Archived - Debt Management Report 2014–2015 - Part 1

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Foreword by the Minister of Finance

I am pleased to table before Parliament the Government of Canada’s Debt Management Report for fiscal year 2014–15. It provides a full accounting of how Canada’s debt is managed.

Canadians have given the Government a strong mandate to take a new approach to securing our mutual prosperity. We are committed to investing in growing our economy, balanced with sound fiscal management. 

A strong and diversified debt management program will allow the Government to fund the necessary investments to stimulate overall long-term economic growth. Following a prudent debt management strategy will continue to allow the Government to raise stable and low-cost funding to meet its needs and the needs of Canadians, while maintaining a well-functioning market in Government of Canada securities.

This year’s Debt Management Report reflects Canada’s strong economic fundamentals and sound fiscal management, which have translated into a high demand for Government of Canada debt securities and a lower overall cost of funding. With well-covered and competitively bid auctions, the Government achieved its fundamental debt management objective of raising stable and low-cost funding to meet the needs of the Government of Canada.

Through effective management of our debt, a commitment to invest in growing our economy and fiscal responsibility, the Government will do everything it can to ensure that Canada’s economy remains strong and prosperous.

The Honourable Bill Morneau, P.C., M.P.
Minister of Finance
Ottawa, 2016

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 the fiscal year ending March 31, 2015.

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 Debt Management Strategy for 2014–15, published on February 11, 2014 as Annex 1 of Budget 2014. It also discusses the environment in which the debt was managed, the composition of the debt, changes in the debt during the year, strategic policy initiatives and performance outcomes.

Other Information

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. Additionally, monthly updates on cash balances and foreign exchange assets are available through The Fiscal Monitor, which is also available on the Department of Finance website.

Executive Summary

Introduction

This publication focuses on two major activities: (i) the management of 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.

The focus of the Debt Management Report is on activities associated with the Government’s market debt, including marketable bonds, treasury bills, retail debt and foreign currency debt, which stood at $649.5 billion at the end of 2014–15 (see shaded area of Chart 1). In addition to market and other types of unmatured debt, other liabilities including pensions and accounts payable brought the total liabilities of the Government of Canada to $1,023.6 billion at that time. When financial and non-financial assets are subtracted from total liabilities, the accumulated deficit of the Government of Canada was $612.3 billion as at March 31, 2015 (see Chart 1).

Chart 1
Snapshot of the Federal Balance Sheet, as at March 31, 2015
Chart 1 - Snapshot of the Federal Balance Sheet, as at March 31, 2015. For details, see the previous paragraph.
Note: Numbers may not add due to rounding.
Source: Public Accounts of Canada.

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. Domestic wholesale funding is conducted through the issuance of marketable securities, which consist of nominal bonds, Real Return Bonds and treasury bills, including cash management bills. These securities are sold predominately via auction but occasionally through syndication at the Government’s discretion.[1] Retail funding is raised through sales of Canada Savings Bonds and Canada Premium Bonds to Canadian residents. Cross-currency swaps of domestic obligations and issuance of foreign currency debt are used to fund foreign reserve assets held in the Exchange Fund Account.

Highlights of 2014–15

Downward Movement in Interest Rates

Throughout 2014–15, yields on Government of Canada securities declined across all maturities and more so for longer maturities, as global growth concerns led investors to seek the relative safe haven of Government of Canada securities. In January 2015, the Bank of Canada announced a cut to the target overnight rate of a quarter of a percentage point to 0.75 per cent, which helped further lower yields across all maturity sectors of Government of Canada domestic debt.

Higher Stock of Market Debt

The stock of market debt increased by $0.8 billion in 2014–15, bringing the total stock to $649.5 billion. The change in the stock was mainly comprised of a $14.6 billion increase in domestic marketable bonds, a $17.3 billion decrease in treasury and cash management bills, a $4.3 billion increase in foreign currency debt and a $0.7 billion decrease in retail debt outstanding.

Strong Demand for Government of Canada Debt Securities

In 2014–15, the relative strength of Canadian capital markets continued to promote primary and secondary market demand for Government of Canada securities. Accordingly, treasury bill and bond auctions remained well-covered and competitively bid, evidence that the current auction format remains the most cost-effective and efficient manner for the Government to raise funding. The Government continued to lock in additional long-term funding in 2014–15, adding for the first time issuance of a 50-year bond to the domestic bond program, in addition to the temporary increase in 10- and 30-year bonds that began in 2012–13. Overall, the weighted average rate of interest on market debt was 2.27 per cent in 2014–15, down from 2.37 per cent in 2013–14.

Global Bonds and Medium-Term Notes

In March 2015, a 3-year US$3.5 billion global bond was issued at a cost of 3-year US$ London Interbank Offered Rate (LIBOR) less 12 basis points, or at 9 basis points over the comparable US Treasury security. The bond outperformed its peers (sovereigns and supranational institutions issuing in the 3-year sector) and was the largest ever US-dollar global note issued by Canada. In 2014–15, US$697 million of medium-term notes were issued at an average funding cost of 3-month US$ LIBOR less 10 basis points.

Ultra-Long Bonds

The Government of Canada successfully issued a total of $3.5 billion in 50-year bonds through three syndications at a weighted average yield of 2.79 per cent in 2014–15. The issuance of bonds in the ultra-long sector is in line with the Government’s 2012–13 commitment to reallocate short-term bond issuance towards long-term bonds to help reduce refinancing risk and to lock in low funding costs for Canadian taxpayers. The bond issuances had exceptionally strong demand from domestic and international investors, with 36 individual accounts across most investor types participating in the issuances.

Part I
2014–15 Debt Management Context

Composition of Federal Debt

Total market debt increased by $0.8 billion (or about 0.1 per cent) to $649.5 billion (see Table 1). For additional information on the financial position of the Government, see the 2014–15 Annual Financial Report of the Government of Canada.

Table 1
Change in the Composition of Federal Debt, as at March 31
$ billions

 

2015 2014 (Restated) Change
Payable in Canadian currency      
Marketable bonds 487.9 473.3 14.6
Treasury and cash management bills 135.7 153.0 -17.3
Retail debt 5.7 6.3 -0.7
 
Total payable in Canadian currency 629.2 632.6 -3.4
Payable in foreign currencies 20.3 16.0 4.3
Total market debt 649.5 648.7 0.8
Market debt value adjustment, capital lease obligations and other unmatured debt 15.7 10.3 5.4
Total unmatured debt 665.2 659.0 6.2
Pension and other accounts 234.8 231.0 3.8
Total interest-bearing debt 900.0 890.0 10.0
Accounts payable, accruals and allowances 123.6 111.7 11.9
Gross debt 1,023.6 1,001.7 21.9
Total financial assets -336.7 -319.4 -17.3
Total non-financial assets -74.6 -70.4 -4.2
 
Federal debt (accumulated deficit) 612.3 611.9 0.4
Note: Numbers may not add due to rounding.
Source: Public Accounts of Canada.

Sources and Uses of Borrowing

The key reference point for debt management is the financial source/requirement, which represents net cash needs for the fiscal 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. Non-budgetary transactions include changes in federal employee pension accounts; changes in non-financial assets; loans, investments and advances; changes in other financial assets and liabilities; and foreign exchange activities. 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 this publication (see Table 2).

With a budgetary surplus of $2 billion and non-budgetary cash outflows of $5 billion, there was a financial requirement of $3 billion in 2014–15. The financial requirement was approximately $2 billion higher than the projection in the Debt Management Strategy for 2014–15. This compares to a financial source of $18 billion in 2013–14 due to maturing mortgage-backed securities purchased under the Insured Mortgage Purchase Program.

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. On the recommendation of the Minister of Finance, the Governor in Council approved an aggregate borrowing limit of $270 billion for 2014–15.[2]

Total actual borrowings in 2014–15 were $242 billion, $28 billion below the authorized borrowing authority limit, but $10 billion higher than the plan set out in the Debt Management Strategy for 2014–15 (Table 3). The higher level of actual over planned borrowings was mainly due to the issuance of ultra-long bonds, a higher rate of cash management bond buybacks than originally expected, and a greater need for cash to satisfy cross-currency swap collateral obligations.

In 2014–15, loans to the Business Development Bank of Canada, Canada Mortgage and Housing Corporation and Farm Credit Canada under the Crown Borrowing Program were $3 billion lower than the planned $4 billion. Since the inception of the program in 2007–08, the consolidated borrowings of these Crown corporations have grown to account for $46 billion of federal market debt.

Table 2
Planned/Actual Sources and Uses of Borrowings, Fiscal Year 2014–15
$ billions
  Planned1 Actual Difference
Sources of borrowings      
  Payable in Canadian currency      
    Treasury bills 130 136 6
    Bonds 95 99 4
    Retail debt 2 2 0
 
  Total payable in Canadian currency 226 236 10
  Payable in foreign currencies 6 5 -1
 
Total cash raised through borrowing activities 232 242 10
Uses of borrowings2      
Refinancing needs      
  Payable in Canadian currency      
    Treasury bills 152 153 1
    Bonds 71 85 14
    Of which:      
      Regular bond buybacks 0.4 0.5 0.1
      Cash management bond buybacks 16 27 11
    Retail debt 2 2 0
 
  Total payable in Canadian currency 226 240 14
  Payable in foreign currencies 5 4 -1
 
Total refinancing needs 231 243 12

Financial source/requirement      
  Budgetary balance 3 -2 -5
  Non-budgetary transactions      
    Pension and other accounts 0 -3 -3
    Non-financial assets 3 4 1
    Loans, investments and advances -5 -2 3
    Of which:      
    Loans to enterprise Crown corporations 4 1 -3
    Other transactions3 0 5 5
  Total non-budgetary transactions -2 5 7
Total financial source/requirement 1 3 2
Total uses of borrowings 232 246 14
Change in other unmatured debt transactions4 0 -5 -5
Net increase or decrease (-) in cash 0 4 4
Note: Numbers may not add due to rounding.
1 Planned numbers are from Budget 2014 and the Debt Management Strategy for 2014–15.
2 A negative sign denotes a financial source.
3 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.
4 Includes cross-currency swap revaluation, unamortized discounts on debt issues, obligations related to capital leases and other unmatured debt.

Government of Canada Credit Rating Profile

The Government of Canada continued to receive the highest possible credit ratings, with a stable outlook, on Canadian-dollar and foreign-currency-denominated short- and long-term debt from the five rating agencies that evaluate Canada’s debt (see Table 3).

Rating agencies indicated that Canada’s effective, stable and predictable policymaking and political institutions, economic resilience and diversity, well-regulated financial market, and the strength of monetary and fiscal flexibility supported the country’s ongoing triple-A credit rating. The rating agencies indicated that Canada’s debt position would remain favourable, which provides investors of Canadian debt with a sense of security.

Table 3
Government of Canada Credit Ratings
Rating Agency Term Domestic
Currency
Foreign
Currency
Outlook Last Rating
Action
Moody's Investors Service Long-term
Short-term
Aaa
P-1
Aaa
P-1
Stable May 2002
Standard & Poor's Long-term
Short-term
AAA
A–1+
AAA
A–1+
Stable July 2002
Fitch Ratings Long-term
Short-term
AAA
F1+
AAA
F1+
Stable August 2004
Dominion Bond Rating Service Long-term
Short-term
AAA
R-1 (High)
AAA
R-1 (High)
Stable n/a
Japan Credit Rating Agency Long-term AAA AAA Stable n/a

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 are guided by the key principles of transparency, regularity, prudence 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 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 preferred debt structure, is mostly achieved through the deliberate allocation of issuance between various debt instruments.

Composition of Market Debt

The composition of the stock of market debt is a reflection of past debt issuance choices. The effects of changes in the issuance patterns of short-term instruments become visible relatively quickly, while the full effect of issuance changes in longer-term maturities will take their full maturity periods to be fully appreciated. A well-distributed maturity profile ensures a controlled exposure to changes in interest rates over time and provides liquidity across different maturity sectors.

In 2014–15, there was a further transition towards a more even distribution of market debt by remaining term to maturity to help reduce exposure to debt rollover risk. As projected in the Debt Management Strategy for 2014–15, the stock of treasury bills declined mainly as a result of about $10 billion of mortgage-backed securities purchased under the Insured Mortgage Purchase Program maturing in 2014–15. The increase in the stock of bonds with remaining terms to maturity of 10 years or more reflects the temporary increase in longer-term issuance first announced in Budget 2012 and confirmed again in Budgets 2013 and 2014 (see Chart 2).

Chart 2
Composition of Market Debt by Remaining Term to Maturity, as at March 31
Chart 2 - Composition of Market Debt by Remaining Term to Maturity, as at March 31. For details, see the previous paragraph.
Note: Data includes Consumer Price Index adjustment.
Sources: Public Accounts of Canada and Bank of Canada.

Medium-Term Debt Structure

The Government’s medium-term debt strategy is informed by modelling analysis that reflects a wide range of economic and interest rate scenarios drawn from historical experience. As noted above, the medium-term debt strategy is aimed at gradually transitioning the debt structure towards a more even distribution, which improves its cost-risk characteristics.

Since September 2012, the Government has pursued a tactical strategy by reallocating some shorter-term issuance towards long-term issuance to take advantage of long-term interest rates that remain near historically low levels. In 2014–15, the share of bonds with original terms to maturity of 10 and 30 years increased by 2.6 percentage points to 43.4 per cent of the stock of market debt outstanding (see Chart 3).

Chart 3
Composition of Market Debt by Original Term of Issuance, as at March 31
Chart 3 - Composition of Market Debt by Original Term of Issuance, as at March 31. For details, see the previous paragraph.
Source: Bank of Canada.

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).[3] The weighted average rate of interest on market debt was 2.27 per cent in 2014–15, down from 2.37 per cent in 2013–14. As such, the interest rate cost of market debt decreased from $15.4 billion in 2013–14 to a new 10-year low of $14.7 billion in 2014–15, reflecting the lower weighted average rate of interest on market debt and a relatively stable stock of market debt (see Chart 4).

Chart 4
Market Debt Costs and Average Effective Interest Rate
Chart 4 - Market Debt Costs and Average Effective Interest Rate. For details, see the previous paragraph.
Source: Public Accounts of Canada.

Average Term to Maturity and Refixing Share of Market Debt, Net of Financial Assets

The average term to maturity (ATM) of market debt (net of financial assets) declined between 2007–08 and 2011–12, primarily due to a large increase in the issuance of treasury bills and 2-, 3- and 5-year bonds relative to longer-term bonds. In 2014–15, the ATM increased to 8.1 years, reflecting the decision to reduce risk and provide increased stability to the Government’s debt structure by lengthening the term of the portfolio and locking in historically low long-term interest rates (see Chart 5).

Chart 5
Average Term to Maturity of Government of Canada Market Debt, Net of Financial Assets
Chart 5 - Average Term to Maturity of Government of Canada Market Debt, Net of Financial Assets. For details, see the previous paragraph.
Source: Bank of Canada.

The net refixing share of market debt measures the proportion of all market debt that matures or needs to be repriced within one year. In 2014–15, the net refixing share of market debt decreased by 2.8 percentage points to 33.2 per cent (see Chart 6). The net refixing share of market debt to gross domestic product (GDP) measures the amount of market debt that matures or needs to be repriced within one year relative to nominal GDP for that year. The net refixing share of market debt to GDP hit a new low of 7.1 per cent in 2014–15, down 1 percentage point from 2013–14. The refixing share net of assets is used rather than the gross refixing share because the net-of-assets measure better reflects the risk exposure to the Government.

Chart 6
Net Refixing Share of Market Debt and Market Debt to GDP
Chart 6 - Net Refixing Share of Market Debt and Market Debt to GDP. For details, see the previous paragraph.
Source: Bank of Canada.

Prudential Liquidity Management

The Government holds liquid financial assets in the form of domestic cash deposits and foreign exchange reserves to promote investor confidence and safeguard its ability to meet payment obligations in situations where normal access to funding markets may be disrupted or delayed. This also supports investor confidence in Canadian government debt.

The prudential liquidity plan includes a $20 billion deposit at the Bank of Canada, an increase in deposits with financial institutions and a commitment to maintain foreign reserves at or above 3 per cent of nominal GDP.[4] The prudential liquidity plan was fully implemented on June 21, 2013, well in advance of the original target date of March 2014. The Government’s overall liquidity levels now cover at least one month (20 business days) of net projected cash flows, including coupon payments and debt refinancing needs.

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, 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. The following actions promoted a well-functioning Government of Canada securities market in 2014–15.

Providing regular and transparent issuance: The Government of Canada conducted treasury bill auctions on a bi-weekly basis, announced the bond auction schedule prior to the start of each quarter and provided details for each operation in a call-for-tenders in the week leading up to the auction.[5] In 2014–15, there were regular auctions for 2-, 3-, 5-, 10- and 30-year nominal and Real Return Bonds. Regular and pre-announced issuance provided certainty for dealers and investors, allowing them to plan their investment activities, and supported participation and competitive bidding at auctions. Bond issuance schedules were communicated through the Bank of Canada website on a timely basis.

Concentrating on key benchmarks: Consistent with the medium-term debt strategy, benchmark target range sizes in 2014–15 remained the same in the 2-, 3-, 5-, 10- and 30-year and Real Return Bond sectors compared to the previous year:

  • 2-year sector: $8 billion to $12 billion
  • 3-year sector: $8 billion to $12 billion
  • 5-year sector: $10 billion to $13 billion
  • 10-year sector: $10 billion to $14 billion
  • 30-year nominal sector: $12 billion to $15 billion

All benchmark bonds in 2014–15 continued to reach or exceed minimum benchmark size targets (see Chart 7).[6]

Chart 7
Size of Gross Bond Benchmarks in 2014-2015
Chart 7 - Size of Gross Bond Benchmarks in 2014-2015. For details, see the previous paragraph.
Source: Bank of Canada.

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.

The amount of debt maturing per quarter as a percentage of GDP rose to an average of 7.7 per cent during 2009–10 due to an increased stock of treasury bills, but it has since declined to an average of 5.6 per cent in 2014–15 (see Chart 8).

Chart 8
Quarterly Maturities of Domestic Market Debt as a Percentage of GDP
Chart 8 - Quarterly Maturities of Domestic Market Debt as a Percentage of GDP. For details, see the previous paragraph.
Source: Bank of Canada.

As a result of higher debt issuance since the financial crisis, the magnitude of single-day cash flow maturities has increased. At $18.8 billion, the June 1, 2014 maturity and coupon payment was the third largest on record (see Chart 9).

The four additional maturity dates—February 1, May 1, August 1 and November 1—introduced in 2011–12 allow the debt program to absorb potential increases in funding requirements and help smooth the cash flow profile of upcoming maturities over the medium term. The smoothing effect of these additional maturity dates on the cash profile will become more apparent over time. The benchmark maturity date profile is as follows:

  • 2-year sector: February 1, May 1, August 1, November 1
  • 3-year sector: February 1, August 1
  • 5-year sector: March 1, September 1
  • 10-year sector: June 1
  • 30-year sector: December 1, alternating years with Real Return Bond maturities
Chart 9
Single-Day Bond Maturities Plus Coupon Payments, Net of Buyback Operations
Chart 9 - Single-Day Bond Maturities Plus Coupon Payments, Net of Buyback Operations. For details, see the previous paragraph.
Source: Bank of Canada

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 and stable. Diversification of the investor base is pursued by maintaining a domestic debt program that issues securities in a wide range of maturity sectors, which meet the needs of many different types of investors.

As at March 31, 2015, domestic investors (including the Bank of Canada) held about 73 per cent of Government of Canada securities (see Chart 10). Among domestic investors, insurance companies and pension funds held the largest share of Government of Canada securities (32.0 per cent), followed by financial institutions (25.2 per cent) and the Bank of Canada (14.3 per cent). Taken together, the top three categories accounted for over two thirds of outstanding Government of Canada securities.

Chart 10
Distribution of Holdings of Government of Canada Securities
Chart 10 - Distribution of Holdings of Government of Canada Securities. For details, see the previous paragraph.
Source: Statistics Canada.

Non-resident investors held just under 28 per cent of Government of Canada marketable securities, up less than 1 percentage point from 2013–14. This level of non-resident holdings of Government of Canada debt remains in the mid to low range compared to other sovereigns in the G-7 (see Chart 11).

Chart 11
Percentage of Total Marketable Debt of G-7 Countries Held by Non-Residents
Chart 11 - Percentage of Total Marketable Debt of G-7 Countries Held by Non-Residents. For details, see the previous paragraph.
Sources: Statistics Canada, L'Agence France Trésor, Bundesbank, Bancaimi (Italy Central Bank), Ministry of Finance Japan, United Kingdom Debt Management Office, United States Department of Treasury.

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 borrowing program and on the liquidity and efficiency of the Government of Canada securities markets. In 2014–15, debt management strategy consultations were held with 46 organizations. The consultations sought the views of market participants on the functioning of Government of Canada treasury bill and bond markets, and on the terms of participation in auctions. 

In general, market participants reported that Government of Canada securities markets continue to function well across all maturity sectors. As such, no major changes were implemented in the Government of Canada’s borrowing program. More details on the subjects of discussion and views expressed during the 2015–16 debt management strategy consultations are available on the Bank of Canada’s website.[7]

Maintaining a well-functioning securities distribution system: As the Government’s fiscal agent, the Bank of Canada distributes Government of Canada marketable bills and bonds by 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 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.[8]

Quick turnaround times enhance the efficiency of the auction and buyback process, and encourage participation by reducing market risk for participants. In 2014–15, the turnaround time for treasury bill and bond auctions averaged 1 minute 48 seconds. Buyback operations averaged 1 minute 43 seconds. Both of these times were faster than the averages in 2013–14, which were 2 minutes 5 seconds and 4 minutes 30 seconds, respectively.[9]

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 generally imply lower bid-offer spreads.

Turnover ratio, which is the ratio of securities traded relative to the amount of securities outstanding, measures market depth. High turnover implies that a large amount of securities changes hands over a given period of time.

The average daily trading volume in the secondary market for Government of Canada bonds during 2014–15 was $30.3 billion, a decrease of $3.4 billion from 2013–14. This was the first year that average daily bond trading volumes have decreased year-over-year since 2008–09 (see Chart 12).

Chart 12
Government of Canada Bond Average Daily Trading Volumes
Chart 12 - Government of Canada Bond Average Daily Trading Volumes. For details, see the previous paragraph.
Source: Bank of Canada.

The annual debt stock turnover ratio in the Government of Canada secondary bond market was 16.7 in 2014–15, the lowest level since 2009–10 (see Chart 13).

Chart 13
Annual Turnover Ratio for Government of Canada Bonds
Chart 13 - Annual Turnover Ratio for Government of Canada Bonds. For details, see the previous paragraph.
Note: Turnover ratio is total trading volume in each calendar year/average stock.
Source: Bank of Canada.

Supporting secondary market liquidity: The Bank of Canada operates a securities-lending program to support the liquidity of Government of Canada securities by providing a secondary and temporary source of securities to the market. The program is triggered when market pricing for Government of Canada bonds and bills moves beyond a specified point.[10] 

Throughout 2014–15, the markets for a number of Government of Canada bonds continued to experience tightness, particularly in repo markets. A bond is considered “tight”, or trading “on special”, when the repo rate (i.e., the rate of interest to be paid on the loan in a repurchase agreement between two parties) is below the general collateral rate (i.e., the repo rate on general collateral, or in this case, the Bank of Canada’s overnight rate). To provide relief for these bonds, the Bank of Canada conducted 288 securities-lending operations in 2014–15, compared to 277 operations in 2013–14 (see Chart 14).

Chart 14
Securities Lending Operations for All Bonds Lent
Chart 14 - Securities Lending Operations for All Bonds Lent. For details, see the previous paragraph.

Using the regular bond buyback program: Bond buyback operations on a cash basis and on a switch basis involve the purchase of bonds with a remaining term to maturity of 12 months to 25 years. Bond buyback operations on a cash basis involve the exchange of a bond for cash. Bond buyback operations on a switch basis, on the other hand, involve the exchange of one bond for another, on a duration-neutral basis (e.g., an off-the-run bond for the building benchmark bond).[11]

In 2014–15, one regular bond buyback on a switch basis was used to promote liquidity in a bond that is being built to become a benchmark bond. The switch operation amounted to $0.5 billion, which was $0.5 billion lower than the total amount of switch operations that occurred in 2013–14. Regular bond buybacks on a cash basis were not used in 2014–15.

Part III
Report on the 2014–15 Debt Program

In 2014–15, treasury bill and bond auctions continued to perform well. Demand for Government of Canada securities remained strong throughout the fiscal year as a result of persistent demand for high-quality sovereign debt securities, and Canada’s strong fiscal and economic position.

Domestic Marketable Bonds

Bond Program

In 2014–15, gross bond issuance was $98.6 billion (including issuance through switch buybacks), about $11.1 billion higher than the $87.5 billion issued in 2013–14. Gross issuance consisted of $96.4 billion in nominal bonds (including switch operations) and $2.2 billion in Real Return Bonds (see Table 4). When taking into account net issuance and maturities, the stock of outstanding bonds increased by $14.6 billion to $487.9 billion, as at March 31, 2015.

Table 4
Annual Bond Program Operations
$ billions
  2010–11 2011–12 2012–13 2013–14 2014–15
Nominal 88.4 95.3 92.6 84.5 96.0
Nominal (switch) 4.9 2.4 0.8 0.8 0.4
Real Return Bonds 2.2 2.2 2.2 2.2 2.2
Total gross issuance 95.5 99.9 95.6 87.5 98.6
Cash buyback 0.0 -3.0 -4.0 0.0 0.0
Switch buyback -4.4 -3.0 -1.1 -1.0 -0.5
Total buyback -4.4 -5.9 -1.5 -1.0 -0.5
Net issuance 91.2 94.0 94.1 86.5 98.1
Note: Numbers may not add due to rounding.
Source: Bank of Canada.

Auction Result Indicators for Domestic Bonds

Auction coverage is defined as the total amount of bids received, including 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. Bond auctions in 2014–15 continued to be well-covered across all sectors, but were below 5-year averages.

The auction tail represents the number of basis points between the highest yield accepted and the average yield of an auction. A small auction tail is preferable as it is generally indicative of better transparency in the pricing of securities. Average auction tails were below the 5-year average across all maturities in 2014–15, with the exception of the auction tail for the 5-year sector, which was only slightly above the 5-year average (see Table 5). A total of 32 nominal bond auctions were conducted in 2014–15, three more than in 2013–14.[12]

Table 5
Performance at Domestic Bond Auctions
    Nominal Bonds Real Return Bonds
   

    2-Year 3-Year 5-Year 10-Year 30-Year 30-Year
Tail 2014–15 0.18 0.25 0.36 0.44 0.35 n/a
Tail 5-year average 0.24 0.35 0.35 0.53 0.37 n/a
Coverage 2014–15 2.67 2.54 2.48 2.42 2.63 2.37
Coverage 5-year average 2.73 2.70 2.61 2.51 2.66 2.51

Notes: Tail represents the number of basis points between the highest yield accepted and the average yield of an auction. Coverage is defined as the total amount of bids received, including bids from the Bank of Canada, divided by the amount auctioned. Tail and coverage ratio were calculated as the weighted averages, where the weight assigned to each auction equals the percentage total allotment in the auction’s issuance sector.
Source: Bank of Canada.

Participation at Domestic Bond Auctions

In 2014–15, primary dealers (PDs) were allotted 67 per cent of auctioned nominal debt securities and customers were allotted 11 per cent (see Table 6).[13] In aggregate, the 10 most active participants were in total allotted 90 per cent of these securities. Primary dealers’ share of the Real Return Bond allotments increased considerably from 40 per cent in 2013–14 to 55 per cent in 2014–15, while over the same period customers’ allocations decreased from 60 per cent to 44 per cent.

Table 6
Historical Share of Bonds Allotted by Participant Category1
Participant Type 2010–11 2011–12 2012–13 2013–14 2014–15





($ billions) (%) ($ billions) (%) ($ billions) (%) ($ billions) (%) ($ billions) (%)
Nominal Bonds                    
  PDs 68 85 66 84 61 83 54 79 62 84
  Non-PD GSDs 0 0 0 0 2 3 6 9 2 3
  Customers 12 15 12 15 12 16 7 10 10 14
  Top 5 participants 44 50 52 55 50 54 51 60 60 65
  Top 10 participants 69 78 77 80 73 79 70 83 83 90
 
  Total nominal bonds issued 80   79   74   68   74  
 
Real Returns Bonds                    
  PDs 1 52 1 37 1 36 1 40 1 55
  Non-PD GSDs 0 0 0 0 0 0 0 0 0 0
  Customers 1 48 1 62 1 64 1 60 1 44
  Top 5 participants 1 56 1 48 1 59 1 53 1 54
  Top 10 participants 2 75 2 69 2 80 2 77 2 76
 
  Total Real Return Bonds Issued 2   2   2   2   2  
Note: Numbers may not add due to rounding.
1 Not including Bank of Canada allotment.
Source: Bank of Canada.

Ultra-Long Bond

In 2014–15, the Government issued 50-year bonds for the first time, seeking to take advantage of historically low long-term interest rates. A total of $3.5 billion of the 2.75 per cent December 1, 2064 bond was issued through three syndications at yields below newly issued 30-year Government of Canada bonds (see Table 7). Each syndication received exceptionally strong demand from both domestic and international investors, with allocation mainly going to insurance companies, pension funds and asset managers. The issuance of ultra-long bonds leads to slightly higher interest cost for the Government’s market debt through the medium term as yields on shorter-term debt are typically lower. However, it allows the Government to lock in historically low long-term rates that may save the Government money in the long term if interest rates rise over the life of the bond.

Table 7
2.75% December 1, 2064 Issuance
Date of Issuance Amount
($ Billions)
Yield Spread to 2045 Benchmark
(Inversion)
April 28, 2014 1.5 2.96 -1.0
July 10, 2014 1.0 2.76 -2.5
November 20, 2014 1.0 2.575 -0.5

Treasury Bills and Cash Management Bills

During 2014–15, $304.5 billion in 3-, 6- and 12-month treasury bills were issued, a decrease of $48.0 billion from the previous year. There were also 28 cash management bill operations for a total of $62.7 billion in 2014–15, compared to 29 operations and a total of $66.0 billion in 2013–14. Together, treasury bill and cash management bill issuance totalled $367.2 billion. As at March 31, 2015, the combined treasury and cash management bill stock totalled $135.7 billion, a decrease of $17.3 billion from the end of 2013–14 (see Chart 15).

Chart 15
Treasury Bills Outstanding and as a Share of Marketable Domestic Debt
Chart 15 - Treasury Bills Outstanding and as a Share of    Marketable Debt. For details, see the previous paragraph.
Source: Bank of Canada.

In 2014–15, all of the treasury bill and cash management bill auctions were fully covered. Coverage ratios for treasury bill auctions in 2014–15 were slightly lower than the 5-year average and were consistent with the trend observed at bond auctions (see Table 8).

Table 8
Performance at Treasury Bill and Cash Management Bill Auctions
  3-Month 6-Month 12-Month Cash Management Bills
Tail        
  2014–15 0.27 0.23 0.24 1.36
  5-year average 0.39 0.37 0.44 1.33
Coverage        
  2014–15 2.09 2.40 2.46 2.37
  5-year average 2.22 2.52 2.54 2.46
Notes: Tail represents the number of basis points between the highest yield accepted and the average yield of an auction. Coverage is defined as the total amount of bids received, including bids from the Bank of Canada, divided by the amount auctioned. Tail and coverage ratio were calculated as the weighted averages, where the weight assigned to each auction equals the percentage total allotment in the auction’s issuance sector.
Source: Bank of Canada.

Participation at Treasury Bill Auctions

In 2014–15, the share of treasury bills allotted to primary dealers increased by 6 percentage points to 84 per cent, while the share allotted to customers decreased by 5 percentage points to 16 per cent (see Table 9). The 10 most active participants were in total allotted 85 per cent of these securities.

Table 9
Historical Share of Amount Allotted to Participants by Type of Auction1
Treasury Bills
Participant Type 2010–11 2011–12 2012–13 2013–14 2014–15
 




  ($ billions) (%) ($ billions) (%) ($ billions) (%) ($ billions) (%) ($ billions) (%)
PDs 285 84 271 78 279 75 274 78 307 84
Non-PD GSDs 4 1 7 2 10 3 4 1 0 0
Customers 50 15 68 20 84 23 75 21 60 16
Top 5 participants 219 64 206 60 236 63 221 63 230 63
Top 10 participants 287 85 292 85 308 83 301 85 310 85
 
Total treasury bills issued 376 339 373 353 367
Note: Numbers may not add due to rounding.
1 Including of Bank of Canada allotment.
Source: Bank of Canada.

Foreign Currency Debt

Foreign currency debt is used to fund the Exchange Fund Account (EFA), which represents the largest component of the official international reserves. The EFA is primarily made up of liquid foreign currency securities and special drawing rights (SDRs). Liquid foreign currency securities are composed primarily of the debt securities of highly rated sovereigns, their agencies that borrow in public markets and are supported by a comprehensive government guarantee, and highly rated supranational organizations. SDRs are international reserve assets created by the International Monetary Fund (IMF) whose value is based on a basket of international currencies. The official international reserves also include Canada’s reserve position at the IMF. This position, which represents Canada’s investment in the activities of the IMF, fluctuates according to drawdowns and repayments from the IMF. The Report on the Management of Canada’s Official International Reserves (www.fin.gc.ca/purl/efa-eng.asp) provides information on the objectives, composition and performance of the reserves portfolio.

The market value of Canada’s official international reserves increased to US$77.7 billion as at March 31, 2015 from US$76.5 billion as at March 31, 2014. The change comprised a US$3.085 billion increase in EFA assets and a US$1.854 billion decrease in the reserve position in the IMF. EFA assets totalled US$74.9 billion as at March 31, 2015. Assets were held at a level consistent with the Government’s commitment to maintain holdings of liquid foreign exchange reserves at or above 3 per cent of GDP. EFA assets are composed primarily of the debt securities of highly rated sovereigns, agencies that borrow on public markets and are supported by a comprehensive government guarantee, and supranational organizations.

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 bond issues. Total cross-currency swap funding and maturities during the reporting period were US$7.1 billion and US$3.2 billion respectively.

In addition to cross-currency swaps of domestic bond issues, the EFA can be funded through a short-term US-dollar paper program (Canada bills), medium-term note (MTN) issuance in various markets (Canada notes, euro medium-term notes (EMTNs)) and international bond issues (global bonds), the use of which depends on funding needs and market conditions (see Table 10).

Table 10
Outstanding Foreign Currency Issues
par value in billions of US dollars
March 31, 2015 March 31, 2014 Change
Swapped domestic issues 47,036 44,767 2,269
Global bonds 11,650 11,755 -105
Canada bills 2,991 2,021 970
Euro medium-term notes 961 125 836
Canada notes 400 550 -150
Total 63,038 59,218 3,820
Note: Liabilities are stated at the exchange rates prevailing on March 31, 2015.
Source: Department of Finance.

In March 2015, a 3-year US$3.5 billion global bond was issued at a cost of 3-year US$ LIBOR less 12 basis points. Priced at 9 basis points over the comparable US Treasury security, the global bond outperformed its peers (sovereigns and supranational institutions) issuing at the 3-year point of the curve. This was the largest ever US-dollar global note issued by Canada. As at March 31, 2015, the Government of Canada had four global bonds outstanding (see Table 11). As with all foreign currency borrowing conducted by the Government of Canada, the proceeds from global bond issuance supplement Canada’s foreign exchange reserves and further diversify the funding base.

Table 11
Government of Canada Global Bonds Outstanding, as at March 31, 2015
Year of Issuance Market Amount in Original Currency Yield
(%)
Term to Maturity
(Years)
Coupon
(%)
Benchmark
Interest Rate—Government Bonds
Spread From
Benchmark at
Issuance (Basis Points)
Spread Over Swap Curve in Relevant Currency on Issuance Date (Basis Points)
2009 Global US$3 billion 2.498 5 2.375 US 23.5 LIBOR – 15.0
2010 Global €;2 billion 3.571 10 3.500 Germany 19.4 EURIBOR + 2.0
2012 Global US$3 billion 0.888 5 0.875 US 8.0 LIBOR – 23.5
2014 Global US$3.5 billion 1.658 5 1.625 US 11.0 LIBOR – 1.0
Note: EURIBOR = Euro Interbank Offered Rate.
Source: Department of Finance.

After having been absent from the MTN market for several years, Canada returned to the market to further diversify the sources of funding available for Canada’s foreign exchange reserves. This program provides the Government with additional flexibility to raise foreign currency. The program allows for issuance in a number of currencies, including the US dollar, euro and pound sterling, using either a US or EMTN prospectus. During 2014–15, US$697 million of MTNs were issued at an average funding cost of 3-month US$ LIBOR less 10 basis points (see Table 12).

Table 12
Government of Canada Medium-Term Notes Outstanding, as at March 31, 2015
Year of Issuance Market Amount in Original Currency (Millions) Yield Term to Maturity (Years) Fixed/
Floating
Interest Rate Basis Index Maturity Spread Over Swap Curve in Relevant Currency on Issuance Date (Basis Points)
2013 Canada notes $50 1.86% 6 Fixed LIBOR – 2
2013 Canada notes $50 6 Floating US$ LIBOR 3 month LIBOR – 2
2013 Canada notes $50 2.30% 7 Fixed LIBOR + 0
2014 Canada notes $400 3 Floating US$ LIBOR 3 month LIBOR – 8
2014 EMTN $125 6 Floating US$ LIBOR 3 month LIBOR + 0
2014 EMTN $125   6 Floating US$ LIBOR 3 month LIBOR + 0
2014 Canada notes $100   6 Floating US$ LIBOR 3 month LIBOR – 2
2014 Canada notes $250   6 Floating US$ LIBOR 3 month LIBOR – 2
2014 Canada notes $50   6 Floating US$ LIBOR 3 month LIBOR – 3
2015 EMTN $161 0.15% 6 Fixed EURIBOR 6 month EURIBOR – 27.5
Note: EURIBOR = Euro Interbank Offered Rate.
Source: Department of Finance.

Retail Debt

In 2014–15, the level of outstanding Canada Savings Bonds and Canada Premium Bonds held by retail investors decreased from $6.3 billion to $5.7 billion. Retail debt represented around 0.9 per cent of total market debt as at March 31, 2015 (see Chart 16).

Chart 16
Evolution of Retail Debt Stock, as of March 31
Chart 16 - Evolution of Retail Debt Stock, as of March 31. For details, see the previous paragraph.
Source: Bank of Canada.

Gross sales and redemptions were $1.5 billion and $2.2 billion, respectively, for a net reduction of $0.7 billion in the stock of retail debt (see Table 13).

Table 13
Retail Debt Gross Sales and Redemptions, 2014–15
$ billions
  Gross Sales Redemptions Net Change
Payroll 1.4 1.5 -0.1
Cash 0.1 0.7 -0.6
Total 1.5 2.2 -0.7
Note: Numbers may not add due to rounding.
Source: Bank of Canada.

Cash Management

The Bank of Canada, as the Government’s fiscal agent, 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.

Cash consists of money on deposit to the credit of the Receiver General for Canada with the Bank of Canada, chartered banks and other financial institutions. Cash with the Bank of Canada includes operational balances and balances held for the prudential liquidity plan.

RG cash balances increased by $1.6 billion to $27.6 billion by the end of 2014–15 (see Table 14 and Chart 17).

Table 14
Daily Liquidity Position
$ billions
  March 31, 2014 March 31, 2015 Average Net Change
Callable deposits with the Bank of Canada 20.0 20.0 20.0 0.0
Balances with the Bank of Canada 2.0 1.5 1.8 -0.5
Balances with financial institutions 4.0 6.2 3.6 2.2
Total 26.0 27.6 26.8 1.6
Note: Numbers may not add due to rounding.
Source: Bank of Canada.
Chart 17
Daily Liquidity Position for 2014–15
Chart 17 - Daily Liquidity Position for 2014-15. For details, see the previous paragraph.
Source: Bank of Canada.

Investment of Receiver General Cash Balances

RG cash balances are invested in a prudent and cost-effective manner via short-term deposits allocated through auctions to chartered banks and other 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. Roughly 90 per cent of daily RG cash balances are auctioned off in the morning auction while the remaining 10 per cent are auctioned off in the afternoon auction. These auctions serve two main purposes: first, as a treasury management tool, they are the means by which the Government invests its excess 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.

Amendments to the terms governing the morning auction of RG cash balances became effective April 1, 2014. These changes reflect evolving market practices and will serve to reduce the Government’s exposure to counterparty credit risk. The changes include amendments to participant eligibility requirements, moving all transactions to a repo framework (i.e., fully secured reverse repurchase agreements), and ensuring eligible securities closely align with those accepted under the Bank of Canada’s Standing Liquidity Facility. These changes will also reduce reliance on credit rating agency ratings for funds management activities, in accordance with G-20 Leaders’ call for accelerated progress in this area.

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. As a result of the changes mentioned above, the morning auction is now fully collateralized. The afternoon auction remains completely uncollateralized as the auction process typically takes place late in the day and, as a result, operational constraints do not allow for collateralization before day’s end (see Chart 18).

Chart 18
Allocation of Cash Balances for Receiver General Auctions
(Average of Daily Balances for Each Month of 2013–14 Fiscal Year)
Chart 18 - Allocation of Cash Balances for Receiver General Auctions. For details, see the previous paragraph.
Source: Bank of Canada.

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 cash balances auctioned to financial institutions (typically around the overnight rate) and the weighted average yield paid on treasury bills. A normal upward sloping yield curve results in a cost of carry for the Government, 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 issue treasury bills. 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 2014–15, treasury bill yields traded predominantly below the overnight rate, resulting in a gain of carrying cash of $3.2 million for the fiscal year, compared to a loss of $0.8 million in 2013–14 and a loss of
$2.2 million in 2012–13.

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 and coupon payment dates. The program also helps smooth variations in treasury bill auction sizes over the year and reduce rollover risk. Securities targeted under this program are Government of Canada bonds with a term to maturity of up to 18 months where the total amount of maturing bonds is greater than $8 billion.

In 2014–15, the total amount of bonds repurchased through the CMBB program was $27.3 billion, compared to $33.1 billion in 2013–14. With the maximum amount of CMBBs allowed for these years being $33.5 billion and $40.3 billion respectively, the program had a success rate of 82 per cent for 2014–15 and 82 per cent for 2013–14. Overall, the CMBB program, together with the switch buyback and cash buyback programs, has contributed to reducing the size of the 2014 May 1, June 1, August 1, November 1 and December 1, as well as the 2015 February 1, bond maturities by about 39 per cent, from a total of $93.8 billion outstanding when first targeted by the program to $56.8 billion outstanding at time of maturity.

Together, the CMBB and regular bond buyback programs have been an important factor in smoothing the amount of bonds outstanding across different maturity dates. This is especially evident for the June maturities in 2011, 2012, 2013 and 2014 (see Chart 19).

Chart 19
Impact of Repurchase Operations on Bond Maturities
Chart 19 - Impact of Repurchase Operations on Bond    Maturities. For details, see the previous paragraph.
Source: Bank of Canada.

Annex 1
Completed Treasury Evaluation Reports

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.

Treasury Evaluation Reports
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 Framework1 2002
Bond Buybacks1 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
Evaluation of the Debt Auction Process1 2010
Evaluation of the Asset Allocation Framework of the Exchange Fund Account1 2012
Report of the Auditor General of Canada on Interest-Bearing Debt2 2012
Crown Borrowing Program Evaluation1 2013
Retail Debt Evaluation1 2015
1 Available on the Department of Finance website.
2 This audit was conducted outside of the Treasury Evaluation Program.

Annex 2
Debt Management Policy Measures Taken Since 1997

The fundamental objective of debt management is to raise stable and low-cost funding to meet the needs of the Government of Canada. Achieving stable, low-cost funding involves striking a balance between debt costs and various risks in the debt structure, which is mostly achieved through the deliberate allocation of issuance between various debt instruments. An associated objective of debt management is to maintain a well-functioning market in Government of Canada securities, which benefits 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. The following table lists significant policy measures that have been taken to achieve stable, low-cost funding and ensure a well-functioning Government of Canada securities market.

Debt Management Policy Measures
Measure Year
Dropped the 3-year bond benchmark 1997
Moved from weekly to bi-weekly treasury bill auctions 1998
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 1999
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
Reduced targeted turnaround times for auctions and buyback operations 2001
Advanced the timing of treasury bill auctions from 12:30 p.m. to 10:30 a.m. 2004
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 2005
Dropped one quarterly 2-year auction 2006
Announced the maintenance of benchmark targets through fungibility (common dates) 2006
Consolidated the borrowings of three Crown corporations 2007
Changed the maturity of the 5-year benchmark and dropped one quarterly 5-year auction 2007
Reintroduced the 3-year bond benchmark 2009
Increased the frequency of cash management bond buyback operations from bi-weekly to weekly 2010
Announced a new framework for the medium-term debt management strategy 2011
Announced plans to increase the level of prudential liquidity by $35 billion over 3 years 2011
Added four new maturity dates—February 1, May 1, August 1 and November 1 2011
Increased benchmark target range sizes in the 2-, 3- and 5-year sectors 2011
Announced a temporary increase in longer-term debt issuance 2012
Announced changes to the Terms and Conditions Governing the Morning Auction of Receiver General Cash Balances 2013
Introduced ultra-long bond issuance 2014

Annex 3
Glossary

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

average term to maturity: The weighted average amount of time until the securities in the debt portfolio mature.

benchmark bond: A bond that is considered by the market to be the standard against which all other bonds in that term area are evaluated against. It is typically a bond issued by a sovereign, since sovereign debt is usually the most creditworthy within a domestic market. Usually it is the most liquid bond within each range of maturities and is therefore priced accurately.

budgetary deficit: The shortfall between government annual revenues and annual budgetary expenses.

buyback on a cash basis: The repurchase of bonds for cash. Buybacks on a cash basis are used to maintain the size of bond auctions and new issuances.

buyback on a switch basis: The exchange of outstanding bonds for new bonds in the current building benchmark bond.

Canada bill: A 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: A 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 debt obligation for another involving different currencies and the exchange of the principal amounts and interest payments.

duration: Measures the sensitivity of the price of a bond or portfolio to fluctuations in interest rates. It is a measure of volatility and is expressed in years. The higher the duration number, the greater the interest rate risk for bond or portfolio prices.

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): An account that aids 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: 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.

fixed-rate share of market debt: The proportion of market debt that does not mature or need to be repriced within one year (i.e. the inverse of the refixing share of market debt).

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: An investment dealer or bank that is authorized to bid at Government of Canada auctions and through which the Government distributes Government of Canada treasury bills and marketable bonds.

interest-bearing debt: Debt consisting of unmatured debt, or debt issued on the credit markets, liabilities for pensions and other future benefits, and other liabilities.

Large Value Transfer System: 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, 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: 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: A member of the core group of government securities distributors that maintain 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: A bond whose interest payments are based on real interest rates. Unlike standard fixed-coupon marketable bonds, the semi-annual interest payments on Government of Canada Real Return Bonds are determined by adjusting the principal by the change in the Consumer Price Index.

refixing share of market debt: The proportion of market debt that matures or needs to be repriced within one year (i.e. the inverse of the fixed-rate share of market debt).

refixing share of market debt to gross domestic product (GDP): The amount of market debt that matures or needs to be repriced within one year relative to nominal GDP for that year.

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

sovereign market: The market for debt issued by a government.

treasury bill: A 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.

ultra-long bond: A bond with a maturity of 40 years or longer.

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

Consultations and Communications Branch
Department of Finance Canada
14th floor
90 Elgin Street
Ottawa, Ontario K1A 0G5

Phone: 613-369-3710
Facsimile: 613-369-4065
TTY: 613-995-1455
E-mail: finpub@fin.gc.ca

Media Enquiries:
613-369-4000


1 In 2014–15, there were regular auctions for 2-, 3-, 5-, 10- and 30-year nominal bonds and Real Return Bonds, and, for the first time, a 50-year nominal bond was issued through syndication.

2 Approved Orders in Council (OIC) are available on the Privy Council Office website. The reference number for the 2014–15 OIC is 2014-0258.

3 Non-market liabilities include pensions, other employee and veteran future benefits, and other liabilities.

4 For more information on Canada’s foreign reserves, see the Report on the Management of Canada’s Official International Reserves.

5 See the Bank of Canada website.

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 exceeds the minimum benchmark size.

7 See the Bank of Canada website.

8 See the Bank of Canada website.

9 The turnaround time is the time taken between the submission of a bid and the return of the complete output to the auction participant. 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. Average times in 2013–14 were slower due to a buyback operation that took over 120 minutes and three auctions that took between 8 and 22 minutes.

10 For bonds, the minimum bid rate is the lower of 150 basis points or 50 per cent of the Bank’s target for the overnight rate (i.e., 150 basis points for target rates of 3 per cent or higher). For treasury bills, the minimum bid rate is the lower of 100 basis points or 50 per cent of the Bank’s target for the overnight rate when the target rate is below 2 per cent.

11 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.

12 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. See Section 6 of the Standard Terms for Auctions of Government of Canada Real Return Bonds.

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

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