Archived - Debt Management Report 2013–2014 - Part 1

Table of Contents

Prudent and sound fiscal management has been the cornerstone of the Government's unflagging commitment to strengthening the resilience of the Canadian economy. This approach has served Canadians well.

The Government is on track to balance the budget in 2015 and, this year, the deficit was reduced to $5 billion. Over the past fiscal year, the stock of market debt declined $19.3 billion, bringing the total stock to $648.7 billion.

On the world economic stage, Canada remains an example to be followed. For the seventh year in a row, the World Economic Forum rated Canada's banking system the world's soundest. Canada's net debt-to-GDP ratio is less than half the average of our G-7 partners. The major credit rating agencies continue to accord Canada a top triple-A rating with a stable outlook, one shared by very few countries.

Turning to recent developments in debt management, strong demand for Government of Canada debt securities continued this year. Treasury bill and bond auctions were well-covered and well-bid, testifying to the strength of Canadian capital markets. Since 2012–13, the Government has pursued a temporary tactical strategy of reallocating short-term issuance towards long-term bonds. With long-term rates remaining near historic lows, it has been advantageous and prudent to continue to lock in additional long-term funding, primarily through a temporary increase in the issuance of 10- and 30-year bonds. In addition, in this fiscal year alone, the Government has issued a total of $3.5 billion in 50-year bonds. Overall, this contributes to a reduction in refinancing risk at a low cost, which is consistent with the key objectives of the medium-term debt strategy.

A liquid, well-functioning government securities market has played a key role in the ongoing success of Canada's Economic Action Plan. I invite you to review this year's Debt Management Report, and our Government's continuing commitment to prudent fiscal management that benefits all Canadians.

The Honourable Joe Oliver, P.C., M.P.
Minister of Finance
Ottawa, December 2014

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, 2014.

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 2013–14, published on March 21, 2013 as Annex 1 of Budget 2013 [PDF 9.13 MB]. 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.

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.

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.

With total liabilities of $1,000.8 billion, financial assets of $318.5 billion and non-financial assets of $70.4 billion, the federal debt (accumulated deficit) stood at $611.9 billion as at March 31, 2014, while the Government of Canada's market debt totalled $648.7 billion (see Chart 1).

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 (RRBs) 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. 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.

The stock of market debt decreased by $19.3 billion in 2013–14, bringing the total stock to $648.7 billion. The change in the stock was mainly comprised of a $4.3 billion increase in domestic marketable bonds, a $27.7 billion decrease in treasury and cash management bills, a $5.2 billion increase in foreign currency debt and a $1.2 billion decrease in retail debt outstanding.

In 2013–14, 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 well-bid.

The Government has pursued a temporary tactical strategy of reallocating short-term issuance towards long-term bonds since 2012–13. With long-term rates remaining near historic lows, it was advantageous and prudent for the Government to continue to lock in additional long-term funding in 2013–14, primarily through a temporary increase in the issuance of 10- and 30-year bonds. Overall, the additional long-term issuance contributes to a reduction in refinancing risk at a low cost, which is consistent with the key objectives of the medium-term debt strategy. Accordingly, the weighted average rate of interest on market debt was 2.37 per cent in 2013–14, down from 2.45 per cent in 2012–13.

In February 2014, a 5-year US$3 billion global bond was issued at a cost of 3-month US$ London Interbank Offered Rate (LIBOR) less 1 basis point. This was the tightest pricing versus Treasuries for a 5-year global bond since Canada's last issue in February 2012. This transaction was met with very strong demand, with interest from over 150 high-quality investors from around the globe.

The Government of Canada successfully launched a medium-term note pilot program in November 2013. 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 euro medium-term note prospectus. In 2013–14, US$675 million of medium-term notes was issued at an average funding cost of 3-month US$ LIBOR less 5 basis points.

During the financial crisis, the Insured Mortgage Purchase Program (IMPP) was introduced as a temporary measure to help address the liquidity crisis and make funds available for consumers, businesses and homebuyers. About $42 billion in mortgage-backed assets purchased by the Government under the IMPP matured between October 15, 2013 and March 15, 2014. The large cash inflows resulting from these asset maturities helped reduce the stock of treasury bills, which fell from $180.7 billion at the start of the year to $153 billion at year end. As at March 31, 2014, approximately $10 billion in IMPP assets remained outstanding with a final maturity in March 2015.

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

Changes to the Terms and Conditions Governing the Morning Auction of Receiver General Cash Balances (the Terms) were announced in August 2013 and became effective on April 1, 2014. The Terms set forth procedures for the auctioning of Receiver General (RG) excess cash balances, which allow the Government to earn a competitive market-driven rate of return on these balances. The revisions include a move to a fully collateralized basis for the morning auction of RG cash balances, which reflects evolving market practices and will serve to reduce the Government's exposure to counterparty credit risk.

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).

Rating agencies indicated that Canada's extremely effective, stable and predictable policymaking and political institutions, the resilience of the economy, better-than-average fiscal and external indicators, 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.

Total market debt decreased by $19.3 billion (or about 3 per cent) to $648.7 billion, mainly due to a decrease in the stock of treasury bills (see Table 2). For additional information on the financial position of the Government, see the 2013–14 Annual Financial Report of the Government of Canada.

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 3).

With a budgetary deficit of $5 billion and non-budgetary cash inflows of $23 billion, there was a financial source of $18 billion in 2013–14. This compares to a financial requirement of $30 billion in 2012–13. The financial source was approximately $4 billion lower than the projection in the Debt Management Strategy for 2013–14. Although largely offset by improvements in the budgetary balance, the primary driver for the lower-than-expected financial source was higher than projected accounting adjustments, which are included in other transactions.

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 $300 billion for 2013–14.^[1]

Total actual borrowings in 2013–14 were $251 billion, $49 billion below the authorized borrowing authority limit, but $9 billion higher than the plan set out in the Debt Management Strategy for 2013–14 (Table 3). The higher level of actual over planned borrowing was mainly due to larger-than-expected refinancing needs. These higher needs were primarily driven by higher-than-anticipated cash management buybacks on bonds which had less than 18 months to maturity.^[2]

In 2013–14, loans to the Business Development Bank of Canada, Canada Mortgage and Housing Corporation and Farm Credit Canada under the Crown Borrowing Program were $2 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 $45 billion of federal market debt. It is important to note that activity under the Crown Borrowing Program does not affect the federal debt (accumulated deficit), since increased federal borrowing is matched by assets in the form of loans to the Crown corporations.

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 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.

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.

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 are 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 2013–14, 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 2013–14, the stock of treasury bills declined mainly as a result of about $42 billion of mortgage-backed securities purchased under the IMPP maturing in the latter half of 2013–14. 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 Budget 2013 (see Chart 2).

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 2013–14, the share of bonds with original terms to maturity of 10 and 30 years increased by 3.4 percentage points to 40.8 per cent of the stock of market debt outstanding (see Chart 3).

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 2.37 per cent in 2013–14, down from 2.45 per cent in 2012–13. As such, the cost of market debt decreased from $16.4 billion in 2012–13 to $15.4 billion in 2013–14, reflecting the lower weighted average rate of interest on market debt and a lower stock of market debt (see Chart 4).

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 2013–14, the ATM was 7.43 years, which was slightly longer than the recent low of 7.37 years reached in 2011–12, reflecting the plan to gradually lengthen the term of the portfolio and lock in low interest rates (see Chart 5).

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 2013–14, the net refixing share of market debt increased by 1.6 percentage points to 36 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 had been relatively steady since 2004–05 and in 2013–14 it was 8.1 per cent, up 0.3 percentage points from 2012–13. 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.

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. In Budget 2011, the Government announced its intention to increase its liquidity position. Under the new liquidity plan, the Government's overall liquidity levels will cover at least one month (or 20 business days) of net projected cash flows, including coupon payments and debt refinancing needs.

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. 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.

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. The following actions promoted a well-functioning Government of Canada securities market in 2013–14.

Providing regular and transparent issuance: The Government of Canada conducts treasury bill auctions on a bi-weekly basis, announces the bond auction schedule prior to the start of each quarter and provides details for each operation in a call-for-tender in the week leading up to the auction.^[4] In 2013–14, there were regular auctions for 2-, 3-, 5-, 10- and 30-year nominal bonds, as well as for 30-year RRBs. 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 and market participant recommendations, benchmark target range sizes remained the same in 2013–14 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

As in recent years, all benchmark bonds in 2013–14 continued to reach or exceed minimum benchmark size targets (see Chart 7).^[5]

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).^[6]

In 2013–14, regular bond buybacks on a switch basis were used to promote liquidity in bonds that are being built to become benchmark bonds. The two switch operations that occurred amounted to $1.0 billion, $0.5 billion lower than in 2012–13. Regular bond buybacks on a cash basis were not used in 2013–14.

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 borrowing program and on the liquidity and efficiency of the Government of Canada securities market. In 2013–14, debt management strategy consultations were held with 38 organizations. The focus of the consultations was on obtaining feedback regarding the effectiveness of the Government's debt distribution framework. Additionally, market participants' views were sought regarding trends affecting the Government of Canada securities market, retail investor demand for securities and access to wholesale Government of Canada securities.

In general, market participants reported that Government of Canada securities markets continue to function well across all maturity sectors. Participants noted that demand for bonds with maturities of 40 years or longer from insurance companies, pension funds and other investors had softened. Participants indicated that they were well aware of the reduction in the stock of treasury bills planned for the last half of 2013–14. Market participants expressed concerns about the ongoing tightness in the repurchase agreement (repo) markets for Government of Canada securities, which they characterized as a structural issue. While dealers reported that Government of Canada debt securities auctions function well, they noted that the terms governing the auctions could be updated to ensure their continued relevance. In terms of retail debt, retail asset brokers and managers indicated that less than 2 per cent of retail investment assets are in Government of Canada securities and that investors have access to a number of different fixed-income products that offer more attractive rates than these Government of Canada investments.^[7]

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 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] A review of the terms of participation for government securities auctions commenced in 2013–14 to ensure their continued relevance.

Quick turnaround times enhance the efficiency of the auction and buyback process, and encourage participation by reducing market risk for participants. In 2013–14, the turnaround time for treasury bill and bond auctions averaged 2 minutes 5 seconds. Buyback operations averaged 4 minutes 30 seconds. Both of these times were slower than the 2012–13 times, which were 1 minute 40 seconds and 1 minute 48 seconds, respectively. The average times were slower due to a buyback operation that took over 120 minutes and three auctions that took between 8 and 22 minutes. Without these outliers, the average turnaround times would have been quicker than last year.^[9]

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, 2014, domestic investors held about 73 per cent of Government of Canada securities
(see Chart 8). Thus, the majority of the national debt is money that the Government of Canada owes to Canadians. Among domestic investors, insurance companies and pension funds held the largest share of Government of Canada securities (28.8 per cent), followed by financial institutions (25.9 per cent) and the Bank of Canada (13.7 per cent). Taken together, these three categories accounted for about two thirds of outstanding Government of Canada securities.

Non-resident investors held close to 27 per cent of Government of Canada marketable securities, down about 3 percentage points from 2012–13.

At 27 per cent, the 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 9).

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 maturing debt rose to an average of 7.7 per cent of GDP per quarter during 2009–10 due to an increased stock of treasury bills, but it has since declined to an average of 6.6 per cent of GDP per quarter in 2013–14 (see Chart 10).

As a result of higher debt issuance since the financial crisis, the magnitude of single-day cash flow maturities has increased. At $19 billion, the June 1, 2013 maturity and coupon payment was the second largest on record (see Chart 11).

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 RRB maturities

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 2013–14 was $33.7 billion, an increase of $3.6 billion from 2012–13. Since 2008–09, average daily bond trading volumes have increased by more than 14 per cent per year (see Chart 12).

With an annual debt stock turnover ratio increasing to 18.7 in 2013–14 from 15.2 in 2009–10, the Government of Canada secondary bond market appears to be on an upward path of annual debt stock turnover ratios since coming out of the recession (see Chart 13).

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 makes available a portion of the Bank of Canada's portfolio of Government of Canada bonds and bills when there is strong demand for these securities in the market. The program offers securities held by the Bank of Canada when market pricing moves beyond a specified point.^[10] Throughout 2013–14, a number of Government of Canada bonds experienced tightness 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) 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 169 securities-lending operations in 2013–14, compared to 30 operations in 2012–13.

In 2013–14, 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 fixed-income securities and Canada's strong fiscal and economic position.

In 2013–14, gross bond issuance was $87.5 billion (including issuance through switch buybacks), about $8.1 billion lower than the $95.6 billion issued in 2012–13, to help absorb maturing assets under the IMPP. Gross issuance consisted of $85.3 billion in nominal bonds (including switch operations) and $2.2 billion in RRBs (see Table 4). When taking into account net issuance and maturities, the stock of outstanding bonds increased by $4.3 billion to $473.3 billion as at March 31, 2014.

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 2013–14 continued to be well-covered across all sectors and were above five-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.

A total of 29 nominal bond auctions were conducted in 2013–14, three fewer operations than in 2012–13. Low volatility and less uncertainty regarding the economic and interest rate outlooks resulted in small tails for most sectors in 2013–14. The size of the tail and coverage for all domestic bond auctions continues to improve (see Table 5).^[11]

In 2013–14, primary dealers (PDs) were allotted 80 per cent of auctioned nominal debt securities and customers were allotted 11 per cent (see Table 6).^[12] The 10 most active participants were in total allotted 83 per cent of these securities. Primary dealers’ share of the RRB allotments declined considerably since 2009–10 from 56 per cent to 40 per cent, while over the same period customers increased their share significantly from 43 per cent to 60 per cent in 2013–14.

During 2013–14, $352.5 billion in 3-, 6- and 12-month treasury bills were issued, a decrease of $20.5 billion from the previous year. There were also 29 cash management bill operations for a total of $66.0 billion in 2013–14, compared to 32 operations and a total of $78.1 billion in 2012–13. Together, treasury bill and cash management bill issuance totalled $418.5 billion. As at March 31, 2014, the combined treasury and cash management bill stock totalled $153.0 billion, a decrease of $27.7 billion from the end of 2012–13 (see Chart 14).

In 2013–14, all of the treasury bill and cash management bill auctions were fully covered. Coverage ratios for treasury bill auctions in 2013–14 were slightly higher than the five-year average and were consistent with the trend observed at bond auctions (see Table 7). Continued low interest rates and interest rate volatility also resulted in smaller tails for treasury bill and cash management bill auctions.

In 2013–14, the share of treasury bills allotted to primary dealers increased by 3 percentage points to 78 per cent, while the share allotted to customers decreased by 2 percentage points to 21 per cent (see Table 8). The 10 most active participants were in total allotted 85 per cent of these securities.

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 on 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 provides information on the objectives, composition and performance of the reserves portfolio.

The market value of Canada's official international reserves increased to US$76.5 billion as at March 31, 2014 from US$70.2 billion as at March 31, 2013. The change comprised a US$6.0 billion increase in EFA assets and a US$0.2 billion increase in the reserve position in the IMF. The increase in official international reserves was consistent with the Government's commitment to maintain holdings of liquid foreign exchange reserves at or above 3 per cent of GDP.

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$5.4 billion and US$3.4 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 9).

In February 2014, the Government of Canada issued a 5-year US$3 billion global bond at a cost of 3-month $US LIBOR less 1 basis point. Priced at 11 basis points over the comparable US Treasury security, this was the tightest pricing versus Treasuries for a 5-year global bond since Canada's last issue in February 2012. This transaction was met with very strong demand, with interest from over 150 high-quality investors from around the globe. As at March 31, 2014, the Government of Canada had four global bonds outstanding (see Table 10). 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.

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. The Government of Canada successfully launched a pilot program in November 2013. 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 2013–14, US$675 million of MTNs was issued at an average funding cost of 3-month US$ LIBOR less 5 basis points (see Table 11).

In 2013–14, the level of outstanding Canada Savings Bonds and Canada Premium Bonds held by retail investors decreased from $7.5 billion to $6.3 billion. Retail debt represented around 1.0 per cent of total market debt as at March 31, 2014 (see Chart 15).

Gross sales and redemptions were $1.6 billion and $2.7 billion, respectively, for a net reduction of $1.1 billion in the stock of retail debt (see Table 12).

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 moneys 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 from $24.1 billion to $26.1 billion in 2013–14, primarily due to the implementation of the prudential liquidity plan announced in Budget 2011 (see Table 13 and Chart 16).

RG cash balances on deposit with chartered banks and other financial institutions are invested in a prudent and cost-effective manner. 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 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.

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 (see Chart 17).

The Bank of Canada, on behalf of the Government of Canada, announced changes to the Terms and Conditions Governing the Morning Auction of Receiver General Cash Balances (the Terms) in August of 2013. These Terms set forth procedures for the auctioning of RG excess cash balances, which allow the Government to earn a competitive market-driven rate of return on these balances. The changes to the morning auction of RG cash balances reflect evolving market practices and will serve to reduce the Government's exposure to counterparty credit risk. The changes, which became effective April 1, 2014, can be viewed on the Bank of Canada website.

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 negative 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 2013–14, treasury bill yields traded predominantly higher than the overnight rate, resulting in a loss of carrying cash of $0.8 million for the fiscal year, compared to a loss of $2.2 million in 2012–13 and a gain of $0.7 million in 2011–12.

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 2013–14, the total amount of bonds repurchased through the CMBB program was $33.1 billion, compared to $31.3 billion in 2012–13. With the maximum amount of CMBBs allowed for these years being $40.3 billion and $35.5 billion respectively, the program had a success rate of 82 per cent for 2013–14 and 88 per cent for 2012–13. Overall, the CMBB program has contributed to reducing the size of the 2013 June 1, August 1, September 1 and November 1, as well as the 2014 February 1 and March 1 bond maturities by about 29 per cent, from a total of $73.5 billion outstanding when first targeted by the program to $52.0 billion outstanding at time of maturity.

Although the core objective of the regular bond buyback program is to promote liquidity in recently issued bonds, this program also has proven to be a valuable tool in reducing the maturity size of off-the-run bonds in recent years. The regular bond buyback program and the CMBB program have combined to contribute to a 34 per cent reduction in the size of bonds maturing in 2013–14.

Together, the CMBB and regular bond buyback programs have been an important factor in smoothing the amount of bonds outstanding across different maturity dates, amounting to a total of 34 per cent in 2013–14. This is especially evident for the June maturities in 2011, 2012 and 2013 (see Chart 18).

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.

A well-functioning wholesale market in Government of Canada securities is important as it benefits the Government as a borrower as well as a wide range of market participants. For the Government as a debt issuer, a well-functioning market attracts investors and contributes to keeping funding costs low and stable over time. For market participants, a liquid and transparent secondary market in government debt provides risk-free assets for investment portfolios, a pricing benchmark for other debt issues and derivatives, and a primary tool for hedging interest rate risk. The following table lists policy measures that have been taken to ensure a well-functioning Government of Canada securities market.

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 (RRB): 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 RRBs 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.

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.

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 Approved Orders in Council (OIC) are available on the Privy Council Office website. The reference number for the 2013–14 OIC is 2013-0325.

² For more information, see the section "Cash Management Bond Buyback Program" in Part III.

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

⁴ See the Bank of Canada website.

⁵ 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.

⁶ 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.

⁷ More details on the subjects of discussion and views expressed during the consultations can be found on 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.

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 Tails are not calculated for RRB 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. [PDF 33 KB]

¹² 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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