Archived - Debt Management Report 2019–2020

Table of Contents

Foreword by the Deputy Prime Minister and Minister of Finance

For over a year, the federal government has worked to combat COVID-19 and mitigate its harm, using every tool available. Eight of every ten dollars spent in Canada to fight the virus and support Canadians has been provided by the federal government. We will continue to do whatever it takes, for as long as it takes, to prevent long-term damage to the Canadian economy and to support Canadians through to the other side of the pandemic.

Every year, the federal government provides a report to Parliament and to Canadians that details the government's domestic debt program. I am pleased to be tabling the Debt Management Report for the 2019-20 fiscal year. This report reflects the main activities of the government's borrowing program as set out in Budget 2019 and is guided by the key principles of transparency, prudence, and regularity. In March 2020, changes were made to the debt program to respond to the COVID-19 pandemic. Therefore, this Debt Management Report captures only a fraction of the government's total COVID-19 response to date. The government has consulted dealers and investors as part of the process for developing the debt management strategy as it has done in the past.

This report demonstrates that 2019-20 debt management operations continued to effectively support the administration of the debt management program, contributing to the objective of raising stable and low-cost funding. It also makes clear how stable our debt is, with about 70 per cent domestically held.

Further accounting of the 2020-21 fiscal year will be provided in the next Debt Management Report. We continue to be guided by fiscal prudence and responsibility. Canada's fiscal position remains the strongest in the G7, which means the government has sufficient room to borrow as necessary to continue to meet the challenges of COVID-19.

We will continue to do whatever it takes to help Canadians stay healthy, safe, and solvent. We will continue to invest in every necessary public health measure and we will support Canadians and Canadian businesses in a deliberate, responsible, and effective way.

The Honourable Chrystia Freeland, P.C., M.P.
Deputy Prime Minister and Minister of Finance
Ottawa, 2021

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, 2020. For the most part, it does not reflect more recent developments or policies implemented under the borrowing program since the onset of the COVID-19 pandemic.

As required under Part IV (Public Debt) of the Financial Administration Act, this publication provides 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 2019–20, published on March 19, 2019, in Budget 2019. 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

The Public Accounts of Canada is tabled annually in Parliament and is available on the Public Services and Procurement Canada website. The Debt Management Strategy and the Report on the Management of Canada's Official International Reserves, which are also tabled annually in Parliament, are available on the Department of Finance Canada 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 Canada website. Under the Borrowing Authority Act, the Minister of Finance is required to table a report to Parliament every three years on amounts borrowed by the Minister on behalf of Her Majesty in Right of Canada and by agent Crown corporations. The most recent report was tabled in Parliament on November 23, 2020 and is available on the Department of Finance Canada website.

The Extraordinary Borrowing Report to Parliament tabled in Parliament on October 22, 2020, provides a detailed account of amounts borrowed in extraordinary circumstances under section 47 of the Financial Administration Act (as enacted by the COVID-19 Emergency Response Act). This report provides details on extraordinary borrowings that were undertaken between April 1, 2020 and September 30, 2020, and is available on the Department of Finance Canada website.

Executive Summary

Introduction

This publication reports 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 for operational purposes and contingency planning.

The government's market debt, including marketable bonds, treasury bills, retail debt and foreign currency debt, stood at $765.2 billion at the end of fiscal year 2019–20 (see boxed 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 $1,248.6 billion at that time. When financial and non-financial assets^{Footnote 1} are subtracted from total liabilities, the federal debt or accumulated deficit of the Government of Canada was $721.4 billion as at March 31, 2020 (see Chart 1).

Domestic 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. 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 (see the section entitled "Foreign Currency Debt").

Highlights for 2019–20

The Debt Management Report consists of three parts covering the main aspects of the Government of Canada's debt program. "Part I – 2019–20 Debt Management Context" focuses on the state of the federal debt, the year's funding requirements and the sources of borrowings used to raise funds, the federal government's credit ratings and the authorities required to borrow. "Part II – Report on Objectives and Principles" reports on debt management objectives to raise stable and low-cost funding to meet the financial needs of the Government of Canada and to maintain a well-functioning market for Government of Canada securities, and associated principles. "Part III – Report on the 2019–20 Debt Program" reports on the operational aspects of the debt program. This year's debt management operations continue to support the effective execution of the debt management program. The main highlights are as follows:

Strong Demand for Government of Canada Debt Securities

In 2019–20, the relative strength of the Canadian economy and its capital markets continued to support demand for Government of Canada securities in primary and secondary markets. Accordingly, treasury bill and bond auctions remained well-covered and competitively bid, providing an efficient manner for the government to raise funding. The publication of the Quarterly Bond Schedule before each quarter and the Call for Tender before each auction helped maintain transparency. This promoted well-functioning markets for the government's securities to the benefit of a wide array of domestic market participants, contributing to the objective of raising stable and low-cost funding.

Stock of Market Debt

The stock of market debt increased by $44.1 billion in 2019–20, bringing the total stock to $765.2 billion. The change in the stock was mainly comprised of a $27.3 billion increase in marketable bonds payable in Canadian dollars, a $17.6 billion increase in treasury and cash management bills, a $0.7 billion decrease in retail debt outstanding, and a $0.1 billion decrease in marketable debt payable in foreign currencies. Notwithstanding the modest increase in its debt stock, Canada's total government net debt-to-GDP (gross domestic product) ratio remains the lowest among the Group of Seven (G7) nations, according to the International Monetary Fund (IMF).

Consistent with an increased issuance at lower interest rate levels for 2019–20, the weighted average rate of interest on market debt decreased to 2.03 per cent, down from 2.18 per cent in 2018–19.

COVID-19 and Debt Management

Towards the end of 2019–20, changes were made to the debt program to respond to the COVID-19 pandemic. In particular, treasury bill issuances increased towards the end of the year in response to the increased borrowing needs stemming from the circumstances of the COVID-19 pandemic. In addition, in March 2020 the Bank of Canada broadened the scope of the bond buyback program as part of its measures to support the continuous functioning of financial markets through the provision of liquidity. Six bond buybacks on a switch basis were held in 2019–20, even though the Debt Management Strategy for 2019–20 had initially planned for only two operations. Finally, in response to the extraordinary circumstances caused by the COVID-19 pandemic, on March 31, 2020, the Minister of Finance approved for the first time borrowings under extraordinary circumstances, pursuant to section 47 of the Financial Administration Act. The COVID-19 Emergency Response Act that received Royal Assent on March 25, 2020 enacted these authorities. No monies were borrowed under section 47 of the Financial Administration Act during the 2019–20 fiscal year.

Part I
2019–20 Debt Management Context

Composition of Federal Debt

In 2019–20, total market debt increased by $44.1 billion (or about 6.1 per cent) to $765.2 billion (see Table 1). For additional information on the financial position of the government, see the 2019–20 Annual Financial Report of the Government of Canada.

Sources of Borrowings and Uses of Borrowings

The key reference point for debt management is the financial requirement or financial source, which represents the net cash outflow or inflow for the fiscal year. This measure differs from the budgetary balance (i.e., the deficit or surplus on an accrual basis) by the amount of non-budgetary transactions and the timing of payments on a cash basis, which can be significant. Non-budgetary transactions include changes in federal employee pension liabilities; changes in non-financial assets; investing activities through loans, investments and advances; and changes in other financial assets and liabilities, including foreign exchange activities. Anticipated borrowing and planned uses of borrowings are set out in the Debt Management Strategy, while actual borrowing and uses of borrowings compared to those forecast are reported in this publication (see Table 2).

There was a financial requirement of $47.2 billion in 2019–20, reflecting $39.4 billion in cash outflows due to a budgetary deficit and a cash outflow of $7.8 billion due to non-budgetary transactions. The financial requirement was approximately $15 billion higher than the projection in the Debt Management Strategy for 2019–20. For comparison, the financial requirement in 2018–19 was $12.7 billion.

In 2019–20, loans to the Business Development Bank of Canada, Canada Mortgage and Housing Corporation and Farm Credit Canada under the Crown Borrowing Program were $3.2 billion higher than the planned $7 billion. Since the inception of the program in 2007–08, the consolidated borrowings of these Crown corporations have grown to account for $77 billion of federal market debt.

Borrowing Authorities

In order to undertake market borrowing activities, the Minister of Finance (the "Minister") needs authority from Parliament as well as the Governor in Council (the "GIC").

Under the Parliamentary borrowing authority framework enacted on November 23, 2017, Parliamentary authority is granted through the Borrowing Authority Act (the "BAA") and Part IV of the Financial Administration Act (the "FAA"), which together allow the Minister to borrow money up to a maximum overall amount as approved by Parliament. The FAA also authorizes the Minister to borrow in excess of the approved maximum amount under limited circumstances for the specific purposes of refinancing outstanding debt, extinguishing or reducing liabilities, and making payments in extraordinary circumstances, such as natural disasters.

Subject to the noted limited exceptions, Parliament approved in the BAA a maximum stock of borrowings of $1,168,000 million, which also includes amounts borrowed by agent Crown corporations, and Canada Mortgage Bonds guaranteed by Canada Mortgage and Housing Corporation. As of March 31, 2020, $1,075,082 million of the Parliamentary-approved borrowing authority was used.

In addition to the new Parliamentary approval, Part IV of the FAA also requires the Minister to receive annual approval from the GIC to carry out borrowing for the Government of Canada for each fiscal year, including issuing securities in financial markets and undertaking related activities subject to a maximum aggregate amount. On the recommendation of the Minister of Finance, the GIC approved $330 billion to be the maximum aggregate principal amount of money that may be borrowed by the Minister in 2019–20.^{Footnote 2} The maximum aggregate principal amount is the sum of the following sub-components: (i) the maximum stock of treasury bills anticipated to be outstanding during the year; (ii) the total value of refinanced and anticipated new issuances of marketable bonds; and (iii) amounts to facilitate intra-year management of the debt and foreign exchange accounts.

During 2019–20, $285 billion of the GIC-approved borrowing authority was used, $45 billion below the authorized borrowing authority limit and $5 billion higher than the plan set out in the Debt Management Strategy for 2019–20 (see Table A4.2 in the Debt Management Strategy).

In response to the extraordinary circumstances caused by the COVID-19 pandemic, on March 31, 2020, the Minister of Finance approved for the first time borrowings under extraordinary circumstances, pursuant to section 47 of the Financial Administration Act. The COVID-19 Emergency Response Act that received Royal Assent on March 25, 2020 enacted these authorities. No monies were borrowed under section 47 of the Financial Administration Act during the 2019–20 fiscal year.

Government of Canada Credit Rating Profile

The Government of Canada throughout 2019–20 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 markets, and the strength of monetary and fiscal flexibility are all reflected in Canada's strong current credit ratings: Moody's (Aaa), S&P (AAA) and Fitch (AA+).

Part II
Report on Objectives and Principles

Objectives and Principles

The fundamental objectives of debt management as of March 2020 were to raise stable and low-cost funding to meet the financial needs of the Government of Canada and to maintain a well-functioning market for Government of Canada securities. 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. 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 is mostly achieved through the deliberate allocation of issuance among various debt instruments and terms.

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 entire maturity periods to be fully appreciated. A well-distributed maturity profile ensures a diversified exposure to changes in interest rates over time and provides liquidity across different maturity sectors to promote well-functioning markets.

Composition by Remaining Term to Maturity

Relative to 2018–19, the government increased total issuance of both treasury bills and bonds in the Debt Management Strategy for 2019–20. Reflecting this, the composition of market debt by remaining term to maturity shifted to a more even distribution, which helps to reduce debt rollover risk. The increase in the stock of debt with remaining terms to maturity between 2 and 3 years partially reflects the increased issuance in the 3–year sector.The higher stock of treasury bills reflects both the increased issuance of treasury bills as part of the Debt Management Strategy for 2019–20 and increased treasury bill issuance towards the end of the year in response to the increased borrowing needs stemming from the circumstances of the COVID-19 pandemic (see Chart 2).

Composition by Original Term of Issuance

In 2019–20, the government increased total issuance of both treasury bills and bonds relative to 2018–19, with treasury bills seeing a larger increase in issuance relative to bonds. In addition, the government decreased Real Return Bond issuance and held 10-year issuance at the same level as 2018–19. As a result, bonds with original terms to maturity of 10 years or more represent 41.2 per cent of the total stock of market debt, compared to 42.6 per cent in 2018–19.

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).^{Footnote 3} The weighted average rate of interest on outstanding market debt was 2.03 per cent in 2019–20, down from 2.18 per cent in 2018–19. As a result and despite an increase in market debt outstanding, the interest cost of market debt as a share of total government expenses decreased from 4.54 per cent in 2018–19 to 4.37 per cent in 2019–20, reflecting the lower weighted average rate of interest on market debt (see Chart 4).

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 2008–09 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 following the financial crisis of 2008-2009. In 2014–15, as the Canadian and global financial markets recovered from the crisis and the Insured Mortgage Purchase Program was wound down, the ATM rose steadily to 8.4 years by 2018–19. In 2019–20, the ATM declined to 7.5 years, reflecting the increased issuance of treasury bills in 2019–20 to support a liquid and well-functioning market for Government of Canada treasury bills.

Maintaining debt rollover within acceptable levels: Prudent management of debt refinancing needs promotes investor confidence and strives to minimize the impact of market volatility or disruptions on the funding program. According to a number of measures of rollover (e.g., quarterly maturities as a percentage of GDP, single-day bond maturities plus coupon payments net of buyback operations, net refixing share of market debt and net refixing share of market debt to GDP), risk in the government's debt program has been trending down over recent years.

The amount of debt maturing per quarter as a percentage of GDP rose to an average of 7.1 per cent during 2010–11 due to a higher stock of treasury bills, but has since declined to an average of 4.3 per cent in 2019–20, (see Chart 6). This mainly reflects the decrease in treasury bills as an overall share of market debt, meaning less debt as a share of GDP matures in a given quarter.

Single-day cash flow maturities had increased as a result of higher debt issuance since the financial crisis of 2008-2009, but have generally been trending downwards since 2012 as a result of the introduction of four new maturity dates—February 1, May 1, August 1 and November 1—in 2011–12. The four additional maturity dates have allowed the debt program to absorb increases in funding requirements and helped smooth the cash flow profile of upcoming maturities over the medium term. Most large single-day maturity dates are now due to principal and coupon payments on bonds that were issued prior to 2011–12 as well as the principal and coupon payments on 3- and 5-year bonds, which share maturity dates. The smoothing effect of these additional four maturity dates on the government's cash flow profile will become even more apparent over time as bonds issued prior to 2011–12 mature.

The benchmark maturity date profile is as follows:

• 2-year sector: February 1, May 1, August 1, November 1
• 3-year sector: March 1, September 1
• 5-year sector: March 1, September 1
• 10-year sector: June 1
• 30-year sector: December 1, alternating years between nominal bond and Real Return Bond maturities

The refixing share of market debt (net of financial assets) measures the proportion of all market debt that matures or needs to be repriced within one year. The refixing share net of financial assets is used rather than the gross refixing share because the net-of-assets measure better reflects the risk exposure to the government. In 2019–20, the net refixing share of market debt increased by 5.6 percentage points to 35.1 per cent (see Chart 7). The net refixing share of market debt to 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 increased to 7.4 per cent in 2019–20, up 1.5 percentage points from 2018–19. The increase in both refixing measures reflects the increase in treasury bill levels in 2019–20, relative to 2018–19.

Maintaining a Well-Functioning Government Securities Market

A well-functioning 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. A well-functioning market helps the government to have more certain access to funding markets over time, contributes to lower and less volatile pricing for the government, 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, stability to other domestic fixed-income markets for which Government of Canada securities serve as benchmarks (e.g., provinces, municipalities and corporations), and a useful tool for hedging interest rate risk. The following actions promoted a well-functioning Government of Canada securities market in 2019–20.

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 Tender in the week leading up to the auction.^{Footnote 4} In 2019–20, there were regular auctions for 2-, 3-, 5-, 10- and 30-year nominal and Real Return Bonds. Bond issuance schedules were communicated through the Bank of Canada website on a timely basis.

Concentrating on key benchmarks: All benchmark bonds in 2019–20 continued to reach or exceed minimum benchmark size targets (see Chart 8).^{Footnote 5} Compared to 2018–19, the benchmark target sizes for the 2-year sector and the 30-year Real Return Bond sector were slightly reduced, the 10-year benchmark target size stayed unchanged, and the benchmark target sizes were increased in the 3-, 5-, and 30-year sectors.

• 2-year sector: $9 billion to $15 billion
• 3-year sector: $6 billion to $12 billion
• 5-year sector: $12 billion to $18 billion
• 10-year sector: $10 billion to $16 billion
• 30-year nominal sector: $12 billion to $18 billion
• 30-year Real Return Bond sector: $9 billion to $15 billion

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, 2020, domestic investors (including the Bank of Canada) held about 71 per cent of Government of Canada securities (see Chart 9). Among domestic investors, insurance companies and pension funds held the largest share of Government of Canada securities (29.1 per cent), followed by financial institutions (25.1 per cent) and the Bank of Canada (13.7 per cent). Taken together, these top three categories accounted for more than two-thirds of outstanding Government of Canada securities.

In 2019–20, non-resident investors held 29 per cent of Government of Canada marketable securities,^{Footnote 6} down approximately one and a half percentage points from 2018–19. This level of non-resident holdings of Government of Canada debt remains in the mid-range compared to other sovereigns in the G7 (see Chart 10).

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 October 2018, the Bank of Canada and the Department of Finance Canada held over 30 bilateral meetings with organizations in Toronto, Montréal and New York. These consultations sought the views of market participants on issues related to the design and operation of the Government of Canada's domestic debt program for 2019–20 and beyond.

Market participants reported that the Government of Canada bond market continues to function well with dealers and investors generally able to source desired allocations with minimal impact on price. Participants also noted a desire for more long-duration nominal issuance to satiate ongoing robust investor demand in that sector. Market participants indicated that the treasury bill market functioned well, and that issues related to decreased treasury bill supply experienced in 2018 had dissipated. More details on these discussions are available on the Bank of Canada website.^{Footnote 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.^{Footnote 8}

Quick turnaround times enhance the efficiency of the auction and buyback processes, and reduce market risk for participants. In 2019–20, the turnaround time for treasury bill and bond auctions averaged 2 minutes 6 seconds, while buyback operations averaged 4 minutes 47 seconds. The average turnaround times in 2018–19 were 2 minutes 2 seconds and 2 minutes 30 seconds, respectively.^{Footnote 9}

Monitoring secondary market trading in Government of Canada securities: Two 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 indicate that participants can 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, which is an indication of a liquid market.

The average daily trading volume in the secondary market for Government of Canada bonds during 2019–20 was $39.5 billion, an increase of $2.8 billion from 2018–19 (see Chart 11).

The annual debt stock turnover ratio in the Government of Canada secondary bond market was 18.9x in 2019–20, an increase from 18.1x in 2018–19. The sectors with the highest turnover are medium-term bonds with maturities between 3 and 10 years at 29.2x, while Real Return Bonds have the lowest turnover at 0.6x (see Chart 12).

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 in repurchase transactions moves beyond a specified point.^{Footnote 10}

The Bank of Canada conducted five securities-lending operations in 2019–20, compared to three operations in 2018–19. Securities-lending operations are generally conducted to alleviate tightness in markets for Government of Canada bonds. 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 Canadian Overnight Repo Rate Average).

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 (e.g., an off-the-run bond for the building-to-benchmark bond), on a duration-neutral basis.^{Footnote 11}

In 2019–20, there were six regular bond buybacks on a switch basis. Three operations involved the exchange of an off-the-run bond for the 30-year building-to-benchmark bond, while single operations were held in each of the 10-year, 5-year and 3-year sectors. The Debt Management Strategy for 2019–20 had initially planned for two bond buyback operations on a switch basis in the 30-year sector. However, in March 2020 the Bank of Canada broadened the scope of the bond buyback program as part of its measures to support the continuous functioning of financial markets through the provision of liquidity.^{Footnote 12} Switch operations amounted to $3,284 million at par value issued, which was $2,399 million higher than the switch operations that occurred in 2018–19. There were no regular bond buybacks on a cash basis in 2019–20.

Part III
Report on the 2019–20 Debt Program

In 2019–20, 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 2019–20, gross bond issuance was $127.0 billion (including issuance through switch buybacks), $27.3 billion higher than the $99.7 billion issued in 2018–19. Gross issuance consisted of $125.2 billion in nominal bonds (including switch operations) and $1.8 billion in Real Return Bonds (see Table 4).

Auction Result Indicators for Domestic Bonds

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. Excluding the 30-year sector, average auction tails were above the 5-year average across all maturities in 2019–20.^{Footnote 13} A total of 40 nominal bond auctions were conducted in 2019–20, four more than in 2018–19. This increase in nominal bond auctions was largely the result of a planned increase of the number of 3-year auctions from four to eight as part of the Debt Management Strategy for 2019–20.

Auction coverage is defined as the total amount of bids received, including bids from the Bank of Canada, divided by the amount auctioned. All else being equal, a higher auction coverage level typically reflects strong demand and therefore should result in a lower average auction yield. Bond auctions in 2019–20 continued to be well-covered, with ratios above the 5-year average in all sectors except for the 5- and 10-year sectors.

Participation at Domestic Bond Auctions

In 2019–20, primary dealers (PDs) were allotted 61 per cent of auctioned nominal bonds, and customers were allotted 39 per cent (see Table 6), excluding the Bank of Canada's allotment.^{Footnote 14} In aggregate, the 10 most active participants were in total allotted 80 per cent of these securities. Primary dealers' share of the Real Return Bond allotments decreased from 40 per cent in 2018–19 to 38 per cent in 2019–20, with customer allocations increasing from 60 per cent to 62 per cent.

 

Treasury Bills and Cash Management Bills

During 2019–20, $276 billion in 3-, 6- and 12-month treasury bills were issued, an increase of $4.0 billion from the previous year. There were also 24 cash management bill operations for a total of $67.6 billion in 2019–20, compared to 24 operations and a total of $68.4 billion in 2018–19. Together, treasury bill and cash management bill issuance totaled $343.6 billion. As at March 31, 2020, the combined treasury and cash management bill stock totaled $151.9 billion, an increase of $17.6 billion from the end of 2018–19 (see Chart 13).

In 2019–20, all treasury bill and cash management bill auctions were fully covered. Auction tails were higher than the 5-year average across treasury bill maturity sectors. Coverage ratios for treasury bill auctions in 2019–20 were lower than the 5-year average for all treasury bill maturity sectors (see Table 7).

Participation at Treasury Bill Auctions

In 2019–20, the share of treasury bills allotted to primary dealers decreased by 4 percentage points to 84 per cent from 88 per cent in 2018–19, while the share allotted to customers increased by 4 percentage points to 16 per cent (see Table 8). The 10 most active participants were in total allotted 85 per cent of these securities.

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 primary objectives of the international reserves are to provide the Government of Canada with liquidity and the ability to intervene in the foreign exchange market to support the Canadian dollar.

The EFA is primarily made up of liquid foreign currency securities and special drawing rights (SDRs). Liquid foreign currency securities are composed primarily of 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 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$86.1 billion as at March 31, 2020 from US$83.4 billion as at March 29, 2019. The change reflects a US$427 million increase in the IMF reserve position, and a US$2,272 million increase in EFA assets. EFA assets, which totaled $83.0 billion as at March 31, 2020, were held at a level that is consistent with the government's commitment to maintain holdings of liquid foreign currency securities at or above 3 per cent of nominal 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 funded by domestic issuances. As at March 31, 2020, Government of Canada cross-currency swaps outstanding stood at US$62.8 billion (par value).

In addition to cross-currency swaps funded by domestic issuances, the EFA is 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 funding method of choice depends on funding needs, costs, market conditions and funding diversification objectives (see Table 9).

As at March 31, 2020, the Government of Canada had three global bonds outstanding.

Retail Debt

In 2019–20, the level of outstanding Canada Savings Bonds and Canada Premium Bonds held by retail investors decreased from $1.2 billion to $0.5 billion. Retail debt represented around 0.1 per cent of total market debt as at March 31, 2020 (see Chart 14).

In Budget 2017, the Government of Canada announced the discontinuation of the Canada Savings Bonds and Canada Premium Bonds program, given that retail debt is no longer a cost-effective source of funds or a preferred investment by Canadians. Following the announcement, Canadians were reassured that all remaining funds in the Payroll Savings Program, the Canada Retirement Savings Plan and the Canada Retirement Income Fund, along with any unredeemed certificated bonds, remain safe and guaranteed by the Government of Canada. The Canada Savings Bonds Program will continue to be wound down until all outstanding bonds have matured by December 1, 2021.

In 2019–20, the stock of retail debt declined by $0.7 billion (see Table 12).

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 RG operating balances and a $20 billion callable demand deposit held for the prudential liquidity plan.

The year-end daily liquidity position increased by $1.8 billion to $33.8 billion by the end of 2019–20 (see Table 13 and Chart 15). The amount of RG balances increased significantly near the end of March as the government began to borrow in preparation to fund its COVID-19 response.

Prudential Liquidity Management

The government holds liquid financial assets in the form of domestic cash deposits and foreign exchange reserves^{Footnote 15} 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.

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 level of settlement balances available to the financial system.

The balances placed via the morning auction are fully collateralized, which reduces the government's exposure to counterparty credit risk. The balances placed via the afternoon auction for a term of one business day (i.e., overnight) remain 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 16).

In March 2020, there were fewer RG auctions conducted, in part reflecting increased cash need stemming from the onset of the COVID-19 pandemic, which resulted in fewer instances where excess cash was available for auction.

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 typically upward sloping yield curve results in a cost of carry for the government, as financial institutions pay rates of interest for government deposits that are 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 2019–20, treasury bill yields traded predominantly lower than the overnight rate, resulting in a gain of carrying cash of $0.8 million in 2019–20.

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 2019–20, the total amount of bonds repurchased through the CMBB program was $31.1 billion, compared to $47.7 billion in 2018–19. The maximum amount of CMBBs allowed for 2019–20 decreased to $70.0 billion from $73.7 billion the previous year, mainly due to slightly decreasing the maximum repurchase amount at each operation. A pilot program introduced in January 2017 to increase flexibility in the maximum repurchase amount at each operation was made permanent in November 2018.^{Footnote 16} The CMBB program had a take-up rate of 43.9 per cent for 2019–20 compared to 64.8 per cent in 2018–19. Overall, the CMBB program, together with the switch buyback program, continued to keep bond maturities at reasonable levels in 2019–20.

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 Canada website.

Annex 2
Debt Management Policy Measures
Taken Since 1997

The fundamental objectives of debt management are to raise stable and low-cost funding to meet the financial needs of the Government of Canada and to maintain a well-functioning market for Government of Canada securities. 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.

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 and which provides a source of liquidity for the Government of Canada. Assets held in the EFA are managed to provide 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
14^th floor
90 Elgin Street
Ottawa, Ontario  K1A 0G5

Phone: 613-369-3710
Facsimile: 613-369-4065
TTY: 613-369-3230
E-mail: fin.financepublic-financepublique.fin@canada.ca

Media Enquiries:
613-369-4000

Reference Tables

I Total Liabilities, Outstanding Market Debt and Debt Charges, as at March 31

II Government of Canada Outstanding Market Debt, as at March 31

III Issuance of Government of Canada Domestic Bonds

IV Outstanding Government of Canada Domestic Bonds, as at March 31, 2020

V Government of Canada Cross-Currency Swaps Outstanding, as at March 31, 2020

VI Crown Corporation Borrowings, as at March 31