Archived - Debt Management Report 2009–2010

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Foreword by the Minister of Finance 

Downward pressure on interest rates and strong demand for Canadian market debt supported a stable environment for debt management in 2009–10.

This meant that the Government of Canada spent less on servicing its debt obligations than in the previous year—even as it continued to make substantial but necessary one-time investments to address the effects of the global financial crisis through Canada's Economic Action Plan.

These Action Plan investments have provided substantial support for Canadian families and businesses. Canada's remarkable economic performance over the course of 2009–10 underscores the effectiveness of the $28 billion in targeted economic stimulus measures that have flowed through the Action Plan.

Now, with signs of sustainable growth emerging across a range of indicators, Canada is seen as a model of best practices in sound economic management by our international partners and independent analysts alike. The Government is being recognized not only for its stewardship of the financial sector, but also for its responsible long-term approach to the management of its debt obligations.

Maintaining a liquid, well-functioning government securities market will continue to be an important objective of the Government's debt management strategy. I invite you to explore the details of the Government's approach to debt management in this year's Debt Management Report.

The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
Ottawa, December 2010

Purpose of This Publication 

This edition of the Debt Management Report provides a detailed account of the Government of Canada's borrowing and debt management activities for fiscal year April 1, 2009 to March 31, 2010.

As required under Part IV (Public Debt) of the Financial Administration Act, this publication ensures transparency and accountability regarding these activities. It reports on actual borrowing and uses of funds compared to those forecast in the 2009–10 Debt Management Strategy, published in January 2009 as Annex 4 of Budget 2009 (available at It also discusses the environment in which the debt was managed, the composition of the debt and changes during the year, strategic policy initiatives and performance outcomes.

The structure and content of this publication has changed from previous years. Part I continues to describe the context for debt management, while Part II reports on the achievement of objectives and principles. As in previous years, Part III reports on the debt program but it has been reorganized by program and type of security. Charts and tables have been redesigned throughout the document to provide further insight into the Government's debt management activities.

Additional information about the federal debt can be found in the Public Accounts of Canada. Information on the management of Canada's foreign reserves is provided in 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.


This publication focuses on two major treasury activities: (i) the management of the federal market debt (the portion of the debt that is borrowed in financial markets; and (ii) the investment of cash balances in liquid assets until needed for operations.

At March 31, 2010, market debt totalled $564.4 billion.

Composition of the Federal Debt, at March 31,2010

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 held in the Exchange Fund Account are funded by cross-currency swaps of domestic obligations and issuance of foreign currency debt. A report on the management of Canada's official international reserves is available at

A detailed description of Government of Canada market debt instruments is available at

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 can be found at See Annex 1 for a list of treasury evaluations performed since 1992.

Highlights of 2009–10 

Canada's Economic Action Plan

To lessen the impact of the global recession on domestic jobs and output, Canada's Economic Action Plan, introduced in January 2009 as part of Budget 2009, provided $28 billion in economic stimulus during fiscal 2009–10. Included in Canada's Economic Action Plan is the Extraordinary Financing Framework (EFF), which provided up to $200 billion in liquidity measures to ensure stability in the financial system and improve access to funding for households and businesses.

As part of the EFF, the Insured Mortgage Purchase Program (IMPP) provided approximately $70 billion (out of a potential $125 billion) in stable long-term financing to mortgage originators through the purchase of insured mortgage pools. The provision of liquidity by the Bank of Canada, partially funded with government cash balances, also played an important role in supporting the well-functioning of the Canadian financial system. The Canadian Secured Credit Facility helped businesses and consumers access financing needed to purchase new vehicles and equipment. These and other measures taken under the EFF did not increase the federal debt (or accumulated deficit) as they were offset by interest-bearing financial assets.

Downward Pressure on Interest Rates

In April 2009, the Bank of Canada announced a conditional commitment to maintain the target for the overnight rate at the effective lower bound of 0.25 per cent until the end of June 2010. The conditional commitment and persistent demand for fixed-income securities helped keep interest rates low across all maturity sectors.

Strong Demand for Market Debt

Net issuance of Government of Canada market debt reached a record high in 2009–10 to meet a financial requirement of $64 billion, including stimulus measures under the Economic Action Plan. The stock of market debt increased by $53.5 billion in 2009–10, mainly due to an increase in the stock of marketable bonds of $73 billion and a decrease in the stock of treasury bills of $16 billion.

Government securities markets easily accommodated the increased levels of issuance, with all treasury bill and bond auctions remaining well-covered and well-bid. Feedback received from market participants throughout 2009–10 was largely positive, with market participants reporting that liquidity was excellent for government benchmarks and that it had vastly improved for off-the-run bonds compared to the previous year.

Despite the increased issuance, debt charges decreased in 2009–10 as a result of the lower interest rate environment.

Successful Issuance of Global Bonds

The Government of Canada issued two global bonds in 2009–10 after a hiatus of more than a decade. In September 2009, a 5-year US$3-billion bond was issued and in January 2010, a 10-year €2-billion bond was issued. Both bonds, which were issued through syndication, met with strong demand and achieved attractive pricing for the Government. The funds raised from both deals were used to fund Canada's foreign exchange reserves.

Adjustments to the Debt Program

In 2009–10, a number of changes were made to the debt program to meet funding requirements: a 3-year bond was reintroduced with March and September maturities, additional March and September maturities were added in the 2-year sector, and a December maturity was added in the 5-year sector. In June 2009, it was announced that the bond program would be increased by about 25 per cent from the initial plan to address revised financial requirement projections.

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 2009–10, the Government continued to provide regular and transparent issuance schedules and communicated changes to the bond issuance schedules through the Bank of Canada website in a timely fashion. Buyback operations on a cash basis were not used due to elevated financial requirements, while switch buybacks continued to be used to promote liquidity for off-the-run bonds.

To provide transparency to market participants with respect to IMPP operations, Canada Mortgage and Housing Corporation (CMHC) coordinated the release of the schedule for IMPP operations with the Government's issuance schedule.

Government of Canada Credit Rating Profile 

The Government of Canada continued to receive the highest possible ratings, with a stable outlook, on both short- and long-term debt from the five rating agencies that evaluate Canada's debt (see Table 1).

Canada's resilient and diversified economy, sound financial sector, strong public finances and prudent fiscal plan have been consistently highlighted by the rating agencies.

Table 1
Government of Canada Credit Ratings
Rating Agency Term Domestic
Outlook Latest Rating Action
to Upgrade Canada to AAA
Moody's Investors Service Long-term Aaa Aaa Stable May 2002
  Short-term P-1 P-1    
Standard & Poor's Long-term AAA AAA Stable July 2002
  Short-term A1+ A1+    
Fitch Ratings Long-term AAA AAA Stable August 2004
  Short-term F1+ F1+    
Dominion Bond Rating Service Long-term AAA AAA Stable n/a
  Short-term R-1 (High) R-1 (High)    
Japan Credit Rating Agency Long-term AAA AAA Stable n/a

Part I: 2009–10 Debt Management Context 

Financial Market Developments 

Global Recovery

In mid 2009–10, the global economy began to stabilize after experiencing the deepest synchronized recession since the 1930s. The global financial crisis that started in late 2008 and lasted through early 2009 led to a pronounced tightening in credit conditions worldwide that negatively impacted global economic activity. Global financial and economic conditions improved considerably in 2009–10 due to the extraordinary policy measures introduced by governments and central banks to support the global financial system and promote economic recovery.

The severe financial market dislocations during the crisis led to historically low interest rates, sharp declines in consumer and business confidence and increased unemployment. Despite the global financial stimulus, credit markets remained cautious throughout the fiscal year due to uncertainty over the prospects for economic recovery and a perceived increase in sovereign risk, particularly in the peripheral European jurisdictions.

Return of Domestic Financial Stability and Economic Growth

Canada's strong financial condition and fiscal position at the onset of the global recession allowed the country to weather the economic downturn relatively well and positioned the Government to respond quickly and forcefully with economic stimulus through Canada's Economic Action Plan.

Canada fared better than all other Group of Seven (G-7) nations during the recession, with output declining 3.4 per cent from peak to trough. Through 2009–10 economic activity in Canada recovered, bringing output almost back to pre-recession levels—the best performance among G-7 nations. In addition, Canada was the only G-7 nation to post a year-over-year increase in employment, recapturing a significant portion of jobs lost as a result of the recession.

Canada's Economic Action Plan

The economic recovery in Canada has been boosted by the Government's ability to deliver stimulus on a scale that is unprecedented in Canadian history. Canada's Economic Action Plan, introduced in January 2009 as part of Budget 2009, provided $28 billion, or roughly 1.5 per cent of GDP, in federal stimulus during fiscal 2009–10.

Through the (IMPP), the Government purchased approximately $70 billion in insured mortgage pools from banks and other mortgage lenders, including $14 billion during 2009–10, before the program ended on March 31, 2010. The IMPP, the Canadian Secured Credit Facility, extraordinary liquidity facilities provided by the Bank of Canada and other Extraordinary Financing Framework measures contributed to the $64-billion financial requirement and $20-billion reduction in the Government's cash balances in fiscal 2009–10.

To view Budget 2009, including the 2009–10 Debt Management Strategy, which was published as Annex 4 of the budget, visit Budget 2010, which includes an update on Canada's Economic Action Plan and the 2010–11 Debt Management Strategy (Annex 3), is available at

Budgetary Outcomes 

The key budgetary reference point for debt management is the financial source/requirement, which represents net borrowing needs for the year. This measure differs from the budgetary balance (i.e. the surplus or deficit) by the amount of non-budgetary transactions, which can be significant.

The budgetary balance is presented on a full accrual basis of accounting, recording government assets and liabilities when they are received 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 includes 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.

With a budgetary deficit of $55.6 billion and a requirement of $8.0 billion from non-budgetary transactions, there was a financial requirement of $63.6 billion in 2009–10. Market debt increased by $53.5 billion. Table 2 presents the change in the composition of federal debt during 2009–10. For additional information on the financial position of the Government, see the 2009–10 Annual Financial Report of the Government of Canada at

Table 2
Change in the Composition of Federal Debt, 2009–10
  March 31, 2010 March 31, 2009 Change
  ($ billions)
Payable in Canadian currency      
Marketable bonds 368.0 295.2 72.8
Treasury and cash management bills 175.9 192.3 -16.4
Retail debt 11.9 12.5 -0.7
Canada Pension Plan bonds 0.5 0.5 0.0
Total payable in Canadian currency 556.1 500.5 55.6
Payable in foreign currencies 8.2 10.4 -2.2
Total market debt 564.4 510.9 53.5
Market debt value adjustment and capital lease obligations -5.2 3.1 -8.3
Total unmatured debt 559.1 514.0 45.1
Pension and other accounts 203.7 196.1 7.6
Total interest-bearing debt 762.8 710.2 52.6
Accounts payable, accruals and allowances 120.5 114.0 6.5
Gross debt 883.3 824.2 59.1
Total financial assets -300.8 -299.0 -1.8
Total non-financial assets -63.4 -61.5 -1.9
Federal debt (accumulated deficit) 519.1 463.7 55.4
Note: Numbers may not add due to rounding.

Sources and Uses of Borrowing 

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 3 of this publication.

On March 5, 2009, the Governor in Council approved an aggregate borrowing limit of $370 billion for 2009–10.[1] Total actual borrowings in 2009–10 were $288 billion, $24 billion below the plan set out in the 2009–10 Debt Management Strategy, and $82 billion below the authorized borrowing authority limit. This difference was mainly due to lower-than-anticipated purchases of insured mortgage pools under the IMPP ($14 billion versus a planned $45 billion), reflecting improved liquidity conditions in the Canadian financial system.

On June 25, 2009, the public was informed that the bond program would be increased by 25 per cent to $100 billion following an upward revision to the budgetary deficit forecast from $34 billion to $50 billion. In the latter part of 2009–10, the Bank of Canada began to unwind term liquidity facilities which had been used to alleviate funding pressures facing the Canadian financial system. The liquidity operations had been partially financed by government cash balances held on deposit at the Bank of Canada. On March 31, 2010, government cash balances held at the Bank of Canada had declined to $13.7 billion, compared to $28.6 billion on March 31, 2009.[2] For more information on the Bank of Canada's term liquidity operations, see the Bank of Canada website at

In 2009–10, loans under the Crown borrowing program to the Business Development Bank of Canada, CMHC and Farm Credit Canada, including loans to CMHC for IMPP operations, were smaller than planned. This mainly reflected lower-than-expected IMPP volumes. Since the inception of the program in 2007–08, the consolidated borrowings of these Crown corporations have grown to account for $33 billion of the federal market debt.[3]

Table 3
Planned/Actual Sources and Uses of Borrowing, 2009–101
  Planned2 Actual Difference
  ($ billions)
Sources of borrowings      
  Payable in Canadian currency      
    Treasury bills 223 176 -47
    Bonds 82 102 +20
    Retail debt 2 2 0
  Total payable in Canadian currency 307 280 -27
  Payable in foreign currencies 5 8 3
Total cash raised through
 borrowing activities
312 288 -24
Uses of borrowings3      
Refinancing needs      
  Payable in Canadian currency      
    Treasury bills 194 192 -2
    Bonds 29 30 1
    Of which:      
      Regular bond buybacks 2 2 0
      Cash management bond buybacks 4 10 6
    Retail debt 2 3 1
    Canada Pension Plan bonds 0 0 0
  Total payable in Canadian currency 225 225 0
  Payable in foreign currencies 7 8 1
Total refinancing needs 232 233 1
Financial source/requirement      
  Budgetary balance 34 55 21
  Non-budgetary transactions      
    Pension and other accounts -3 -8 -5
    Non-financial assets 2 3 1
    Loans, investments and advances 70 27 -43
    Of which:      
      Loans to Crown corporations (including loans
        to CHMC for IMPP operations)
69 26 -43
      Other transactions4 -1 -14 -13
    Total non-budgetary transactions 68 8 -60
Total financial source/requirement 101 64 -38
Total uses of borrowings 332 296 -60
Other unmatured debt transactions5 0 11 11
Net increase or decrease (-) in cash -20 -18 -2
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 2009 and the 2009–10 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.

Part II: Report on Objectives and Principles 

Objectives and Principles 

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.

In support of these objectives, the design and implementation of the domestic debt program is guided by the key principles of transparency, regularity and liquidity, which support a well-functioning government securities market. Towards this end, the Government publishes strategies and plans, and consults regularly with market participants to ensure the integrity and attractiveness of the market for dealers and investors. The principle of prudence also guides all debt management activities. The structure of the debt is managed conservatively in a cost-risk framework, preserving access to diversified sources of funding and supporting a broad investor base.

Raising Stable Low-Cost Funding 

In general, achieving stable low-cost funding involves striking a balance between debt costs and various risks in the debt structure. This selected balance between cost and risk, or the preferred debt structure, is achieved through the deliberate allocation of issuance between various debt instruments.

Cost of Market Debt

Market debt costs are the largest component of public debt charges (public debt charges also include interest expenses on non-market liabilities).[4] The cost of market debt declined from $16.4 billion in 2008–09 to $15.3 billion in 2009–10 due to a significant reduction in the average rate of interest on outstanding market debt (see Chart 1). In 2009–10, debt costs on unmatured debt represented about 57 per cent of total public debt charges compared to 60 per cent the previous year.[5]

The average rate of interest on market debt was 2.7 per cent in 2009–10, down from 3.2 per cent in 2008–09. This rate, which is a combination of the financing rates on outstanding debt issued in the past and the current year, has been falling over the past 10 years as a result of declining market interest rates.

Chart 1 - Market Debt Costs and Average Effective Interest Rate

Characteristics of Market Debt Structure

Market 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 a funding mix between shorter- and longer-term borrowings. 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 the debt 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.

A well-distributed maturity profile ensures a controlled exposure to changes in interest rates over time and provides liquidity across different maturity sectors. In 2009–10, the average term to maturity (ATM) of market debt decreased from 6.2 years to 6.0 years, while modified duration decreased from 4.9 years to 4.8 years, as an increase in short-term bond issuance more than offset a reduction in the treasury bill stock (see Chart 2).[6] The changes in ATM and modified duration from 2007–08 to 2009–10 were mainly due to large fluctuations in the stock of treasury bills relative to bonds in the context of evolving government financial requirements.

Chart 2 - Modified Duration and Average Term to Maturity of Government of Canada Market Debt

The refixing share of interest-bearing debt measures the proportion of all interest-bearing debt that matures or needs to be repriced within one year.[7] In 2009–10, the refixing share of interest-bearing debt decreased by 4 percentage points to 36 per cent as a result of the reduction in the stock of treasury bills (see Chart 3).

The refixing share of GDP measures the amount of interest-bearing debt that matures or needs to be repriced within one year relative to nominal GDP for that year. The refixing share of GDP has been steadily declining for much of the last 20 years as a result of a lower debt-to-GDP ratio. In 2009–10, the refixing share of GDP was 12 per cent, down slightly from 2008–09.

Chart 3 - Refixing Share of Interest-Bearing Debt and Gross Domestic Product

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, and provides flexibility to meet changing financial requirements. 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 2009–10, the following actions promoted a well-functioning Government of Canada securities market.

Providing regular and transparent issuance: For over a decade, the practice of pre-announcing quarterly bond auction schedules and the call for tenders has been in place.[8] There have been regular auctions for 2-, 3-, 5- 10- and 30-year nominal bonds, as well as for 30-year Real Return Bonds. Regular and pre-announced issuance provides certainty for dealers and investors, allowing them to plan their investment activities, and supports participation and competitive bidding at auctions by primary dealers and investors. As in 2008–09, the Government's heightened financial requirements in fiscal 2009–10 necessitated an elevated number of auctions relative to pre-crisis years. Bond issuance schedules were communicated through the Bank of Canada website on a timely basis, and were coordinated with the IMPP operation schedule published on the CMHC website.

Concentrating on key benchmarks: The 2-, 5-, 10- and 30-year new building benchmark target sizes were maintained (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). The target benchmark size for the reintroduced 3-year bond mirrored the 2-year benchmark target of $7 billion to $10 billion. In 2009–10, all maturities continued to reach or exceed minimum benchmark size targets (see Chart 4).[9]

Chart 4 - Size of Gross Bond Benchmarks

Using the regular bond buyback program: 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 bonds with a remaining term to maturity of 12 months to 25 years for more liquid benchmark bonds.[10] Due to the elevated financial requirements in fiscal 2009–10, buyback operations on a cash basis[11] were halted, while switch buybacks in longer maturities continued to be used to promote liquidity in off-the-run bonds. In total, bond buyback operations amounted to $2.1 billion in 2009–10, the lowest in over 10 years (see Chart 14).

Consulting with market participants: Formal consultations with market participants are held at least once a year in order to obtain their views on the design of the bond program and the liquidity and efficiency of the Government of Canada securities market. Due to the exceptional market conditions since 2008–09, the formal consultations were supplemented by additional informal consultations throughout the year. In the formal consultations, the Government received feedback from market participants on the market impacts of higher issuance resulting from measures introduced by the Government and the Bank of Canada to support liquidity in the financial system. The main messages received were that liquidity was excellent for benchmark bonds as a result of increased issuance, the liquidity in long off-the-run bonds had improved significantly due to switch buybacks in the long end, and the market would be able to safely absorb the increased levels of issuance planned for the year.[12]

Supporting broad participation in Government of Canada operations: As the Government's fiscal agent, the Bank of Canada distributes Government of Canada marketable bills and bonds through 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, which form the core group of distributors for Government of Canada securities.

To maintain a well-functioning securities distribution system, government securities auctions are monitored to ensure that GSDs abide by the terms and conditions.[13]

In 2008, minimum bidding requirements for Government of Canada nominal bonds, treasury bills and fungible cash management bills were adjusted to support GSDs during a period of high volatility in interest rates. These temporary measures were terminated in January 2010.

Quick turnaround times enhance the efficiency of the auction and buyback process and encourage participation by reducing the market risk for participants. Turnaround times averaged 1 minute 39 seconds for treasury bill and bond auctions and 2 minutes 23 seconds for buyback operations in 2009–10.[14]

Ensuring a broad investor base in Government of Canada securities: 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 March 31, 2010, insurance companies and pension funds accounted for the largest share of holdings of Government of Canada market debt securities, representing 23.0 per cent. The next largest share was held by chartered banks and quasi-banks (18.5 per cent), followed by other private financial institutions (17.1 per cent) and non-residents (16.5 per cent). Taken together, these four sectors held 75 per cent of outstanding Government of Canada securities (see Chart 5).

Chart 5 - Distribution of Holdings of Government of Canada Market Debt

Over the last decade, the share of government marketable securities held by non-residents has shown a notable decline. While renewed foreign investor interest in Canada has resulted in an uptick of non-resident holdings over the past year, the level remains low in comparison with other sovereigns (see Chart 6).

Chart 6 - International Comparison of Non-Resident Holdings of Government Marketable Securities

Maintaining debt rollover within acceptable parameters: Prudent management of debt refinancing needs promotes investor confidence and strives to minimize the impact of market volatility or disruptions on the funding program.

Quarterly maturities of domestic market debt as a percentage of GDP is an indicator of the amount of refinancing a government faces relative to the size of the economy. Since 2000–01, quarterly maturities have averaged approximately 6 per cent of GDP (see Chart 7). While this ratio rose from around 6 per cent to 8.5 per cent during the financial crisis due to increased debt issuance, rollover levels have declined back to 6 per cent more recently. According to statistics from OECD countries, Canada's rollover ratio is consistent with the international sovereign mid-point of approximately 7 per cent of GDP.

Chart 7 - Quarterly Maturities of Domestic Market Debt

The concentration of issuance mainly around the June 1 maturity date in recent years was helpful in maintaining benchmark liquidity in an environment of declining debt issuance. This concentration plus increased issuance on the March 1 and September 1 maturity dates has led to four large single-day bond maturities and coupon payment dates: March 1, June 1, September 1 and December 1 (see Chart 8). In 2009–10, single-day bond maturities plus coupon payments ranged up to $14.2 billion.

Chart 8 - Single-Day Bond Maturities Plus Coupon Payments

Monitoring secondary market trading in Government of Canada securities: 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 during a specific period (e.g. daily). Large trading volumes typically allow 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, measures 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 average daily volume of transactions in the Government of Canada secondary bond market was $19.7 billion in 2009–10, up $2.7 billion from 2008–09. Since 2007–08, average daily bond trading volumes have declined by about 16 per cent (see Chart 9).

Chart 9 - Government of Canada Bond Average Daily Trading Volumes

With an annual debt stock turnover ratio of 15.2 in 2009–10, the Government of Canada secondary bond market compares favourably with other major sovereign bond markets (see Chart 10). The downward trend in the turnover ratio since 2006 is consistent with the experience of comparable countries.

Chart 10 - Sovereign Bond Turnover Ratios

Part III: Report on the 2009–10 Debt Program 

In 2009–10, despite historically elevated issuance levels, both treasury bill and bond auctions continued to perform well. The demand for Government of Canada securities was strong throughout the fiscal year as a result of a flight to quality and Canada's strong fiscal and economic position.

Domestic Marketable Bonds 

Marketable Bond Program

In 2009–10, gross marketable bond issuance was $102.2 billion (including issuance through switch buybacks), about $27.2 billion higher than the $75.0 billion issued in 2008–09 (see Reference Table VI for further details). This gross issuance consisted of $100 billion in nominal bonds (including switch operations), and $2.2 billion in Real Return Bonds (see Table 4). Taking into account gross issuance, buybacks and maturities, the stock of outstanding marketable bonds increased by $73 billion to $368 billion over the course of the fiscal year.

Table 4
Annual Bond Program Operations
  2002–03 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10
  ($ billions)
Nominal 36.4 33.9 30.8 27.9 27.3 29.5 69.9 97.7
Nominal (switch) 5.9 5.5 4.7 4.5 4.5 2.5 3.0 2.3
Real Return Bonds 1.4 1.4 1.4 1.5 1.6 2.3 2.1 2.2
Total gross issuance 43.7 40.8 36.9 33.9 33.4 34.3 75.0 102.2
Cash buybacks -7.1 -5.2 -6.8 -5.3 -5.1 -4.3 -3.2 0.0
Switch buybacks -5.0 -5.0 -4.7 -3.3 -4.7 -2.4 -2.7 -2.1
Total buybacks -12.1 -10.2 -11.4 -8.6 -9.8 -6.7 -5.9 -2.1
Net issuance 31.6 30.7 25.5 25.3 23.6 27.6 69.0 100.1

Auction Result Indicators for Domestic Bonds

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.

Assuming that all primary dealers bid at their maximum bidding limit, the coverage ratios for primary dealers would reach at least 2.42 for bond auctions.[15] Similarly, if all primary dealers only bid at their minimum bidding obligation, the coverage ratios would be 1.21 for bond auctions.[16]

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

In 2009–10, 37 nominal bond auctions were conducted, compared to 22 in 2008–09. Auction results are presented in Table 5.[17] As in previous years, four Real Return Bond auctions were conducted (one per quarter). Bond auctions continued to be well-covered across all sectors and were in line with four-year averages. Decreased volatility resulted in smaller tails for 2-year and 5-year issues, while continued uncertainty regarding the economic and interest rate outlook led to wider tails for 10-year bonds relative to 2008–09. The 3-year bond that was reinstated in 2009–10 had larger tails relative to 2-year and 5-year bonds, reflecting its status as a new benchmark bond.[18]

Table 5
Performance at Bond Auctions
    Nominal Bonds Real Return Bonds

    2-Year 3-Year 5-Year 10-Year 30-Year 30-Year
Tail 2009–10 0.41 1.26 0.56 1.39 0.76 n/a
Tail 4-year average 0.48 1.261 0.78 0.96 0.59 n/a
Coverage 2009–10 2.52 2.31 2.33 2.20 2.55 2.45
Coverage 4-year average 2.45 2.311 2.33 2.34 2.55 2.69
1 Reflects only one year of data since the 3-year bond was reintroduced in 2009–10.

Participation at Domestic Bond Auctions

In 2009–10, primary dealers were allotted over 86 per cent of auctioned nominal debt securities, and customers were allotted 13 per cent (see Table 6).[19] The 10 most active participants were allotted 83 per cent of these securities. Primary dealers' share of the Real Return Bond allotments was 56 per cent, with customers receiving close to the remaining 43 per cent of the allotments.

Table 6
Share of Amount Allotted to Participants by Type of Auction, 2009–10
Participant Type Nominal Bonds Real Return Bonds
Primary dealers 86.6 56.2
Other GSDs 0.3 0.6
Customers 13.2 43.2
Top 5 participants 55.9 56.6
Top 10 participants 82.8 75.3
Notes: These numbers exclude securities purchased by the Bank of Canada. Numbers may not add due to rounding.

Treasury Bills and Cash Management Bills 

Over the fiscal year, $377.5 billion in 3-month, 6-month and 1-year treasury bills were auctioned, a decrease of $17 billion from the previous year. In addition, $63.5 billion in cash management bills were issued for various short-term maturities compared to $96.3 billion in 2008–09. The number of cash management bill operations also decreased, dropping from 34 to 24 in 2009–10.

During 2009–10, the combined treasury and cash management bill stock decreased by $16.4 billion to $175.9 billion (see Chart 11). The slightly lower short-term issuance in 2009–10 had the effect of reducing the fluctuations in the average size of treasury bill operations. Net new issuance ranged from ‑$4.8 billion to +$4.6 billion per operation, with a standard deviation of $2.3 billion, versus ‑$2.2 billion to +$8.7 billion per operation in 2008–09, with a standard deviation of $2.9 billion.

Chart 11 - Treasury Bills Outstanding

If all primary dealers bid at their maximum bidding limits for treasury bill auctions, the coverage ratios for primary dealers would reach over 2.5. Similarly, if all primary dealers bid at their minimum bidding obligation for bill auctions, the coverage ratios would be 1.13.

In 2009–10, all of the treasury bill and cash management bill auctions were fully covered. Coverage ratios for treasury bill auctions in 2009–10 were in line with the four-year average, consistent with the trend observed at bond auctions (see Table 7). Decreased volatility in the short-term securities and low interested rates also resulted in much smaller tails for treasury bill and cash management bill auctions.

Table 7
Performance at Treasury Bill and Cash Management Bill Auctions
    Treasury Bills  
    3-Month 6-Month 12-Month Cash Management Bills
Tail 2009–10 0.50 0.51 0.85 1.20
Tail 4-year average 0.96 0.94 1.17 4.36
Coverage 2009–10 2.01 2.38 2.18 2.23
Coverage 4-year average 2.09 2.25 2.17 2.32

Participation at Treasury Bill and Cash Management Bill Auctions

In 2009–10, primary dealers were allotted 86 per cent of auctioned short-term debt securities, while customers were allotted 12 per cent (see Table 8). The 10 most active participants were allotted 88 per cent of these securities.

Table 8
Share of Amount Allotted to Participants by Type of Auction, 2009–10
Participant Type Cash Management Bills Treasury Bills
Primary dealers 87.8 86.2
Other GSDs 0.0 1.5
Customers 12.2 12.3
Top 5 participants 74.2 66.9
Top 10 participants 94.1 88.1
Notes: These numbers exclude securities purchased by the Bank of Canada. Numbers may not add due to rounding.

Foreign Currency Debt 

Foreign currency debt is used to fund the official international reserves. The Exchange Fund Account (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 of the official international reserves is the International Monetary Fund (IMF) reserve position, which represents Canada's investment in the activities of the IMF and fluctuates according to drawdowns and repayments from the IMF. The Report on the Management of Canada's Official International Reserves, available at, provides information on the objectives, composition and performance of the reserves portfolio.

The market value of the official international reserves increased to US$56.7 billion at March 31, 2010 from US$43.5 billion at March 31, 2009. The change comprised a US$12.3-billion increase in EFA assets (which included an allocation of 5.2 billion special drawing rights) and a US$872-million increase in the IMF reserve position.

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$8.1 billion and US$3.2 billion, respectively.

In addition to cross-currency swaps of domestic obligations, the EFA can be funded through 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 (see Table 9).

Table 9
Outstanding Foreign Currency Liabilities at March 31, 2010
  March 31, 2010 Change From March 31, 2009
  (par value in millions of US dollars)
Swapped domestic issues 34,817 3,367
Global bonds 5,701 5,701
Canada bills 2,415 -3,631
Euro medium-term notes 0 -1,328
Canada notes 0 0
Total 42,933 4,109
Note: Liabilities are stated at the exchange rates prevailing on March 31, 2010.

Fiscal 2009–10 marked the first time in more than a decade that Canada issued global bonds (see Table 10). In September 2009, the first issue was a 5-year, US$3-billion, 2.375 per cent coupon issue. The second issue, in January 2010, was a 10-year, €2-billion, 3.5-per-cent coupon issue. The funds raised were used exclusively to increase Canada's foreign exchange reserves.

Both global bonds were successfully issued through syndicated offerings and met with strong demand from a diverse investor base. The US-dollar offering priced the tightest to US Treasuries of any sovereign since 2005, while the euro issue achieved a tighter spread versus German government bonds than corresponding maturity bonds issued by Euro-area governments such as France, the Netherlands and Finland. The two bonds issued were also five times oversubscribed and have performed well in secondary markets.

Table 10
Amount of Government of Canada Global Bonds Outstanding
Year of Issuance Market Amount in Original Currency Yield Term to Maturity Coupon Benchmark Interest Rate—Government Bonds Spread From Benchmark at Issuance Spread Over Swap Curve in Relevant Currency on Issuance Date
      (%) (Years) (%)   (Basis
2009 Global US$3 billion 2.498  5 2.375 USA 23.5 LIBOR-15
2010 Global €2 billion 3.571 10 3.5     Germany 19.4 EURIBOR+2
1 London Interbank Offered Rate.
2 Euro Interbank Offered Rate.

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) and, when feasible, to deliver cost-effective funding for the Government and 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 2009 to the beginning of April 2010, through two channels: payroll deductions and cash purchases through financial institutions and dealers or directly from the Government. The sales campaign was supported by television advertising. In 2009–10, it was announced that starting in the fall of 2010 the length of the CSB campaign would be reduced from six months to two months.

The level of outstanding CSBs and CPBs held by retail investors decreased slightly from $12.5 billion at the start of 2009–10 to $11.9 billion at the end of 2009–10, representing 2.1 per cent of total market debt at March 31, 2010 (see Chart 12).

Chart 12 - Evolution of the Retail Debt Stock

Gross sales and redemptions were $2.1 billion and $2.8 billion, respectively, for a net reduction of $0.7 billion in the stock of retail debt (see Table 11).

Table 11
Retail Debt Gross Sales and Redemptions, 2009–10
  Gross Sales Redemptions Net Change
    ($ billions)  
Payroll 1.6 1.5 0.1
Cash 0.5 1.3 -0.8
Total 2.1 2.8 -0.7

Cash Management 

The Bank of Canada, as fiscal agent for the Government, manages the Receiver General (RG) Consolidated Revenue Fund, from which the balances required for the Government's day-to-day operations are drawn. The core objective of cash management is to ensure that the Government has sufficient cash available at all times to meet its operating requirements.

Twice-daily auctions of RG cash balances, treasury bill auctions, cash management bill auctions and the cash management bond buyback program are used to manage RG cash balances.

Twice-Daily Auctions of Receiver General Cash Balances

In 2009–10, RG cash balances fluctuated widely, reaching a peak of $46.1 billion and a low of $14.8 billion. Average daily RG cash balances for 2009–10 were $24.6 billion compared to $21.2 billion in 2008–09. This was due to a number of factors, including preparing for large bond maturities, funding government programs such as the IMPP, and providing support for Bank of Canada liquidity operations.

RG cash balances are invested in a prudent and 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.

The level of cash balances held by financial institutions tends to be at its 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 by financial institutions in 2008–09 were $7.2 billion, down slightly from $8.7 billion in 2008–09.

A portion of the morning auction has been offered on a collateralized basis since September 2002, permitting access to a broader group of potential participants, while ensuring that the Government's credit exposure is effectively mitigated. 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 80 per cent (see Chart 13).

Chart 13 - Receiver General Auctions of Cash Balances Allocation Between Collateralized and Uncollateralized Tranches

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 2009–10, treasury bill yields traded predominantly higher than the overnight rate, resulting in a loss of carrying cash of $5.7 million for the fiscal year, compared to a gain of $11.4 million in 2008–09 and $16.5 million in 2007–08.

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 2009–10, an adjustment to the buyback program was made to increase the flexibility of the program.[20]

In 2009–10, the total amount of bonds repurchased through the CMBB program was $10.3 billion, compared to $8.6 billion in 2008–09. The CMBB program in 2008–09 and 2009–10 reduced the size of the 2009 June 1, September 1 and December 1 bond maturities by about 32 per cent, from a total of $25.6 billion outstanding at the beginning of 2008–09 to $17.5 billion outstanding at the end of 2009–10.

The CMBB program has been the most consistently useful method for reducing maturity sizes (see Chart 14). However, switch and cash repurchase operations have also proven to be valuable tools in recent years. Overall, repurchase operations reduced the size of the 2009 June 1, September 1 and December 1 bond maturities by as much as 35 per cent to 60 per cent.

Chart14 - Impact of Repurchase Operations on Bond Maturities