.0|
|Treasury bills and cash
|CPP bonds and notes||3.1||0.0||1.4||1.7||-1.4|
|Total domestic debt3||413.2||408.5||-4.7|
|Payable in foreign currencies4|
|Foreign currency bonds5||7.4||0.3||1.2||6.4||-0.9|
|Euro Medium-Term Notes||1.5||0.1||0.0||1.6||0.1|
|Total foreign currency debt||14.1||10.4||-3.7|
|Total market debt||427.3||418.8||-8.5|
|Obligations related to
|Total unmatured debt||421.1||414.2||-7.0|
|Note: Numbers may not add due to rounding.
1 Includes a Consumer Price Index adjustment of $390.6 million.
2 These securities are rolled over, or refinanced, a number of times during the year. This results in a larger number of new issues per year than stock outstanding at the end of the fiscal year.
3 Includes a consolidation adjustment for Crown corporations and other entities.
4 Liabilities are stated at par value at the March 31, 2007 exchange rate. Changes in outstanding amounts for foreign currency bonds, Canada notes and Euro Medium-Term Notes include the exchange rate appreciation/depreciation of the currency of issue versus the Canadian dollar.
5 Includes $245.4 million in securities assumed by the Government of Canada on February 5, 2001, on the dissolution of Petro-Canada Limited.
Real Return Bonds (RRBs)
With RRB issuance in 2006–07 of $1.6 billion, and a Consumer Price Index adjustment of $0.3 billion, the level of outstanding RRBs increased from $24.5 billion to $26.5 billion at March 31, 2007 (see Reference Table VIII for more information on RRB auctions).
In the spring of 2007, the Department of Finance and the Bank of Canada sought the views of institutional investors, government securities distributors, and other interested parties regarding the RRB auction plan (see Spring 2007 Consultations—Views Sought on the Auction Plan for Real Return Bonds at www.bankofcanada.ca/en/notices_fmd/2007/not220307.html).
Regular Bond Buyback Program
The objectives of the regular bond buyback program are to enhance liquidity and maintain active new issuance in the primary market for Government of Canada bonds. Regular bond buyback operations totalled $9.8 billion in 2006–07, consisting of roughly $2.4 billion in the 2-year sector, $3.2 billion in the 5-year sector, $3.1 billion in the 10-year sector and $1.1 billion in the 30-year sector (see Reference Table XI for more information on buyback operations).
Buybacks on a cash basis totalled $5.1 billion. Switch buyback operations in 2006–07 resulted in $4.5 billion of additional bond issuance.
The amount of new bonds issued through buybacks on a switch basis does not necessarily equal the amount of old bonds bought back through those operations because the exchange is not based on par value but rather on a duration-neutral basis. Chart 11 shows the impact of regular bond buybacks on benchmark sizes in 2006–07.
Treasury Bills and Cash Management Bills (CMBs)
The stock of outstanding treasury bills and CMBs increased by $2.5 billion during 2006–07 to $134.1 billion at March 31, 2007, consistent with the orderly move to a lower fixed-rate share of debt. Over the fiscal year, $315.0 billion in treasury bills and CMBs were auctioned, an increase of $5.1 billion from the previous year (see Table 8). Throughout the year, $68.0 billion in CMBs were issued for various short-term maturities. More frequent use of CMBs, as a cost-effective cash management tool, helped smooth fluctuations in cash balances over the year.
Treasury Bill and CMB Program Issuance
|3-month treasury bills||117.4||129.7||137.5||140.2||137.8|
|6-month treasury bills||47.8||51.9||54.5||55.4||54.6|
|12-month treasury bills||47.8||51.9||54.5||55.4||54.6|
|Total treasury bills||213.0||233.5||246.5||251.0||247.0|
|Total including CMBs||236.8||262.4||271.5||309.9||315.0|
|Source: Bank of Canada.|
In October 2006, the Government celebrated the 60th anniversary of Canada Savings Bonds (CSBs). As in prior years, the Government sold CSBs and Canada Premium Bonds (CPBs) over a six-month period from October 2006 to April 2007. Sales were made through two channels: payroll deductions and cash purchases made through financial institutions or directly from the Government. The sales were supported by the CSB advertising campaign.
As part of the initiatives in Budget 2006 to achieve savings from programs and activities, in September 2006 the Government announced its intention to consolidate the administration of the retail debt program by winding up its special operating agency, Canada Investment and Savings (CI&S). The closure of CI&S was effective March 31, 2007, and the transfer of responsibilities back to the Bank of Canada and the Department of Finance took effect April 1, 2007. This consolidation is expected to produce future administrative cost savings of some $5 million per year.
In 2006–07, total expenditures for the retail debt program were $87.8 million, $3.2 million below the detailed expenditure plan of $91 million, and well under the budgetary cap of $105 million. This represents the seventh consecutive year of expenditure reduction.
The level of outstanding debt held by domestic retail investors—CSBs and CPBs—decreased from $17.3 billion to $15.2 billion in 2006–07 (see Chart 12). Gross sales and redemptions were $1.8 billion and $4.1 billion, respectively, for a net reduction of $2.3 billion in the stock of retail debt (see Table 9).
The decline of the retail debt stock is consistent with the trend in overall government debt and an environment of increased competition from private sector retail savings instruments. Further details about the retail debt can be found in Reference Table XII.
Retail Debt Gross Sales and Redemptions, 2006–07
|Gross Sales||Redemptions||Net Change|
|Source: Bank of Canada.|
Bill and Bond Auction Results Indicators
Acting as the Government’s fiscal agent, the Bank of Canada sells Government of Canada marketable bonds and bills via auction to government securities distributors (GSDs) and customers. GSDs that maintain a certain threshold of activity in the primary and secondary market for Government of Canada securities may apply to become primary dealers and form part of the core group of distributors of Government of Canada securities. Information about the rules, terms, schedules and results of Government of Canada securities auctions is available on the Bank of Canada website at www.bankofcanada.ca/en/markets/markets_auct.html.
The two conventional measures of auction performance are the auction coverage and tail. These two measures, combined with the yield of the securities issued, describe the quality of an auction in terms of its competitiveness and its impact on the cost of borrowing.
The auction coverage is defined as the total amount of bids received divided by the auction amount. Higher statistics typically reflect strong demand and therefore should typically result in lower borrowing costs. The auction tail is the number of basis points between the highest yield accepted and the average yield. In this case, a small auction tail is preferable as it usually indicates strong demand and therefore lower borrowing costs.
Under the rules and terms covering government auctions, active dealers (primary dealers) are required to bid for 50 per cent of their auction limit at reasonable prices. Maximum coverage ratios from primary dealers (which represent about 90 per cent of winning bids) could reach about 2.8 for bond auctions and 2.5 for treasury bill and CMB auctions. Minimum coverage ratios, assuming that all primary dealers bid at their minimum bidding obligation, would be about 1.4 for bond auctions and 1.2 for treasury bill and CMB auctions.
In 2006–07, coverage for bond auctions was slightly higher than the 4-year average, while tails for most treasury bill and bond auctions were narrower than the 4-year average, indicating relatively more competitive bidding at auctions (see Table 10).
Performance at Auctions
|Coverage (Ratio)||Tail (Basis Points)|
|2003– 2004||2004– 2005||2005– 2006||2006– 2007||4-yr.
|2003– 2004||2004– 2005||2005– 2006||2006– 2007||4-yr.
|Real Return Bonds1||2.85||2.53||2.69||2.71||2.69||n.a.||n.a.||n.a.||n.a.||n.a.|
|1 Auction tails for Real Return Bonds (RRBs) are not relevant since RRBs are distributed through single-price auctions.
2 Excludes CMBs.
Source: Bank of Canada.
Participation at Auctions
In 2006–07, primary dealers were allotted over 94 per cent of the auctioned short-term and nominal debt securities, while customers were allotted between 2 and 5 per cent. The 10 most active participants won over 91 per cent of the auctioned nominal debt securities (see Table 11).
Primary dealers’ share of the Real Return Bond (RRB) allotments was close to 75 per cent, with customers receiving close to the remaining 25 per cent of the allotments.
Share of Amount Allotted to Participants by Type of Auction,
|Top 5 participants||72.4||70.6||65.4||55.2|
|Top 10 participants||98.4||94.4||91.2||77.6|
|Note: These numbers exclude securities bought by the Bank of Canada.
Source: Bank of Canada.
RRB auctions have more active customer participation than other types of auctions due to strong investor demand from institutions that hold them to maturity for asset-liability management purposes.
Note that the share of RRBs allotted to customers has declined from the 2005–06 level of 48 per cent to 25 per cent, in favour of primary dealers.
A continuing challenge for the Government’s debt strategy in recent years has been to maintain sufficient issuance of Government of Canada bonds to support a liquid and efficient secondary market.
Trading Volume and Turnover Ratio
The two conventional measures of liquidity and efficiency in the secondary market for Government of Canada securities are trading volume and turnover ratio.
Trading volume shows the amount of securities traded per period. Large trading volume typically allows participants to buy or sell in the marketplace without a substantial change in the price of the securities and in general implies lower bid-offer spreads. Turnover ratio, which is the ratio of securities traded relative to the amount of securities outstanding, is a measure of market depth and efficiency. High turnover implies that a large amount of securities changes hands over a given period of time, a hallmark of a liquid and efficient securities market.
The volume of transactions in the Government of Canada bond market has grown significantly since 1990. Average daily bond trading volume hit a record $22.7 billion in 2006–07, an increase of 5 per cent from 2005–06 and 68 per cent since 2000–01 (see Chart 13).
With an annual debt stock turnover ratio trending upward to 22.7 in 2006, the Government of Canada bond market compares favourably with other major sovereign bond markets, with the exception of the United States (see Chart 14).
A repo, or repurchase agreement, is a transaction in which a party sells a security and simultaneously agrees to repurchase it at a given price at a given time in the future. These transactions provide short-term financing or support to dealer inventories and are equivalent to collateralized loans. They provide a barometer of the debt market’s financing activity.
The presence of liquid repo markets for Government of Canada treasury bills and nominal bonds complements and adds efficiency to the domestic fixed-income securities market. The active interest rate futures contract, based on the 10-year Government of Canada bonds, contributes to efficient capital markets by providing additional important trading, pricing and hedging tools.
Both Government of Canada bond repos and treasury bill repos remained very active in 2006–07. The total trading volume for Government of Canada bond repos in 2006–07 was $26.6 billion, up from $21.2 billion in 2005–06. The treasury bill repo market volume in 2006–07 was $2.6 billion compared to $3.2 billion in 2005–06.
Interest Rate Futures Market
The futures contract based on the 10-year Government of Canada bond basket (or the CGB contract) continues to be actively traded, with trading volume jumping to 7.7 million contracts in calendar year 2006, a 64-per-cent increase from 2005.
The futures contract based on the 2-year Government of Canada bond (or the CGZ contract), originally launched in 2004 and modified in July 2006, had a trading volume of less than 0.1 million contracts in 2006.
Secondary Trading by Market Participants
Secondary market trading of Government of Canada securities is highly concentrated, with primary dealers accounting for over 91 per cent of trading activity. The 10 most active participants in the federal securities secondary market represented over 94 per cent of trading activity (see Table 12).
Secondary Trading: Share by Type of Participant, 2006–07
|Participant Type||Treasury Bills||Bonds|
|Top 5 participants||82.7||65.8|
|Top 10 participants||98.5||94.2|
|Source: Bank of Canada.|
Receiver General (RG) cash balances, the Government of Canada’s Canadian-dollar balances, are invested in a prudent, cost-effective manner through auctions with private sector financial institutions. Since February 1999, when Canada’s electronic funds transfer system, the Large Value Transfer System, was implemented, RG cash balances have been allocated to bidders twice daily through an auction process administered by the Bank of Canada. These auctions serve two main purposes: first, as a treasury management tool, they are the means by which the Government invests its short-term Canadian-dollar cash balances; second, the auctions are used by the Bank of Canada in its monetary policy implementation to neutralize the impact of public sector flows on the financial system.
A portion of the morning auction has been offered on a collateralized basis since September 2002, permitting access to a wider group of potential participants, while ensuring that the Government’s credit exposure is effectively mitigated.
The Government’s treasury managers use a number of indicators to monitor the performance of cash management activities, including the average level of cash balances, the coverage and tail at RG auctions, the distribution of participants at RG auctions, the effectiveness of the cash management bond buyback program, the cost of carry and the profile of treasury bill operations.
RG cash balances fluctuate widely over the year for a variety of reasons. In 2006–07, they reached a peak of $22.5 billion and a low of $1.8 billion (see Chart 15). Cash balances tend to be at their highest during the months of March, April, May and November in anticipation of the large flows related to fiscal year-end and to cover large bond coupon and principal outflows on June 1 and December 1.
Average daily cash balances in 2006–07 were $5.7 billion, a level comparable to 2005–06 (see Table 13). Since 2005–06, more frequent use of cash management bills as a cash management tool has meant that cash balances can be built up quickly prior to redemption and coupon payment dates, and therefore cash balances can be raised closer to the actual payment dates.
Average Daily Receiver General Cash Balances Held at Financial Institutions
|Average daily cash balances||7.9||8.2||5.6||5.7|
|Source: Bank of Canada.|
Collateral arrangements were introduced in 2002 to mitigate the credit risk tied to the deposit of cash balances with counterparties. Participants with approval for uncollateralized bidding limits maximize their uncollateralized lines prior to using their collateralized lines. Generally, at least 20 per cent of the balances are collateralized; however, in months of high balances, the proportion of collateralized balances can exceed 70 per cent (see Chart 16).
In 2006–07, coverage for the morning RG auction was lower than in 2005–06 but was above the rolling four-year average (see Table 14). Coverage for the afternoon RG auction also declined from 2.33 to 2.17.
The lower coverage and wider tails for the afternoon auction reflect the reduced number of eligible participants. In addition, many participants have already completed their daily funding requirements by the afternoon auction.
Performance at Receiver General Auctions
|Tail (basis points)||1.68||1.26||1.76||1.39||1.51|
|Tail (basis points)||3.09||2.96||3.49||2.79||3.09|
|Source: Bank of Canada.|
The top 10 participants in the Large Value Transfer System (LVTS) won about 81 per cent of RG auctions on average in 2006–07, while the non-LVTS participants won about 18 per cent of the amount allotted (see Table 15).
Receiver General Auctions Share of Amount Allotted Between LVTS and Non-LVTS Participants
|Top 10 LVTS||76.0||74.3||79.9||81.2|
|Source: Bank of Canada.|
The Government received a series of recommendations following the review of the Receiver General cash management program (see the Report on the Evaluation of the Receiver General Cash Management Program available at www.fin.gc.ca/efa-cfc/Report2006-eng.asp).
Analysis of the recommendations is underway, which included suggestions to encourage greater participation in the RG auctions, the potential benefits of alternative treasury management tools in enhancing the effectiveness of the management of the RG account, and the development and introduction of a 1-month treasury bill to smooth balances and reduce fluctuations in the size of consecutive bill auctions.
The cash management bond buyback (CMBB) program helps manage cash requirements by reducing the high levels of cash balances needed for key coupon and maturity payment dates. The program also helps smooth variations in treasury bill auction sizes over the year.
In 2006–07, the total amount of bonds repurchased through the CMBB program was $8.2 billion, compared to $8.7 billion in 2005–06. The CMBB program in 2005–06 and 2006–07 reduced the size of the 2006 June 1, September 1 and December 1 bond maturities by about 35 per cent, from a total of $28.4 billion outstanding at the beginning of 2005–06 to $18.6 billion outstanding after CMBB operations in 2006–07 (see Chart 17). The reduction in the outstanding size of these maturities through the CMBB program is in addition to the $4.2-billion reduction achieved through the regular bond buyback program. Together, the CMBB and regular buyback operations reduced the total outstanding in the June, September and December 2006 maturities by 42 per cent.
A key measure for the cost to the Government of maintaining cash balances is the net return on these cash balances: the difference between the return on government balances auctioned to financial institutions (typically around the overnight rate) and the average yield paid on treasury bills. A normal upward sloping yield curve results in a positive cost of carry, as financial institutions pay rates of interest for government deposits based on an overnight rate that is lower than the rate paid by the Government to borrow funds. Conversely, under an inverted yield curve, short-term deposit rates are higher than the average of 3- to 12-month treasury bill rates, which can result in a net gain for the Government.
The net cost of carrying RG cash balances was $1.6 million in 2006–07, compared to $9.4 million in 2005–06 (see Chart 18). This improvement is attributable to favourable market conditions.
An indicator of cash management activities is the profile of treasury bill operations (amount issued per auction date less amount maturing per auction date). Smooth profiles provide increased certainty of supply for market participants and help reduce the cost associated with large operations. The profile of treasury bill operations continued to be smooth in 2006–07, with net new issuance ranging from -$3 billion to +$4 billion per operation, with a standard deviation of $1.5 billion (see Chart 19 and Table 16).
Profile of Net Size of Treasury Bill Issues
|Range||-4 to 4||-2 to +6||-2 to +4||-2 to +3||-3 to +4|
of new issues
|Source: Bank of Canada.|
Foreign currency debt is used to fund the foreign exchange reserves, which are held in the Exchange Fund Account. A variety of instruments are available to meet foreign currency funding requirements. In 2006–07, the sources of funding for reserves were Canada bills and domestic funds swapped into foreign currency using cross-currency swaps.
The Report on the Management of Canada’s Official International Reserves, available at www.fin.gc.ca/toc/2007/oir07_-eng.asp, provides information on the objectives, composition and performance of the reserves portfolio.
In 2006–07, the level of outstanding Canada bills decreased from $4.7 billion (US$4.0 billion) to $1.8 billion (US$1.6 billion). In 2006–07, Canada bills were issued, on average, at an all-in cost of US$ LIBOR (London Inter-Bank Offered Rate) less 20 basis points, which was generally in line with the levels achieved in recent years.
In 2006–07, no new foreign currency bonds were issued, while a total of $1.2 billion (US$1 billion) matured. The total decline in the stock of outstanding foreign currency bonds, including the exchange rate effect, was $0.9 billion. The total outstanding was $6.4 billion (US$5.6 billion) at the end of 2006–07.
There were no new Canada note issues or maturities in 2006–07. The total outstanding was $0.5 billion (US$0.4 billion) at the end of 2006–07.
In 2006–07, no new Euro Medium-Term Notes were issued or matured. The total outstanding increased from $1.5 billion (US$1.3 billion) to $1.6 billion (US$1.4 billion).
In 2006–07, $5.8 billion (US$5 billion) was raised to fund the foreign exchange reserves by entering into 51 cross-currency swaps at an average cost of US$ LIBOR less 41 basis points, which was generally in line with the levels achieved in recent years. A total of $2.3 billion (US$2 billion) of swaps matured in 2006–07. At the end of the 2006–07 fiscal year, the outstanding amount of cross-currency swaps totalled $30.6 billion (see Reference Table X). Taking into account the effect of cross-currency swaps, foreign currency obligations were 9.8 per cent of the Government’s total market debt.
A collateral management framework is used to mitigate credit risk exposures to financial institution counterparties associated with cross-currency swap transactions. Under this framework, high quality collateral (e.g. government securities) is pledged by counterparties when the net market value of their contracts with the Government of Canada exceeds specified limits. Over the fiscal year, given the strength of the Canadian dollar, most of the swaps were "in the money," meaning that the market value of the swaps had increased in favour of the Government.
A diversified investor base ensures there is active demand for Government of Canada securities, thereby helping to keep funding costs low. Diversification of the investor base is pursued by maintaining a domestic wholesale debt program that is attractive to a wide range of investors, and offering a retail debt program that provides savings products to suit the needs of individual Canadians.
At March 31, 2007, based on Statistics Canada surveys, other financial institutions, which include investment dealers, mutual funds and property and casualty insurance companies, accounted for the largest share of holdings of Government of Canada marketable debt securities (23 per cent). The next largest share was held by life insurance companies and pension funds (22 per cent), followed by chartered banks and near-banks (15 per cent), and non-residents (14 per cent). Taken together, these four sectors held close to 75 per cent of outstanding Government of Canada securities (see Chart 20).
With a decline of 10 per cent, the share of Government of Canada marketable securities held by non-residents shows the most notable change between 1998 and 2007. Additional details on the distribution of Government of Canada marketable debt is available on the Statistics Canada website at www.statcan.ca/english/nea-cen/index.htm.
|Debt Management Objectives||1992|
|Debt Structure—Fixed/Floating Mix||1992|
|Internal Review Process||1992|
|External Review Process||1992|
|Benchmarks and Performance Measures||1994|
|Foreign Currency Borrowing—Canada Bills Program||1994|
|Developing Well-Functioning Bond and Bill Markets||1994|
|Liability Portfolio Performance Measurement||1994|
|Retail Debt Program||1994|
|Guidelines for Dealing With Auction Difficulties||1995|
|Foreign Currency Borrowing—Standby Line of Credit and FRN||1995|
|Treasury Bill Program Design||1995|
|Real Return Bond Program||1998|
|Foreign Currency Borrowing Programs||1998|
|Initiatives to Support a Well-Functioning Wholesale Market||2001|
|Debt Structure Target/Modelling||2001|
|Reserves Management Framework||2002|
|Funds Management Governance Framework1||2004|
|Retail Debt Program1||2004|
|Borrowing Framework of Major Federal Government-Backed Entities1||2005|
|Receiver General Cash Management Program1||2006|
|Exchange Fund Account Evaluation1||2006|
|1 Available at www.fin.gc.ca.|
asset-liability management: An investment decision-making framework that is used to concurrently manage a portfolio of assets and liabilities.
Specific issue which is typically the most liquid bond within each range of maturities. It is considered by the market to be the standard against which all other bonds issued in that term area are evaluated.
The shortfall between government annual revenues and annual budgetary expenses.
buyback on a cash basis:
The repurchase of bonds for cash. Used to maintain the size of bond auctions and new issuance.
buyback on a switch basis:
The exchange of outstanding bonds for new bonds in the current building benchmark.
Promissory note denominated in US dollars, issued for terms of up to 270 days. Canada bills are issued for foreign exchange reserves funding purposes only.
Canada Investment Bond:
A non-marketable fixed-term security instrument issued by the Government of Canada.
Promissory note usually denominated in US dollars and available in book-entry form. Canada notes can be issued for terms of nine months or longer, and can be issued at a fixed or a floating rate. Canada notes are issued for foreign exchange reserves funding purposes only.
Canada Premium Bond:
A non-marketable security instrument issued by the Government of Canada, which is redeemable once a year on the anniversary date or during the 30 days thereafter without penalty.
Canada Savings Bond:
A non-marketable security instrument issued by the Government of Canada, which is redeemable on demand by the registered owner(s), and which, after the first three months, pays interest up to the end of the month prior to cashing.
An agreement that exchanges one type of obligation for another involving different currencies and the exchange of the principal amounts and interest payments.
electronic trading system:
An electronic system that provides real-time information about securities and enables the user to execute financial trades.
Exchange Fund Account (EFA):
The objective of the EFA is to aid in the control and protection of the external value of the Canadian dollar. Assets held in the EFA are managed to provide foreign currency liquidity to the Government and to promote orderly conditions for the Canadian dollar in the foreign exchange markets, if required.
Measures the difference between the cash inflows and outflows of the Government’s Receiver General account. In the case of a financial requirement, it is the amount of new borrowing required from outside lenders to meet financing needs in any given year.
foreign exchange reserves:
The foreign currency assets (e.g. interest-earning bonds) held to support the value of the domestic currency. Canada’s foreign exchange reserves are held in the Exchange Fund Account.
Government of Canada securities auction:
A process used for selling Government of Canada debt securities (mostly marketable bonds and treasury bills) in which issues are sold by public tender to government securities distributors and approved clients.
government securities distributor (GSD):
An entity (i.e. an investment dealer or bank) that is authorized to bid at Government of Canada auctions and through which the Government distributes Government of Canada treasury bills and marketable bonds.
Consists of unmatured debt, or market debt, and liabilities to internally held accounts such as federal employees’ pension plans.
Large Value Transfer System (LVTS):
An electronic funds transfer system introduced in February 1999 and operated by the Canadian Payments Association. It facilitates the electronic transfer of Canadian-dollar payments across the country virtually instantaneously.
An interest-bearing certificate of indebtedness issued by the Government of Canada, and having the following characteristics: bought and sold on the open market; payable in Canadian or foreign currency; having a fixed date of maturity; interest payable either in coupon or registered form; face value guaranteed at maturity.
Market debt that is issued by the Government of Canada and sold via public tender or syndication. These issues can be traded between investors while outstanding.
The market in which short-term capital is raised, invested and traded using financial instruments such as treasury bills, bankers’ acceptances, commercial paper, and bonds maturing in one year or less.
Consists of the Government’s internal debt, which is, for the most part, federal public sector pension liabilities and the Government’s current liabilities (such as accounts payable, accrued liabilities, interest payments and payments of matured debt).
overnight rate; overnight financing rate; overnight money market rate; overnight lending rate:
An interest rate at which participants with a temporary surplus or shortage of funds are able to lend or borrow until the next business day. It is the shortest term to maturity in the money market.
primary dealer (PD):
Member of the core group of government securities distributors that maintains a certain threshold of activity in the market for Government of Canada securities. The primary dealer classification can be attained in either treasury bills or marketable bonds, or both.
The market in which issues of securities are first offered to the public.
Real Return Bond (RRB):
Government of Canada RRBs pay semi-annual interest based upon a real interest rate. Unlike standard fixed-coupon marketable bonds, interest payments on RRBs are adjusted for changes in the Consumer Price Index.
A market where existing securities trade after they have been sold to the public in the primary market.
Market for the debt issued by a government.
Short-term obligation sold by public tender. Treasury bills, with terms to maturity of 3, 6 or 12 months, are currently auctioned on a bi-weekly basis.
The conceptual or graphic representation of the term structure of interest rates. A "normal" yield curve is upward sloping, with short-term rates lower than long-term rates. An "inverted" yield curve is downward sloping, with short-term rates higher than long-term rates. A "flat" yield curve occurs when short-term rates are the same as long-term rates.
Department of Finance Canada
Financial Sector Policy Branch
Financial Markets Division
140 O’Connor St., 20th Floor, East Tower
Ottawa, Canada K1A 0G5
1. The OIC for 2006–07 can be viewed on the website of the Privy Council Office at http://www.pco-bcp.gc.ca/oic-ddc/oic-ddc.asp?LANG=en, using reference number 2006-0140. [Return]
2. A customer is a bidder on whose behalf a government securities distributor has been directed to submit a competitive or non-competitive bid for a specified amount of securities at a specific price. [Return]
3. Primary dealers trade on behalf of their clients as well as for their own accounts. [Return]