Archived - Debt Management Report 2008-2009

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Foreword by the Minister of Finance

Amid early and tentative signs that Canada is returning to economic growth after a severe recession, it is becoming clear that Canada's Economic Action Plan has played a central role in the turnaround.

The Economic Action Plan is a broad, well-crafted plan that provides a boost to our economy and invests in Canada's future.

A key element of the Economic Action Plan has been to improve access to financing for Canadian consumers and businesses amid the global financial and economic turbulence.

Our Government responded with timely measures under the Extraordinary Financing Framework, including:

  • The Insured Mortgage Purchase Program, under which the Government purchased $55 billion of insured residential mortgage pools from Canadian financial institutions in fiscal year 2008–09 to help them continue lending.
  • Bank of Canada liquidity provisions, partially financed by government cash balances, to help alleviate funding pressures. This extraordinary liquidity peaked at over $41 billion in December 2008.
  • Increased borrowings of Crown corporations, including the Business Development Bank of Canada and Export Development Canada, to support access to credit for Canadian businesses.

Debt securities issued to fund these measures found a ready and diversified investor base thanks to Canada's strong fiscal position, combined with our policy of maintaining a liquid, well-functioning securities market.

Indeed, while our market debt has risen substantially, the federal debt, or the accumulated deficit, increased by only $6 billion in fiscal year 2008–09, as the increase in market debt was largely offset by an associated increase in financial assets such as National Housing Act Mortgage-Backed Securities purchased under the Insured Mortgage Purchase Program. 

Canada's net debt-to-GDP (gross domestic product) ratio is the lowest of all Group of Seven (G7) countries, and few other countries can claim to have fiscal and economic fundamentals that are as strong as Canada's. 

The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
Ottawa, December 2009

Purpose of This Publication

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, 2008 to March 31, 2009.

It provides a comprehensive report on the environment in which the debt is managed, changes in the debt during the year, and the implementation of planned borrowing operations and initiatives set out in the 2008–09 Debt Management Strategy, published in February 2008 as Annex 2 of Budget 2008. Reference tables containing statistics on the operation of debt programs are provided at the end of the report. 

The purpose of this publication is to ensure transparency and accountability in Government of Canada funds management activities. Information on the management of Canada's 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.

Federal Debt Management

Management of the federal debt involves two major activities: managing the portion of the debt that is borrowed in financial markets (market debt); and investing part of the proceeds of borrowings in liquid assets until needed for operations. At March 31, 2009, market debt totalled $510.9 billion. This was composed of marketable bonds, treasury bills and cash management bills, retail debt, foreign currency debt and Canada Pension Plan (CPP) bonds. The Government held $47.0 billion of cash on deposit with the Bank of Canada, chartered banks and other financial institutions.

Market Debt (C$ billions)
Payable in Canadian currency  
Marketable bonds 295.2
  (fixed-rate bonds with maturities up to 30 years  
  and Real Return Bonds with 30-year maturities)  
Treasury bills and cash management bills 192.3
  (zero-coupon securities maturing within 12 months)  
Retail debt 12.5
  (Canada Savings Bonds and Canada Premium Bonds)  
CPP bonds 0.5
Payable in foreign currency  
Marketable bonds and foreign currency notes 1.7
  (fixed-rate bonds, Canada notes and Euro Medium-Term Notes)  
Canada bills 8.7
  (zero-coupon securities maturing within 9 months)  
Total market debt 510.9
Liquid Financial Assets  
Cash on deposit 47.0
Note: Numbers may not add due to rounding.

This document is structured as follows:

  • The introduction provides highlights of the debt program for 2008–09, as well as information related to governance and the debt strategy framework.
  • Part I describes the environment in which the debt is managed and the composition of market debt.
  • Part II reports on the achievement of the two principal objectives of debt management for fiscal year 2008–09: raising funding efficiently and maintaining a well-functioning government securities market.
  • Part III provides measures on the outcomes of the domestic debt and foreign debt programs. It also reviews measures of liquidity and efficiency in the secondary market for Government of Canada securities.
  • Annex 1 lists treasury evaluations performed since 1992, Annex 2 contains a list of policy measures taken since 1997 to ensure a well-functioning government securities market, Annex 3 contains a glossary of debt management terms and Annex 4 contains contact information.
  • Reference tables provide historical information on debt-related activities.



Financial and Economic Turbulence

Although economic indicators in recent months have provided some encouraging signs of recovery, the global economic context in 2008–09 became increasingly dire as the year progressed. As the financial turmoil intensified and credit markets became severely dislocated in the fall of 2008, the world economy entered a synchronized recession, with economic activity contracting in all G7 countries. The financial market turmoil also caused hardship in emerging economies, which were hit by the disruption of global trade and credit flows.

In Canada, the recession that officially began in the fourth quarter of 2008 has been difficult for businesses and workers. However, strong economic fundamentals, together with the resilience of the financial sector, have allowed the Canadian economy to fare better than many other industrialized countries.

Change in the Debt Management Environment

The financial and economic turbulence led to a changed environment for debt management in 2008–09 compared to prior years. In the decade leading up to 2008–09, a continuing challenge for federal debt managers had been to maintain sufficient issuance to support liquid markets even as federal debt declined. In the 2008–09 fiscal year, as financial requirements increased, the focus of debt management was to increase issuance, while maintaining the overall stability and effective functioning of the market during a period of great economic uncertainty. While government debt issuance increased during this period, both in terms of the amount issued and the frequency of auctions, the government securities market in Canada responded well. Despite greater market volatility, both bond and treasury bill auctions remained well covered and well bid.

Canada's Economic Action Plan

In Budget 2009, the Government introduced Canada's Economic Action Plan, which provided about $40 billion in fiscal stimulus to lessen the impact of the global recession on jobs and output, hasten the recovery and ensure Canada's long-term prosperity.

In addition, Canada's Economic Action Plan provides for up to $200 billion through the Extraordinary Financing Framework (EFF) to ensure the continued stability of the Canadian financial system and improve financing for Canadian households and businesses. The various measures included in the EFF are designed to restore confidence, support financing and encourage lending. The largest component of the EFF is the Insured Mortgage Purchase Program (IMPP), through which the Government has committed to purchase up to $125 billion of insured mortgage pools from lenders, thereby providing them with stable long-term financing. 

Federal Debt

In 2008–09, actual borrowings were higher than planned in the 2008–09 Debt Management Strategy, published in February 2008 with the budget, mainly due to weaker fiscal conditions and funding requirements related to the EFF. Market debt increased by $116.8 billion, most of which was issued to acquire interest-bearing investments, and the federal debt increased by $6.1 billion.

With a net debt-to-GDP ratio well below the average of other G7 countries, Canada was in a better position than most countries to weather the economic downturn. Entering 2008–09, Canada's solid financial position provided the Government with the necessary flexibility to increase debt issuance to fund elevated financial requirements.

Maintaining a Liquid Government Securities Market

Maintaining a liquid, well-functioning government securities market is an important objective of Canada's debt management strategy. During 2008–09, the Government continued to provide regular and transparent issuance schedules, with a particular focus on the liquidity of key benchmarks. Changes to the bond issuance schedules were communicated through the Bank of Canada's website to ensure transparency. While buyback operations on a cash basis were discontinued in the fourth quarter of 2008–09 due to higher financial requirements, switch buybacks in the longer maturities continued to be used. Finally, there was close communication between the Government and Canada Mortgage and Housing Corporation (CMHC), which administers the IMPP. IMPP operations were coordinated with government bond auctions to provide additional transparency for market participants. Since December 2008, the Quarterly Bond Schedule published on the Bank of Canada's website has been released in conjunction with the schedule of IMPP operations on CMHC's website.

Debt Strategy Framework

Debt management activities are conducted in view of key objectives and principles.

Debt Management Objectives

The fundamental objective of debt management is to raise stable and low-cost funding to meet the 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 stable and is generally to the benefit of a wide array of domestic market participants.

Debt Management Principles

In support of these objectives, the design and implementation of the domestic debt program emphasizes the following principles.

Transparency, regularity and liquidity: The design and implementation of the domestic debt program should emphasize transparency, regularity and liquidity to support a well-functioning government securities market. The Government should publish strategies and plans, and consult regularly with market participants to ensure the integrity and attractiveness of the market for dealers and investors.

Prudence: The principle of prudence should guide all debt management activities. This is facilitated by managing the structure of the debt, preserving access to diversified sources of funding and supporting a broad investor base.

Borrowing Authority

Authority to borrow in financial markets is provided by Part IV of the Financial Administration Act, which authorizes the Minister of Finance to issue securities and undertake related activities, including entering into financial contracts and derivatives transactions. 

Anticipated borrowing and planned uses of funds are set out in the Debt Management Strategy, while actual borrowing and uses of funds compared to those forecast are reported in Table 2 of this publication. Detailed information on outcomes is also provided in the Public Accounts of Canada.

Borrowing authority is obtained from the Governor in Council through an Order in Council (OIC). In November 2008, the Governor in Council approved an aggregate borrowing limit of $296 billion for 2008–09, an increase of $90 billion over the original 2008–09 Submission to Council.1 This intra-year increase in the borrowing ceiling enabled the provision of immediate measures to mitigate the impact of the global financial market disruption. These measures took the form of a commitment to provide long-term funding for financial institutions through the Insured Mortgage Purchase Program and special liquidity measures by the Bank of Canada that required supplementary borrowings. The total amount of cash raised through borrowing activities in 2008–09 was $279 billion.


Responsibility for strategic planning and the operational management of 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 the 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.

For additional details on the governance framework, see the Funds Management Governance Framework.

Treasury Evaluation Program

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 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.

Reports on the findings of these evaluations and the Government's response to each evaluation are tabled with the House of Commons Standing Committee on Public Accounts by the Minister of Finance. Copies are also sent to the Auditor General of Canada. The reports are posted on the Department of Finance website. See Annex 1 for a list of the treasury evaluations performed since 1992.

Part I: Context for 2008–2009 Debt Management 

This section provides an overview of the context within which debt management decisions were taken in 2008–09. It contains a brief description of financial market developments, the resulting impact on the debt program, information on budgetary outcomes, including the sources and uses of borrowing, and an overview of the growth in the Canadian short-term securities and fixed-income markets.

Financial Market Developments

In 2008–09, the global economy went through a synchronized contraction, with severe financial market dislocations and a sharp decline in consumer and business confidence. While the economic slowdown was particularly evident in the United States and other advanced economies, emerging market economies were also affected. Throughout the fiscal year, credit markets remained disrupted and credit conditions generally tight.

Although Canada entered the downturn from a position of strength, the Canadian economy was significantly affected by ongoing global financial market turbulence and weaker US and global demand. Canada was the only G7 country to record positive growth in both the second and third quarters of 2008. It entered recession in the fourth quarter of 2008, with real GDP contracting by an annualized rate of 3.7 per cent, followed by a contraction of 5.4 per cent in the first quarter of 2009.

On January 27, 2009, the Government introduced Canada's Economic Action Plan. As part of Budget 2009, the Economic Action Plan pledged to provide about $40 billion in fiscal stimulus to the Canadian economy over a two-year period, equivalent to about 2.5 per cent of GDP. Additionally, Budget 2009 included provisions of up to $200 billion through the Extraordinary Financing Framework (EFF) to improve financing for Canadian households and businesses. The EFF, which includes the Insured Mortgage Purchase Program, new flexibilities and resources for financial Crown corporations, the Canadian Secured Credit Facility, extraordinary liquidity provided by the Bank of Canada and other measures, required higher market borrowings in 2008–09 and 2009–10 than prior years. To view Budget 2009, including the 2009–10 Debt Management Strategy, which was published as Annex 4 of the budget, visit the Department of Finance website.

Market Debt Context

The following diagram illustrates the relationship between market debt and the other components of the federal debt.

Composition of the Federal Debt, at March 31, 2009

There are two types of market debt: domestic debt, which is denominated in Canadian dollars, and foreign currency debt.

Funding in Canadian dollars is done through both wholesale and retail channels. Wholesale funding is conducted through issuance of marketable securities, which consist of 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 reserve assets, which are held in the Exchange Fund Account, are funded by cross-currency swaps of domestic obligations and issuance of foreign currency debt.

A detailed description of Government of Canada market debt instruments is available on the Department of Finance website.

While the main focus of the federal debt strategy is on the management of market debt, the Government's level of indebtedness is measured by the federal debt (accumulated deficit). In 2008–09, the federal debt increased by $6.1 billion. However, market debt increased by $116.8 billion, mainly to fund measures under the Extraordinary Financing Framework to support access to financing. This increase in market debt was mostly offset by corresponding financial assets.

Table 1 presents the change in the composition of federal debt during 2008–09.

Table 1
Change in the Composition of Federal Debt, 2008–09
  March 31, 2008 March 31, 2009 Change
  ($ billions)
Payable in Canadian currency      
Marketable bonds 253.5 295.2 41.7
Treasury and cash management bills 116.9 192.3 75.4
Retail debt 13.1 12.5 -0.6
CPP bonds 1.0 0.5 -0.5
Total payable in Canadian currency 384.6 500.5 115.9
Payable in foreign currencies 9.5 10.4 0.9
Total market debt 394.1 510.9 116.8
Market debt value adjustment
 and capital lease obligations
-3.4 3.1 6.5
Total unmatured debt 390.7 514.0 123.3
Pension and other accounts 191.2 196.1 4.9
Total interest-bearing debt 581.9 710.2 128.3
Accounts payable, accruals and allowances 110.5 114.0 3.5
Gross debt 692.3 824.2 131.9
Total financial assets -176.0 -298.9 -122.9
Total non-financial assets -58.6 -61.5 -2.9
Federal debt (accumulated deficit) 457.6 463.7 6.1
Note: Numbers may not add due to rounding.

Budgetary Outcomes

The key budgetary reference point for debt management is the financial source/requirement. This measure is affected not only by the budgetary balance but also by non-budgetary transactions.

The budgetary balance is presented on a full accrual basis of accounting, recording government assets and liabilities when they are receivable or incurred, regardless of when the cash is received or paid. In contrast, the financial source/requirement measures the difference between cash coming into the Government and cash going out. This measure is affected not only by changes in the budgetary balance but also by the cash source/requirement resulting from the Government's investing activities through its acquisition of capital assets and its loans, financial investments and advances, as well as from other activities, including payment of accounts payable and collection of accounts receivable, foreign exchange activities, and the amortization of its tangible capital assets. The difference between the budgetary balance and financial source/requirement is recorded in non-budgetary transactions.

With a budgetary deficit of $5.8 billion and a requirement of $84.3 billion from non-budgetary transactions, there was a financial requirement of $90.1 billion in 2008–09, compared to a financial source of $14.5 billion in 2007–08. For additional information on the financial position of the Government, see the 2008–09 Annual Financial Report of the Government of Canada.

Sources and Uses of Borrowing

The 2008–09 Debt Management Strategy published in February 2008 outlined the action plan for the management of the debt and cash balance for the 2008–09 fiscal year (for more information, see the 2008–09 Debt Management Strategy).

In 2008–09, actual borrowings were higher than planned in the 2008–09 Debt Management Strategy, with bond issuance $41 billion higher than planned and treasury bills outstanding at March 31, 2009 $52 billion higher than planned.

The additional amount borrowed was primarily used to fund higher financial requirements, including measures under the Extraordinary Financing Framework (specifically the Insured Mortgage Purchase Program) and Bank of Canada liquidity provisions, and to meet the higher-than-expected borrowing needs of three financial Crown corporations.

The Insured Mortgage Purchase Program (IMPP): The IMPP was established on October 10, 2008 to help maintain the availability of longer-term credit in Canada through the purchase of insured mortgage pools (National Housing Act Mortgage-Backed Securities) by Canada Mortgage and Housing Corporation (CMHC). Initially, the size of the program was set at $25 billion and then raised to up to $75 billion. In Budget 2009, the size of the IMPP was increased to up to $125 billion. In 2008–09, $55 billion of insured mortgage pools were purchased under the program. Since debt issued to finance the IMPP is matched by corresponding assets, the IMPP did not lead to an increase in the federal debt (accumulated deficit).

Bank of Canada liquidity provisions: In 2008–09, the Bank of Canada continued to respond to the challenges facing the Canadian financial system by conducting term liquidity operations to alleviate funding pressures. The extraordinary liquidity provided to financial markets by the Bank of Canada peaked at over $41 billion in December 2008 and declined to approximately $35 billion at the end of March 2009. These liquidity operations were partially financed by government cash balances held on deposit at the Bank of Canada. On March 31, 2009, government cash balances at the Bank of Canada totalled $28.6 billion, compared to $4.0 billion on March 31, 2008. Government cash balances held at the Bank of Canada increase the level of government borrowing but do not affect the federal debt (accumulated deficit). For more information on the Bank of Canada's term liquidity operations, see the Bank of Canada website.

Increase in borrowings of Crown corporations: As originally announced in Budget 2007, since 2008–09, the Government has fully consolidated the borrowings of three financial Crown corporations—the Business Development Bank of Canada, CMHC and Farm Credit Canada—into the federal debt program.

In 2008–09, loans to Crown corporations, excluding loans to CMHC for IMPP operations, increased by $17 billion, $2 billion higher than projected in the 2008–09 Debt Management Strategy. The consolidation of Crown borrowing activity does not affect the federal debt (accumulated deficit), since increased federal borrowing is matched by assets in the form of loans to the Crown corporations.

Table 2 provides details on the planned and actual sources and uses of borrowings for 2008–09.

Table 2
Planned/Actual Sources and Uses of Borrowing, 2008–091
  Planned2 Actual Difference
  ($ billions)
Sources of Borrowings      
  Payable in Canadian currency      
    Treasury bills 140 192 52
    Bonds 34 75 41
    Retail debt 2 3 1
  Total payable in Canadian currency 176 270 94
  Payable in foreign currencies 5 9 4
Total cash raised through borrowing activities 181 279 98
Uses of Borrowings3      
Refinancing needs      
  Payable in Canadian currency      
    Treasury bills 117 117 0
    Bonds 35 34 -1
    Of which:      
      Regular bond buybacks 6 6 0
      Cash management bond buybacks 6 9 3
    Retail debt 5 3 -2
    CPP bonds 1 1 0
  Total payable in Canadian currency 158 155 -3
  Payable in foreign currencies 8 8 0
Total refinancing needs 166 163 -3
Financial source/requirement      
  Budgetary balance -2 6 8
  Non-budgetary transactions      
    Pension and other accounts -4 -5 -1
    Non-financial assets 1 3 2
    Loans, investments and advances 17 75 58
    Of which:      
       Loans to Crown corporations
       (including loans to CHMC for
       IMPP operations)
15 72 57
    Other transactions4 3 12 9
  Total non-budgetary transactions 18 84 66
Total financial source/requirement 15 90 75
Total uses of borrowings 181 253 72
Other unmatured debt transactions5 0 -7 -7
Net increase or decrease (-) in cash 0 33 33
Note: Numbers may not add due to rounding.
1 Certain categories have been reclassified to conform to the current year's presentation.
2 Planned numbers are from Budget 2008 and the 2008–09 Debt Management Strategy.
3 A negative sign denotes a financial source.
4 Primarily includes the conversion of accrual adjustments into cash, such as tax and other account receivables; provincial and territorial tax collection agreements; and tax payables and other liabilities.
5 Includes cross-currency swap revaluation, unamortized discounts on debt issues and obligations related to capital leases.

Public Debt Charges and Market Debt Costs

Interest-bearing debt includes market debt, which is the focus of the debt management strategy. The cost of interest-bearing debt, or public debt charges, includes market debt costs plus interest expenses on non-market liabilities.2

Public Debt Charges

Public debt charges as a percentage of budgetary revenues have been decreasing in recent years, falling from a peak of 37.6 per cent in 1990–91 to 13.3  per cent in 2008–09. In other words, the Government spent about 13 cents of every revenue dollar on interest payments on the interest-bearing debt in 2008–09 (see Chart 1).

In 2008–09, public debt charges declined by $2.3 billion to $31.0 billion as an increase in the stock of interest-bearing debt was more than offset by a decrease in the average effective interest rate on that stock.

Similarly, public debt charges as a percentage of GDP declined to 1.9 per cent in 2008–09 from 2.2 per cent in 2007–08.

Chart 1 - Public Debt Charges

Market Debt Costs

The cost of market debt fell from $18.2 billion in 2007–08 to $16.4 billion in 2008–09 due to a significant reduction in the average rate of interest on outstanding market debt (see Chart 2). In 2008–09, market debt costs represented about 53 per cent of public debt charges compared to 55 per cent the previous year.

The average rate of interest on outstanding market debt was 3.2 per cent in 2008–09, down from 4.6 per cent in 2007–08. This rate, which is a combination of the financing rates on debt issued in the past and the current year, has been falling over the past 10 years, largely as a result of general reductions in market interest rates.

Chart 2 - Average Effective Interest Rate on Outstanding Market Debt

Amount of Debt Securities Outstanding in the Canadian Market

In 2008, the amount of securities outstanding in the Canadian short-term market (money market) increased by about 12 per cent compared to the previous year, primarily due to higher stocks of treasury bills and provincial short-term paper. The amount of commercial paper outstanding continued to decline in 2008 (see Chart 3).

Chart 3 - Amount of Domestic Short-Term Securities Outstanding by Issue Type

During 2008, the size of the Canadian bond market increased by about 10 per cent. All categories within the market expanded, with the exception of Maple Bonds (Canadian-dollar bonds issued in Canada by foreign entities). The share of the Canadian bond market represented by Government of Canada bonds has declined since the mid-1990s. At December 31, 2008, Government of Canada bonds represented 21 per cent of total bonds outstanding, down from almost 50 per cent in 1996 (see Chart 4). In recent years, Canada Mortgage Bonds issued by the Canada Housing Trust and underlying National Housing Act Mortgage-Backed Securities have been the catalyst for growth in the term securitization sector.

Chart 4 - Amount of Domestic Bonds Outstanding by Issue Type

Part II: Objectives of Debt and Cash Management

In a year of higher-than-expected debt issuance, raising funding efficiently and maintaining a well-functioning government securities market continued to be the main objectives of the management of debt and cash balances in 2008–09. This section provides information on the achievement of the two objectives.

Raising Funding Efficiently

Achieving the objective of raising funding efficiently involves managing the Government's exposure to changes in interest rates and their impact on borrowing costs. This section highlights the actions taken to manage interest rate risk.

Debt Structure

The Government's interest-bearing debt is made up of short- and long-term debt instruments. As the yield curve is normally upward sloping, there is generally a trade-off between cost and risk in the selection of which length of terms to issue. While borrowing costs for longer-term instruments tend to be higher and remain fixed for a longer period, there is a reduced risk of having to refinance at higher interest rates. In contrast, borrowing costs tend to be lower on average for shorter-term instruments but are fixed for shorter periods, therefore increasing the risk of having to refinance the debt at higher interest rates. Under the debt strategy, striking a balance between fixed-rate (longer-term) and floating-rate (short-term) debt in the market debt structure is a key decision managed over time.

A well-distributed maturity profile ensures a controlled exposure to changes in interest rates over time and provides liquidity across different maturity sectors. In 2008–09, debt issuance continued to emphasize the distribution of borrowing across three treasury bill maturities (3-, 6- and 12-month) and five bond maturities (2-, 5-, 10- and 30-year nominal bonds and a 30-year Real Return Bond).3

The maturity profile of outstanding Government of Canada bonds is well distributed across each of the maturity sectors (see Chart 5). The increase in the stock of longer-dated bonds (12+ years) since 2001 reflects increased issuance of both nominal 30-year bonds and Real Return Bonds, as well as an increase in the inflation adjustment for the latter.4

Chart 5 - Maturity Profile of Outstanding Goverment of Canada Bonds, at March 31

The fixed-rate share measures the proportion of all Government of Canada interest-bearing debt that does not mature or need to be repriced within one year. It is calculated on a net basis by excluding components of the debt that are matched with financial assets of the same term, and which therefore do not represent an exposure to interest rate risk. The federal liabilities netted out from the fixed-rate share calculation include liabilities used to fund the assets in the Exchange Fund Account; debt securities matched with corresponding loans to Crown corporations; Government of Canada debt securities held by the Bank of Canada; matched assets related to the Insured Mortgage Purchase Program; and the debt offset by Receiver General cash and deposit balances.

In 2008–09, the fixed-rate share decreased from 62.6 per cent to 61.0 per cent due to a relative increase in short-term borrowings used to meet elevated funding requirements.

The increase in short-term debt issuance lowered the modified duration and average term to maturity of the debt portfolio. In 2008–09, the modified duration decreased by 0.5 years to 4.9 years, and the average term to maturity decreased by 1 year to 6.0 years (see Chart 6).5

Chart 6 - Modified Duration and Average Term to Maturity of Government of Canada Market Debt

Holdings of Government of Canada Market Debt

A diversified investor base supports an active secondary market 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 that suit the needs of individual Canadians.

At December 31, 2008, life insurance companies and pension funds accounted for the largest share of holdings of Government of Canada market debt securities, representing 22 per cent. The next largest share was held by other financial institutions, which include investment dealers, mutual funds, and property and casualty insurance companies (19 per cent), followed by non-residents (14 per cent) and chartered banks and near-banks (14 per cent). Taken together, these four sectors held close to 70 per cent of outstanding Government of Canada securities (see Chart 7).

Over the last decade, the share of government marketable securities held by non-residents has shown the most notable decline. In 2008, several groups of investors increased their holdings of Government of Canada securities, with chartered banks and near-banks showing the biggest increase. Additional details on the distribution of Government of Canada market debt are available on the Statistics Canada website.

Chart 7 - Distribution of Holdings of Government of Canada Market Debt

Maintaining a Well-Functioning Government Securities Market

A well-functioning wholesale market in Government of Canada securities is important as 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 2008–09, the following actions were taken to promote liquidity in Government of Canada securities:

Providing regular and transparent issuance: The practice of pre-announcing quarterly bond auction schedules and the call for tenders has been in place for more than a decade. As in recent years, there were regular auctions for 2-, 5- 10- and 30-year nominal bonds, as well as for 30-year Real Return Bonds. Regular and pre-announced issuance provided certainty for dealers and investors in terms of planning their investment activities and supported participation and competitive bidding at auctions by primary dealers and investors. Due to the increased financial requirements in the 2008–09 fiscal year, more auctions were held. To ensure transparency, all changes to bond issuance schedules were communicated through the Bank of Canada website on a timely basis, and were coordinated with the Insured Mortgage Purchase Program (IMPP) operation schedule published on the Canada Mortgage and Housing Corporation (CMHC) website.

Concentrating on key benchmarks: The 2-, 5-, 10- and 30-year new building benchmark target sizes were unchanged from the previous year (2-year bonds: $7 billion to $10 billion; 5-year bonds: $9 billion to $12 billion; 10-year bonds: $10 billion to $14 billion; and 30-year bonds: $12 billion to $15 billion). In 2008–09, the minimum target sizes for all maturities were reached and due to the increase in borrowing requirements, most non-fungible benchmarks built in 2008–09 exceeded their target ranges (see Part III for the actual amount issued in each maturity).6

Using the regular bond buyback program: Against the backdrop of debt paydown in recent years, use of the regular bond buyback program on both a switch and cash basis to repurchase less-liquid off-the-run bonds has helped maintain gross bond issuance and benchmark bond sizes at higher levels than otherwise would have been possible.7 Despite higher debt issuance in 2008–09, the buyback program continued to play an important role. Operational changes to the buyback program were made to increase the flexibility of the program. Due to the higher financial requirements in 2008–09, buyback operations on a cash basis were scaled back in the last quarter of the fiscal year, while switch buybacks in longer maturities continued to be used (see Part III for more details). 

Consulting with market participants: Consultations with market participants are held typically once a year in order to obtain their views on the liquidity and efficiency of the Government of Canada securities market. Due to the exceptional circumstances in 2008–09, however, the formal consultations held in November were followed by additional consultations. In the November consultations, market participants' views were requested on certain operational aspects of domestic debt programs, including issuances related to the IMPP. Representatives from CMHC participated in the consultations. The main messages received were that while liquidity in the Canadian fixed-income market had generally declined, Government of Canada bonds and treasury bills had been less adversely affected. Additionally, while welcoming the transparency and coordination between the Government and CMHC, participants offered suggestions on how the bond program could be adjusted on the dates IMPP operations were performed.8

Consolidating the borrowings of Crown corporations: The Crown borrowing program, which was officially launched in April 2008, reduced overall borrowing costs for the Business Development Bank of Canada, CMHC and Farm Credit Canada and enhanced the liquidity of the Government of Canada debt program. In 2008–09, loans to Crown corporations, excluding loans to CMHC for IMPP operations, increased by $17 billion.

Supporting broad participation in Government of Canada operations: Active participation in auction and buyback operations by a diverse group of market participants helps achieve the key objective of raising funding efficiently. Initiatives such as lower turnaround times have enhanced the efficiency of the auction and buyback process and encouraged participation by reducing the market risk for participants. Turnaround times have fallen significantly in recent years, from an average of 45 minutes in 1997–98, to an average of under 2 minutes for treasury bill and bond auctions and an average of around 3 minutes for buyback operations in 2008–09.9

Supporting government securities distributors (GSDs): To maintain a well-functioning securities distribution system, government securities auctions are monitored to ensure that GSDs abide with the terms and conditions.10 In October 2008, the minimum bidding requirements for Government of Canada nominal bond, treasury bill and fungible cash management bill auctions were modified to help primary dealers meet their obligations during periods of high volatility. The initiative taken in February 2008 to modify the minimum bidding obligation for Real Return Bonds was also extended after the trial period ended on March 31, 2009. These changes are intended to be temporary and will be amended when necessary.

Part III: Report on the 2008–2009 Debt Program

Part III reports on the outcomes of the domestic debt and foreign debt programs used to finance market debt. It also reviews measures of liquidity and efficiency in the secondary market for Government of Canada securities.

Details of the domestic debt program and auction results are presented first, followed by details of cash management activities and Receiver General auction results. Part III concludes with an overview of secondary market indicators and a brief description of Canada's foreign currency debt programs.

The outcomes of funds management activities are typically the product of many factors. As a result, measures only serve as useful metrics to help interpret and understand the results and context of funds management initiatives.

Domestic Debt Program

The domestic debt program consists of the issuance of three treasury bill maturities (3-, 6- and 12-month), cash management bills, and five bond maturities (2-, 5-, 10- and 30-year nominal bonds and a 30-year Real Return Bond), a bond buyback program, and two retail debt products (Canada Savings Bonds and Canada Premium Bonds).11

As the Government's fiscal agent, the Bank of Canada distributes Government of Canada marketable bills and bonds through auction to 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, which form the core group of distributors for Government of Canada securities.

In 2008–09, treasury bill and bond auctions continued to be well covered and well bid. While the credit market turbulence that began in August 2007 had no major impact on auctions, volatility caused by uncertainties in the market resulted in slightly wider tails and lower coverage ratios at auction.

The secondary market for Government of Canada securities continues to exhibit trading volumes and turnover ratios that compare favourably to those of other countries, despite a decline relative to previous years.

Program Activity

In 2008–09, the amount of money borrowed by the federal government from financial markets exceeded the amount planned in the 2008–09 Debt Management Strategy, mainly due to the increased financial requirements stemming from various initiatives taken by the Government to support financial markets (see Part I for details). As a result, bond and treasury bill issuance increased.

Marketable Bonds

In 2008–09, gross marketable bond issuance was $75.0 billion (including issuance through switch buybacks), about $40.7 billion higher than the $34.3 billion issued in 2007–08. This gross issuance consisted of $72.9 billion in nominal bonds, including $3.0 billion in switch operations, and $2.1 billion in Real Return Bonds (see Table 3). Taking into account gross issuance, buybacks and maturities, the stock of outstanding marketable bonds increased by $41.7 billion during the fiscal year to $295.2 billion at March 31, 2009.

The gross nominal bond issuance of $72.9 billion consisted of $23.2 billion in 2-year bonds, $29.0 billion in 5-year bonds, $15.7 billion in 10-year bonds and $5.1 billion in 30-year bonds. In 2008–09, the amount of nominal bonds outstanding increased by $39.3 billion to $263.5 billion.

The level of outstanding Real Return Bonds increased from $29.4 billion to $31.8 billion at March 31, 2009, as a result of increased issuance ($2.1 billion) and a Consumer Price Index adjustment increase of $0.35 billion for 2008–09.

Table 3
Annual Bond Program Operations
  2002–03 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09
  ($ billions)
Nominal 36.4 33.9 30.8 27.9 27.3 29.5 69.9
Nominal (switch) 5.9 5.5 4.7 4.5 4.5 2.5 3.0
Real Return Bonds 1.4 1.4 1.4 1.5 1.6 2.3 2.1
Total gross issuance 43.7 40.8 36.9 33.9 33.4 34.3 75.0
Cash buyback -7.1 -5.2 -6.8 -5.3 -5.1 -4.3 -3.2
Switch buyback -5.0 -5.0 -4.7 -3.3 -4.7 -2.4 -2.7
Total buybacks -12.1 -10.2 -11.4 -8.6 -9.8 -6.7 -5.9
Net issuance 31.6 30.7 25.5 25.3 23.6 27.6 69.0
Note: Numbers may not add due to rounding.
Source: Bank of Canada.

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 benchmarks compared to 2003. From 2003 to 2009, the number of individual bonds outstanding was reduced from 58 to 46, while the average size per maturity date increased from $6.0 billion to $8.1 billion (see Table 4).

Table 4
Impact of Debt Management Activities on Profile of Outstanding Bonds
  Nominal Bonds Real Return Bonds Total

  2003 2009 2003 2009 2003 2009
Total bonds outstanding ($ billions) 270.1 263.5 16.2 26.4 286.3 289.9
Average size per maturity date ($ billions) 6.0 8.5 5.4 5.3 6.0 8.1
Number of bonds outstanding 55 41 3 5 58 46
Number of maturity dates 45 31 3 5 48 36
Weighted average coupon rate (%) 6.5 4.6 4.2 3.5
Sources: Bank of Canada and Public Accounts of Canada.

Bond Buyback Program

The objectives of the bond buyback program are to maintain new issuance and enhance market liquidity for Government of Canada bonds. Buyback operations, which are performed on a cash and switch basis, accomplish this objective by helping to increase benchmark sizes in the face of declining borrowing requirements. The program was scaled back in the last quarter of the fiscal year as borrowing requirements increased, with liquidity enhancement being the focus of the remaining (switch) operations.

Bond buyback operations on a cash basis involve the purchase of bonds with a remaining term to maturity of 12 months to 25 years. Bond buyback operations on a switch basis involve the exchange, on a duration-neutral basis, of less-liquid bonds with a remaining term to maturity of 12 months to 25 years for liquid benchmark bonds.12 In 2008–09, operational changes to the buyback program were made to increase the flexibility of the program. In March 2008, the lower bound of the remaining term to maturity for bonds eligible for the bond buyback program was changed from 18 months to 12 months. Furthermore, the bond buyback baskets were expanded to include more issues. In December 2008, the buyback floor threshold below which the Government will not reduce the outstanding amount of bonds maturing on one maturity date was changed from $5 billion to $3 billion.

In light of the higher financial requirements for 2008–09, buyback operations on a cash basis were scaled back, totalling $3.2 billion and consisting of roughly $1.1 billion in the 2-year sector, $0.3 billion in the 5-year sector, $1.0 billion in the 10-year sector and $0.8 billion in the 30-year sector. In 2008–09, bonds repurchased on a switch basis totalled $2.7 billion, $0.3 billion higher than planned.

In total, bond buyback operations amounted to $5.9 billion in 2008–09. Chart 8 shows the impact that bond buybacks on a cash and switch basis had on benchmark sizes in 2008–09.

Chart 8 - Impact of Regular Buyback Program on Benchmark Sizes, at March 31, 2009

Treasury Bills and Cash Management Bills 

The stock of outstanding treasury and cash management bills increased by $75.4 billion during 2008–09 to $192.3 billion at March 31, 2009. Over the fiscal year, $438.8 billion in bills were auctioned, an increase of $150.9  billion from the previous year (see Chart 9). Throughout the year, $96.3 billion in cash management bills were issued for various short-term maturities. More frequent use of these short-term securities, as a cost-effective cash management tool, helped smooth fluctuations in cash balances over the year.

Chart 9 - Treasury Bill and Cash Management Bill Program Issurance

Due to the increased reliance on short-term debt to meet funding needs, the fluctuation in the average size of treasury bill issues increased in 2008–09. Net new issuance ranged from -$2.2 billion to +$8.7 billion per operation, with a standard deviation of $2.9 billion (see Chart 10).

Chart 10 - Gross and Net Issurance at Treasury Bill Auctions

Retail Debt

The objectives of the retail debt program are to provide Canadians with access to Government of Canada retail savings products; to maintain public awareness of Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs); when feasible, to deliver cost-effective funding for the Government; and to look for opportunities to reduce overall program delivery costs.

As in recent years, the Government sold CSBs and CPBs over a six-month period, from early October 2008 to the beginning of April 2009, through two channels: payroll deductions and cash purchases through financial institutions and dealers or directly from the Government. These sales were supported by a television advertising campaign.

The level of outstanding CSBs and CPBs held by retail investors decreased slightly from $13.1 billion at the start of 2008–09 to $12.5 billion at March 31, 2009 (see Chart 11). Gross sales and redemptions were $2.8 billion and $3.3 billion, respectively, for a net reduction of $0.6 billion in the stock of retail debt (see Table 5 and Reference Table XII). Retail debt also continued to decline as a share of total market debt.

Table 5
Retail Debt Gross Sales and Redemptions, 2008–09
Sales Channel Gross Sales Redemptions Net Change
  ($ billions)
Payroll 1.6 1.4 0.2
Cash 1.2 1.9 -0.7
Total 2.8 3.3 -0.6
Note: Numbers may not add due to rounding.
Source: Bank of Canada.

Chart 11 - Evolution of the Retail Stock

Auction Result Indicators for the Domestic Debt Program

The two conventional measures used to gauge auction performance are the auction coverage and tail. These two measures, combined with the yield at issue, 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, excluding bids from the Bank of Canada, divided by the amount auctioned. A higher auction coverage level typically reflects strong demand and therefore should result in a lower average auction yield. Under the Terms of Participation in Auctions for Government Securities Distributors covering government auctions, a primary dealer's bids, and bids from its customers, must total a minimum of 50 per cent of its auction limit or 50 per cent of its formula calculation, rounded upward to the nearest percentage point, whichever is lower. In addition, the minimum level of bidding must be at a reasonable price. Assuming that all primary dealers bid at their maximum bidding limit, the coverage ratios for primary dealers would reach at least 2.5 for bill auctions and 2.67 for bond auctions. Similarly, if all primary dealers only bid at their minimum bidding obligation, the coverage ratios would be about 1.25 for bill auctions and 1.34 for bond auctions.

The auction tail represents the number of basis points between the highest yield accepted and the average yield. A small auction tail is preferable as it generally indicates better transparency in the pricing of securities.

Marketable Bonds

Due to higher-than-planned issuance, 22 nominal bond auctions were conducted in 2008–09, compared to 14 in 2007–08. The auction results for the auctions conducted are presented in Table 6.13 While nominal bond auctions continued to be well covered, increased uncertainty and volatility in financial markets resulted in moderately wider tails and slightly lower coverage ratios at bond auctions.

Table 6
Performance at Bond Auctions
    Nominal Real Return Bonds

     2-Year 5-Year 10-Year 30-Year 30-Year
Tail (basis points) 2008–09 0.72 1.19 1.33 0.79 n.a.
  4-year average 0.50 0.80 0.67 0.45 n.a.
Coverage (ratio) 2008–09 2.24 2.19 2.25 2.52 2.68
  4-year average 2.40 2.39 2.44 2.56 2.76
Source: Bank of Canada.

Treasury Bills and Cash Management Bills

In 2008–09, there were 26 treasury bill auctions, and the number of cash management bill auctions increased to 34 from 32 in 2007–08. All of the auctions were fully covered. The coverage ratios for treasury bill auctions in 2008–09 were slightly lower than the four-year average, consistent with the trend observed at bond auctions (see Table 7). Volatility in the short-term securities also resulted in wider tails for treasury bill and cash management bill auctions.

Table 7
Performance at Treasury Bill and Cash Management Bill Auctions
    3-Month 6-Month 12-Month Cash Management Bills
Tail (basis points) 2008–09 1.77 1.54 2.05 4.82
  4-year average 0.99 1.00 1.15 4.41
Coverage (ratio) 2008–09 2.00 2.13 2.05 2.23
  4-year average 2.14 2.18 2.14 2.41
Source: Bank of Canada.

Participation at Domestic Debt Auctions

In 2008–09, primary dealers were allotted over 89 per cent of auctioned short-term and nominal debt securities, while other GSDs and customers were allotted under 11 per cent (see Table 8).14 The 10 most active participants were allotted over 90 per cent of these securities. Primary dealers' share of the Real Return Bond allotments was about 37 per cent, with customers receiving close to the remaining 62 per cent of the allotments.

Table 8
Share of Amount Allotted to Participants by Type of Auction, 2008–09
Participant Type Cash Management Bills Real Bills Nominal Bonds  Return Bonds
Primary dealers 92.4 89.8 94.2 37.4
Other GSDs 0.0 0.3 0.2 0.4
Customers 7.6 9.9 5.6 62.2
Top 5 participants 67.4 68.7 66.2 52.3
Top 10 participants 92.9 90.7 90.6 73.0
Notes: These numbers exclude securities bought by the Bank of Canada. Numbers may not add due to rounding.
Source: Bank of Canada.

Cash Management

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.

Receiver General Cash Balances

RG cash balances fluctuate widely over the year for a variety of reasons. In 2008–09, there was a significantly increased fluctuation in RG cash balances, with balances reaching a peak of $55 billion and a low of $2 billion. Also, average daily RG cash balances for 2008–09 were $21.2 billion compared to $7.3  billion in 2007–08. This was due to a number of factors, including preparation for large government programs, such as the Insured Mortgage Purchase Program and other initiatives, plus the raising of cash balances at the Bank of Canada to support the Bank's liquidity operations. The Bank of Canada's liquidity operations increase the assets on the Bank's balance sheet and must be offset by either reducing other assets or increasing liabilities. In the case of increasing liabilities, one option is to increase RG cash balances by the Government issuing securities and holding the cash received at the Bank of Canada.

The portion of cash balances at financial institutions 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 RG cash balances held at financial institutions in 2008–09 were $8.7 billion, up significantly from 2007–08 (see Table 9). Although frequent use of cash management bills allows cash balances to be built up quickly, resulting in lower average daily balances, average daily cash balances in 2008–09 were much higher, mainly due to the need to set cash aside to fund various government initiatives (see Part I for details).

Table 9
Average Daily Receiver General Cash Balances Held at Financial Institutions
  2005–06 2006–07 2007–08 2008–09
  ($ billions)
Average daily cash balances 5.6 5.7 5.4 8.7
Note: Average daily RG cash balances at the Bank of Canada for 2008–09 were $12.4 billion, compared to $1.9 billion in 2007–08.
Source: Bank of Canada.

Collateral arrangements were introduced in 2002 to mitigate the credit risk related 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 12).

Chart 12 - Receiver General Auctions of Cash Balances Allocation Between Collateralized and Uncollateralized Tranches

Cash Management Bond Buyback Program

The cash management bond buyback (CMBB) program helps manage cash requirements by reducing the high levels of cash balances needed for key maturity payment dates. The program also helps smooth variations in treasury bill auction sizes over the year.

In 2008–09, the total amount of bonds repurchased through the CMBB program was $8.6 billion, compared to $11.0 billion in 2007–08. The CMBB program in 2007–08 and 2008–09 reduced the size of the 2008 June 1, September 1 and December 1 bond maturities by about 34 per cent, from a total of $28.5 billion outstanding at the beginning of 2007–08 to $18.7 billion outstanding at the end of 2008–09 (see Chart 13).

Chart 13 - Impact of CMBB Operations on Large Payments, at March 31, 2009

Cost of Carry

A key measure of 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.

In 2008–09, yields on treasury bills continued to remain low and often traded below the overnight rate, resulting in a gain of carrying cash of $11.4 million for the fiscal year, compared to $16.5 million in 2007–08 and a net cost of $1.6 million in 2006–07 (see Chart 14).

Chart 14 - Cost (-) or gain (+) of Carry for Cash Balances

Auction Result Indicators for Receiver General Cash Balances

In 2008–09, coverage for the morning RG auction was lower than the rolling four-year average (see Table 10). Coverage for the afternoon RG auction declined from 2.04 in 2007–08 to 1.97 in 2008–09. Nevertheless, auctions encountered no demand issues and continued to be well covered.

The lower coverage and wider tails for the afternoon auction compared to the morning auction reflect the smaller number of eligible participants for the afternoon auction. In addition, many participants have already completed their daily funding requirements by the afternoon auction.

(For definitions of coverage and tail, see the section entitled "Auction Result Indicators for the Domestic Debt Program".)

Table 10
Performance at Receiver General Auctions
  2008–09 4-Year Average
Morning auctions    
  Coverage (ratio) 3.34 3.64
  Tail (basis points) 1.12 1.54
Afternoon auctions    
   Coverage (ratio) 1.97 2.13
   Tail (basis points) 5.21 3.71
Source: Bank of Canada.

Participation at Receiver General Auctions

The top 10 participants in the Large Value Transfer System (LVTS) won about 77 per cent of RG auctions on average in 2008–09, while the non-LVTS participants won 22.5 per cent of the amount allotted (see Table 11).

Table 11
Receiver General Auctions Share of Amount Allotted Between LVTS and Non-LVTS Participants
Participant Type 2005–06 2006–07 2007–08 2008–09
Top 5 LVTS 65.6 63.2 47.8 67.4
Top 5 others 16.8 15.0 26.0 18.6
Top 10 LVTS 79.9 81.2 69.0 77.4
Top 10 others 17.8 17.6 29.8 22.5
Source: Bank of Canada.

Secondary Market

As the economic outlook deteriorated and financial requirements increased in the 2008–09 fiscal year, raising funding efficiently and maintaining a well-functioning government securities market continued to be the main objectives of the management of debt and cash balances (see Part II for details). In an environment where government debt issuance is increasing, the Government is continuing to encourage proper conduct of market participants.

Code of Conduct for the Domestic Debt Market

The liquidity of the domestic debt market is a function of program design and public confidence in its integrity. The Investment Industry Regulatory Organization of Canada Rule 2800, Code of Conduct for Corporation Dealer Member Firms Trading in Wholesale Domestic Debt Markets, originally introduced in 1998 by the Investment Dealers Association (a predecessor organization) and updated in 2008, was developed jointly with the Bank of Canada and the Department of Finance, and is the formal code of conduct for dealing practices in wholesale domestic debt markets.

Ongoing vigilance by the Government and the Bank of Canada helps to maintain the integrity of trading in Canadian fixed-income securities, thereby encouraging liquidity and efficiency, promoting public confidence, and supporting the maintenance of active Government of Canada securities trading and lending.

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 represents the amount of securities traded per period. Large trading volume typically allows participants to buy or sell in the marketplace without a substantial impact on 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 declined to $16.9 billion in 2008–09, down $5.1 billion from 2007–08. Since 2006–07, average daily bond trading volume has declined by about 24 per cent (see Chart 15).

Chart 15 - Government of Canada Bond Average Daily Trading Volumes

In 2008 the annual debt stock turnover ratio trended downward, consistent with trends observed in comparable countries except the United Kingdom. With an annual debt stock turnover ratio of 19.3 in 2008, the Government of Canada bond market compares favourably with other major sovereign bond markets (see Chart 16).

Chart 16 - Sovereign Bond Turnover Ratios

Share of Domestic Debt in the Secondary Market

The share of government bonds as a proportion of total domestic bonds outstanding and as a proportion of total domestic trading volume declined slightly in 2008, continuing the trend in recent years. While the share of government bonds as a proportion of total domestic bonds outstanding declined from about 49 per cent in 1996 to about 21 per cent in 2008, government bonds accounted for just under 77 per cent of total domestic bond secondary trading volume in 2008 (see Chart 17).

 Chart 17 - Share of Government of Canada Bonds in the Domestic Market

The share of treasury bills as a proportion of total domestic short-term securities outstanding increased from 35 per cent in 2007 to 48 per cent in 2008, while the share of treasury bills as a proportion of total domestic short-term securities trading increased from 12 per cent to 15 per cent. Since 1996, the share of treasury bills as a proportion of total domestic short-term securities outstanding has declined by 9 per cent and the share of treasury bills as a proportion of total domestic short-term securities trading has declined by 48 per cent (see Chart 18).

Chart 18 - Share of Government of Canada Treasury Bills in the Domestic Market

Repo Markets

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 similar to collateralized loans. The presence of liquid repo markets for Government of Canada treasury bills and nominal bonds complements and enhances the efficiency of the domestic fixed-income securities market. 

Government of Canada bond repo markets remained very active in 2008–09, with total average daily trading volume lower at $23.12 billion compared to $27.08 billion in 2007–08. Average daily treasury bill repo market volume increased in 2008–09 to $2.25 billion compared to $1.7 billion in 2007–08.

Secondary Trading by Market Participants

The share of secondary market trading of Government of Canada securities is highly concentrated, with primary dealers accounting for more than 86 per cent of trading activity in 2008–09.15 The 10 most active participants represented over 96 per cent of trading activity (see Table 12).

Table 12
Secondary Trading: Share by Type of Participant, 2008–09
Participant Type Treasury Bills Bonds
Primary dealers 97.6 86.5
Other GSDs 2.4 13.5
Top 5 participants 78.4 68.2
Top 10 participants 99.3 96.4
Source: Bank of Canada.

Interest Rate Futures Market

An active and liquid interest rate futures market contributes to efficient capital markets by providing important trading, pricing and hedging tools, and supporting pricing for Government of Canada securities. In 2008, the volume of futures contracts based on the Government of Canada bond decreased along with volumes of other interest rate derivatives.

The futures contract based on the 10-year Government of Canada bond basket (or the CGB contract)16 had a trading volume of 7.4 million contracts in calendar year 2008, a 21-per-cent decrease from 2007.

Trading volume of the futures contract based on the 2-year Government of Canada bond (or the CGZ contract),16 originally launched in 2004 and modified in July 2006, was minimal in 2008.

The futures contract based on the 30-year Government of Canada bond (or the LGB contract),16 launched in November 2007, had a trading volume of roughly 3,000 contracts for 2008.

Foreign Currency Debt Programs

Foreign currency debt is used to fund the foreign exchange reserves, which are held in the Exchange Fund Account (EFA). The Report on the Management of Canada's Official International Reserves provides information on the objectives, composition and performance of the reserves portfolio.

The market value of the official international reserves increased to US$43.5 billion at March 31, 2009 from US$43.1 billion at March 31, 2008. The change comprised a US$415-million decrease in EFA assets and a US$882-million increase in the International Monetary Fund (IMF) reserve position.

The EFA, which represents the largest component of the official international reserves, is an actively managed portfolio of liquid foreign currency securities and deposits. The other component is the IMF reserve position, which is not actively managed. This position, which represents Canada's investment in the activities of the IMF, fluctuates according to drawdowns and repayments from the IMF.

The EFA is funded by liabilities of the Government of Canada denominated in, or converted to, foreign currencies. Funding requirements are primarily met through an ongoing program of cross-currency swaps of domestic obligations. Total cross-currency swap issuance and maturities during the reporting period were US$6.1 billion and US$2.4 billion, respectively.

In addition to cross-currency swaps of domestic obligations, the EFA is funded by a short-term US-dollar paper program (Canada bills), medium-term note issuance in various markets (Canada notes and Euro Medium-Term Notes) and international bond issues (global bonds), the use of which depends on funding needs and market conditions.

There was no new issuance of Canada notes, Euro Medium-Term Notes or global bonds during the period. Table 13 presents the change in outstanding foreign currency issues. Note that the changes reflect not only issuance and maturities, but also changes in the exchange rates of the euro and yen versus the US dollar (as the foreign currency issues are reported in US dollars).

Table 13
Outstanding Foreign Currency Issues at March 31, 2009
  March 31, 2009 Change From March 31, 2008
  (par value in millions of US dollars)
Swapped domestic issues 31,450 947
Global bonds 0 -5,729
Canada bills 6,046  4,601
Euro Medium-Term Notes 1,328 -251
Canada notes 0 -502
Total 38,824 -934
Note: Liabilities are stated at the exchange rates prevailing on March 31, 2009.

Annex 1: Completed Treasury Evaluation Reports, 1992–2007

Area Year
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
Bond Buybacks 2003
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
Risk Management Report1 2007
1 Available at  

Annex 2: Policy Measures Taken Since 1997 to Ensure a Well-Functioning Government Securities Market

1997: Dropped the 3-year bond benchmark

1998: Moved from weekly to bi-weekly treasury bill auctions

1999: Introduced a cash-based bond buyback program

1999: Introduced standardized benchmarks (fixed maturities and increased size)

1999: Started regular cross-currency-swap–based funding of foreign assets

2001: Introduced a switch-based bond buyback program

2001: Allowed the reconstitution of bonds beyond the size of the original amount issued

2001: Introduced the cash management bond buyback program

2001–2006: Reduced targeted turnaround times to less than 3 minutes for auctions and less than 5 minutes for buyback operations

2004: Advanced the timing of treasury bill auctions from 12:30 10:30 a.m.

2005: Advanced the timing of bond auctions from 12:30 p.m. to 12:00 p.m.

2005: Reduced the timing between bond auctions and cash buybacks to 20 minutes

2006: Dropped one quarterly 2-year auction

2006: Announced the maintenance of benchmark targets through fungibility (common dates)

2007: Consolidated the borrowings of three Crown corporations

2007: Changed the maturity of the 5-year benchmark and dropped one quarterly 5-year auction

Annex 3: Glossary

asset-liability management: An investment decision-making framework that is used to concurrently manage a portfolio of assets and liabilities.

benchmark bond: 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.

budgetary deficit: 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.

Canada bill: 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.

Canada note: 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.

cross-currency swap: 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.

financial source/requirement: 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 securities auctions and through which the Government distributes Government of Canada treasury bills and marketable bonds.

interest-bearing debt: 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.

marketable bond: 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.

marketable debt: 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.

money market: 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.

non-market debt: 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.

primary market: 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.

secondary market: A market where existing securities trade after they have been sold to the public in the primary market.

sovereign market: Market for the debt issued by a government.

treasury bill: 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.

yield curve: 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.

Annex 4: Contact Information

Department of Finance Canada
Financial Sector Policy Branch
Financial Markets Division
140 O'Connor St., 20th Floor, East Tower
Ottawa, Canada  K1A 0G5
Telephone: 613-992-9031
Fax: 613-943-2039.

1 The OIC for 2008–09 can be viewed on the Privy Council Office website, using reference numbers 2008-0446 and 2008-1738.

2 Public debt charges include the interest on unmatured debt and on pensions, other employee and veteran future benefits and other liabilities, the amortization of premiums, discounts and commissions on unmatured debt, and the servicing costs and the costs of issuing new borrowings.

3 An announcement to reintroduce a 3-year nominal bond maturity was made in the 2009–10 Debt Management Strategy.

4 The nominal outstanding amount of Real Return Bonds reflects increases in the Consumer Price Index over time through the inflation adjustment. If new issuance is excluded, the nominal outstanding amount of previously issued Real Return Bonds will still increase if there has been positive inflation over the time period.

5 Modified duration measures the price sensitivity of a security or portfolio of fixed-income securities to changes in yields. Multiplying the modified duration of a security by the change in its yield gives the estimated percentage change in the price of the security. The average term to maturity is calculated by multiplying the remaining maturity on each instrument by its weight in the portfolio.

6 Non-fungible securities do not share the same maturity dates with outstanding bond issues. The benchmark size for bonds that are fungible with existing bonds is deemed attained once the total amount of outstanding bonds for that maturity date exceeds the minimum benchmark size.

7 Buybacks on a switch basis involve the exchange of less-liquid bonds for liquid benchmark bonds.

8 More details on the subjects of discussion and the views expressed during the consultations can be found on the Bank of Canada website.

9 The Bank of Canada targets an average turnaround time of less than 3 minutes for auctions and less than 5 minutes for buyback operations. Maximum turnaround times are 5 minutes for auctions and 10 minutes for buyback operations.

10 The terms and conditions of auctions are available on the Bank of Canada website.

11 An announcement to reintroduce a 3-year nominal bond maturity was made in the 2009–10 Debt Management Strategy.

12 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 is on a duration-neutral equivalent basis.

13 Tails are not calculated for Real Return Bond auctions since successful bidders are allotted bonds at the single-price equivalent of the highest real yield (single-price auction type) of accepted competitive bids (Section 6 of the Standard Terms for Auctions of Government of Canada Real Return Bonds).

14 A customer is a bidder on whose behalf a GSD has been directed to submit a competitive or non-competitive bid for a specified amount of securities at a specific price.

15 Primary dealers trade on behalf of their clients as well as for their own accounts.

16 CGB, CGZ and LGB are trademark products of the Montréal Exchange.