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The Debt Management Strategy sets out the Government of Canada’s objectives, strategy and plans for the management of its domestic debt and foreign currency liabilities. Borrowing activities support the ongoing refinancing of government debt coming to maturity, the execution of the budget plan, and other financial operations of the Government, including borrowing on behalf of some Crown corporations.
The Financial Administration Act requires that the Government table the Debt Management Strategy in Parliament prior to the start of the fiscal year. Further information on the management of the Government’s debt and liquid financial assets, including a description of the governance framework and details on program activities and outcomes, can be found in two annual reports that are tabled in Parliament following the tabling of the Public Accounts of Canada : the Debt Management Report and the Report on the Management of Canada’s Official International Reserves , both of which can be found on the Department of Finance website.
Highlights of 2008–2009 Debt Management Strategy
- In 2008–09, the Government’s Debt Management Strategy incorporates the borrowing needs of three financial Crown corporations: the Business Development Bank of Canada, Farm Credit Canada and Canada Mortgage and Housing Corporation.
- Consolidating the borrowings of the three Crown corporations into the federal debt program, as announced in Budget 2007, will reduce overall borrowing costs and enhance the liquidity of the Government of Canada debt program.
- The 2008–09 bond program will maintain gross and net bond issuance in the four nominal benchmark bonds and in the 30-year Real Return Bond at levels comparable to 2007–08.
- Gross issuance of domestic marketable bonds is planned to be $34 billion, just under $1 billion less than in 2007–08.
- The size of the regular bond buyback program will be scaled back from its 2007–08 level as the bond stock becomes concentrated in fewer old benchmark bonds. The target for 2008–09 is to conduct $6 billion in regular bond buyback operations, $1 billion less than in 2007–08.
- Correspondingly, planned net issuance of domestic marketable bonds is expected to be largely unchanged from 2007–08 at $28 billion. The stock of bonds is expected to fall by about $1 billion over the year to $252 billion.
- The total outstanding amount of treasury bills is expected to increase from about $117 billion at the end of 2007–08 to about $140 billion by the end of 2008–09.
- The fixed-rate share of the debt, now measured on a net and quarterly average basis, is expected to hold steady at about 62 per cent in 2008–09, somewhat higher than the previously anticipated 60-per-cent level, reflecting a decision to maintain the size of the bond program against the backdrop of a larger-than-expected financial source in 2007–08.
- As in 2007–08, one 2-year and one 5-year auction that are fungible with outstanding bonds are planned to be forgone. The forgone 5-year auction will be in the third quarter and the forgone 2-year auction will be in the fourth quarter of the fiscal year.
- The timing of the auction cycle of the 30-year nominal bond will be changed to the first and third quarters of the fiscal year from the current timing of issues in the second and fourth quarters, maintaining two 30-year nominal bond auctions in 2008–09.
Debt Management Framework
Composition of the Debt
The focus of the Government’s debt strategy is the market debt, which is a component of gross debt. The federal debt consists of the total liabilities of the Government of Canada (gross debt) minus financial and non-financial assets. The following diagram illustrates the relationships between the components of the federal debt.
For accounting purposes, gross debt is decomposed into: market debt, which is issued and outstanding in financial markets; value adjustments to market debt (for the foreign exchange value of swap liabilities and the net of unamortized premiums and discounts of new issues and buybacks); capital leases; and other liabilities. The rest of the liabilities comprise liabilities held outside capital markets and include obligations to public sector pension plans as well as accounts payable and accrued liabilities and allowances.
Financial assets comprise cash on deposit with the Bank of Canada, chartered banks and other financial institutions; accounts receivable (including tax receivables); foreign exchange accounts; and loans, investments and advances.
Non-financial assets comprise tangible capital assets, inventories and prepaid expenses.
The liabilities that are actively managed under the debt strategy include wholesale and retail debt denominated in Canadian dollars, together with foreign currency liabilities. The latter category comprises both direct foreign currency debt and derivatives (where domestic debt issues are converted to foreign currency via cross-currency swaps).
Borrowing activities support the ongoing refinancing of government debt coming to maturity, the execution of the budget plan, and other financial operations of the Government, including borrowing on behalf of some Crown corporations (Table A2.1).
Table A2.1
| Composition of Domestic and Foreign Liabilities and
Liquid Financial Assets (Forecast at March 31, 2008) (per cent) |
|
|---|---|
| Canadian-Dollar-Denominated Liabilities 1 | |
| Marketable bonds | 66 |
| Treasury bills and cash management bills | 31 |
| Retail debt (Canada Savings Bonds and | |
| Canada Premium Bonds) | 3 |
| Total | 100 |
| Foreign Currency Liabilities | |
| Cross-currency swaps | 76 |
| Global bonds | 14 |
| Other debt | 10 |
| Total | 100 |
| Liquid Financial Assets | |
| Cash balances | 20 |
| Foreign exchange reserves | 80 |
| Total | 100 |
| 1 Includes 8 per cent of Canadian-dollar-denominated debt later swapped to foreign currencies. | |
Borrowing Authority
Authority to borrow in financial markets is provided by Part IV of the Financial Administration Act (FAA), which authorizes the Minister of Finance, with the approval of the Governor in Council, to issue securities and undertake related activities, including entering into financial contracts and derivatives transactions.
Amendments made to the FAA in 2007 regarding the Government’s borrowing activities provide for greater transparency and accountability and increased flexibility to meet future borrowing needs, particularly with respect to the consolidation of Crown corporation borrowings. To satisfy these new requirements, anticipated borrowing and planned uses of funds are presented in the next section. Actual borrowing and uses of funds compared to those forecast will be reported in the 2008–09 Debt Management Report , and detailed information on outcomes will be provided in the 2008 Public Accounts of Canada . Both documents will be tabled in Parliament in the fall of 2009.
The Debt Management Strategy sets out the aggregate principal amount expected to be borrowed (see the following section). A margin for prudence is added to facilitate intra-year management of the debt and foreign exchange reserves to determine the amount of borrowing authority to be requested from the Governor in Council. In 2008–09, this amount is $206 billion, the same as last year.[1] The sources and uses of borrowings are described in the following section, and are set out in Table A2.2.
Planned Borrowing Activities for 2008–09
Sources of Borrowing
Over the 2008–09 fiscal year, the aggregate principal amount of money borrowed by the federal government from financial markets is expected to be $181 billion, sourced mainly through a change in the stock of treasury bills and issuance of marketable bonds (Table A2.2).
Uses of Borrowing
Refinancing Needs
The Government’s commitment to debt reduction has resulted in a declining federal debt burden. Nonetheless, the Government of Canada continues to have an outstanding amount of market debt. As a result, there is a requirement for borrowing that is driven primarily by the need to refinance debt coming to maturity during the year. In 2008–09, it is projected that refinancing needs will be approximately $166 billion. The main source of refinancing needs during the year stems from the turnover of the treasury bill stock, which has a term to maturity of one year or less. The next largest component is the $23 billion in bonds maturing in 2008–09, which represents 9 per cent of the outstanding stock of marketable bonds. Other lesser amounts include retail debt (Canada Savings Bonds and Canada Premium Bonds) and foreign-denominated bonds that mature in 2008–09.
Financial Source/Requirement
The other main determinant of borrowing needs is the Government’s financial source or requirement. If the Government has a financial source, it can use the source for some of its refinancing needs. If it has a financial requirement, then it must meet that requirement along with its refinancing needs.
The financial source/requirement measures the difference between cash coming in to the Government and cash going out. This measure is affected not only by the budgetary balance but also by the Government’s non-budgetary transactions. The budgetary balance is presented on a full accrual basis of accounting, recording government liabilities and assets when they are incurred or acquired, regardless of when the cash is paid or received. Non-budgetary transactions include changes in federal employee pension accounts; changes in non-financial assets; investing activities through loans, investments and advances (including loans to three Crown corporations — the Business Development Bank of Canada, Farm Credit Canada and Canada Mortgage and Housing Corporation); and other transactions (e.g. changes in other financial assets and liabilities and foreign exchange activities). Non-budgetary transactions also include adjustments made to convert the Government’s financial statements from full accrual to cash accounting.
For 2008–09, a budget surplus of $2 billion and a financial requirement of $15 billion are projected. This requirement reflects an expected $15 billion of loans to the three Crown corporations.
As the planned amount to be borrowed is equal to the planned uses of borrowings, the year-end cash position is planned to be unchanged.
Actual borrowing for the year may differ from the forecast due to uncertainty associated with economic and fiscal projections, the timing of cash transactions and other factors, such as changes in foreign reserve needs. A full account of actual borrowing against the plan presented here will be provided in the Debt Management Report, which will be tabled in Parliament in the fall of 2009.
Table A2.2
| Planned Sources and Uses of Borrowing for 2008–09 (billions of dollars) |
|
|---|---|
| Sources of Borrowings | |
| Payable in Canadian currency | |
| Treasury bills1 | 140 |
| Bonds | 34 |
| Retail debt | 2 |
| Canadian-currency borrowings issued | 176 |
| Payable in foreign currencies | 5 |
| Total cash raised through borrowing activities | 181 |
| Uses of Borrowings | |
| Refinancing needs | |
| Payable in Canadian currency | |
| Treasury bills | 117 |
| Bonds | 23 |
| Regular bond buybacks | 6 |
| Buybacks of bonds prior to maturity | 6 |
| Retail debt | 5 |
| Canada Pension Plan bonds and notes | 1 |
| Canadian-currency borrowings—repayments | 158 |
| Payable in foreign currencies | 8 |
| Total refinancing needs | 166 |
| Financial source/requirement | |
| Budgetary balance | -2 |
| Non-budgetary transactions | |
| Pension and other accounts | -4 |
| Non-financial assets | 1 |
| Loans, investments and advances | 17 |
| Of which: | |
| Loans to Crown corporations | 15 |
| Other transactions | 3 |
| Total non-budgetary transactions | 18 |
| Total financial source/requirement | 15 |
| Total uses of borrowings | 181 |
| Net Increase or Decrease (-) in Cash | 0 |
| Notes: Numbers may
not add due to rounding. A negative sign denotes a financial
source. 1 These securities are rolled over, or refinanced, a number of times during the year. This results in a larger number of new issues per year than the stock outstanding at the end of the fiscal year, which is presented in the table. |
|
2008–09 Debt Strategy
Objectives
The main objective of the federal debt strategy is to raise stable and low-cost funding to meet the operational needs of the Government. An associated objective is to maintain a well-functioning Government of Canada securities market, which helps to keep debt costs low and contributes to efficient capital markets by providing key pricing and hedging tools.
Debt Structure
In general, achieving stable, low-cost funding involves striking a balance between cost and risk in the debt structure, which is itself achieved through the selection of debt instruments. Currently, the main operational measure used to describe the debt structure is the fixed-rate share, which is the proportion of all interest-bearing debt that does not mature or need to be repriced within one year relative to the total amount of Government of Canada interest-bearing debt. The fixed-rate measure is used in combination with other measures to assess the Government’s exposure to changes in interest rates over time.
In 2003, it was announced that the fixed-rate share of the debt would be reduced in an orderly and transparent manner from two-thirds to 60 per cent by the end of fiscal year 2007–08 to achieve debt cost savings while retaining a prudent debt structure. In the 2007–08 Debt Management Strategy, the Government indicated that the transition to the target fixed-rate debt structure of 60 per cent was expected to be completed in 2007–08.
During 2007–08, improvements were made to the calculation of the fixed-rate share of the debt to more appropriately reflect the Government’s exposure to interest rate risk. The fixed-rate share is now calculated on a net basis rather than a gross basis by excluding components of the debt that are matched with financial assets of the same term and therefore do not represent an exposure to interest rate risk. The federal liabilities netted out from the fixed-rate share calculation include liabilities funding the assets in the Exchange Fund Account; debt securities matched with corresponding loans to Crown corporations; Government of Canada debt securities held by the Bank of Canada; and the debt offset by Receiver General cash and deposit balances.[2]
In 2007–08, there was a larger-than-projected financial source. Given the objective to support a well-functioning market for government securities, the bond program was maintained largely as planned, resulting in reduced treasury bill issuance. As a result, the fixed-rate share of the debt is projected to average 62 per cent, using the new revised measure, over the final quarter of 2007–08, and to remain at that level in 2008–09. The actual outcome will be affected by such factors as the amount and maturity of Crown corporation borrowings (see the section "Borrowing by Major Crown Corporations") and the Government’s financial source.
Maintaining a Well-Functioning Government Securities Market
To support a liquid and well-functioning market for its securities, the Government strives to maintain transparent, regular and diversified borrowing programs. In the prevailing environment of declining Government of Canada debt, the strategic and operational focus of federal debt management is to support the functioning of debt programs and to promote competition and participation, which helps to keep debt costs low and benefits a wide array of domestic market participants.
Market Consultations
As in past years, market participants were consulted as part of the process of developing the debt strategy. Views were sought to help identify and assess potential measures that could be taken to best achieve the Government’s debt management objectives given the projected continuing decline in its borrowing needs and the consolidation of the borrowings of three Crown corporations.
Overall, the main messages were that the Government of Canada securities market is functioning well, despite recent turbulence in the financial markets, and is adapting to an environment of declining borrowing needs. Participants indicated that the market could accommodate some variation in issuance in the annual bond program relative to what had been announced at the beginning of the year, e.g. as could arise with the consolidation of the borrowings of the Crown corporations.
Given the views received from market participants and the Government’s borrowing plans, no major adjustments to debt programs or operations are considered necessary in the short run. More details on the subjects of discussion and the views expressed during the consultations can be found at www.bankofcanada.ca/en/notices_fmd/index.html.
Borrowing by Major Crown Corporations
As announced in Budget 2007, starting in 2008–09, the Government will fully consolidate the borrowings of three financial Crown corporations—the Business Development Bank of Canada (BDC), Canada Mortgage and Housing Corporation (CMHC) and Farm Credit Canada (FCC)—into the federal debt program. Export Development Canada, the Canadian Wheat Board and the Canada Housing Trust, which administers the Canada Mortgage Bond (CMB) program, will continue to borrow on a stand-alone basis.[3]
Consolidating the borrowings of BDC, CMHC and FCC will reduce borrowing costs by eliminating the "agency spread" otherwise paid by Crown-backed entities. It will also enhance the liquidity of the Government of Canada debt market. For 2008–09, it is estimated to increase federal marketable debt issuance by roughly $15 billion.[4] For planning purposes, based on discussion with the individual Crown corporations, $10 billion of this amount has been allocated to treasury bill issuance and $5 billion to bond issuance.
The consolidation of Crown borrowing activity will not affect the federal debt (accumulated deficit) or total government net debt, since increased federal borrowing will be matched by additional assets in the form of loans to the Crown corporations. Under the new arrangement, BDC, CMHC and FCC unmatured debt issued prior to consolidation will remain outstanding in the marketplace. The Minister of Finance will continue to approve all Crown borrowing plans within the context of annual corporate plan approvals. Crown corporations will continue to be responsible for the governance and management of their treasury functions, including decisions on how much to borrow from the Government of Canada and at what maturity.
2008–09 Debt Program
Bond Program
The size of the bond program is based on the financial source/requirement forecast in the budget, the amount of bonds maturing, forecast Crown corporation borrowing requirements, the plan for regular buybacks and the need for fixed-rate borrowing for other purposes, such as funding the foreign reserves (Chart A2.1). The bond program for 2008–09 will support liquidity in the key maturities (i.e. 2, 5, 10 and 30 years).
In 2008–09, the level of gross bond issuance will be largely maintained, at about $34 billion. The total stock of bonds is planned to decline by about $1 billion to $252 billion (Table A2.3).
Table A2.3
Bond Issuance Plan for 2008–09
(billions of dollars)
|
2006–07 Actual |
2007–08 Estimate |
2008–09 Plan |
|
|---|---|---|---|
| Gross bond issuance | 33.4 | 34.6 | 34 |
| Buybacks | -9.9 | -7.2 | -6 |
| Net issuance | 23.5 | 27.4 | 28 |
| Maturing bonds and adjustments1 | -27.1 | -32.4 | -29 |
| Change in bond stock | -3.6 | -5.0 | -1 |
| 1 Includes cash management bond buybacks and the inflation adjustment for Real Return Bonds. | |||
Benchmark Bond Targets
In 2008–09, the 2-, 5-, 10- and 30-year benchmark target sizes will be maintained:
- 2-year bonds: $7 billion to $10 billion.
- 5-year bonds: $9 billion to $12 billion.
- 10-year bonds: $10 billion to $14 billion.
- 30-year bonds: $12 billion to $15 billion.
For bond issues that are fungible with existing old benchmarks (2- and 5-year bonds with a June 1 maturity), benchmark target sizes are deemed to be attained once the combined size of the new benchmark and the old benchmark have largely reached the target sizes mentioned above.
Bond Auction Schedule
Quarterly auctions of 2-, 5- and 10-year bonds and semi-annual auctions of 30-year bonds will continue, and will be announced through the Quarterly Bond Schedule on the Bank of Canada website before the start of each quarter (www.bankofcanada.ca/cars/bd_auction_schedule.html).
As in 2007–08, one 2-year and one 5-year auction that are fungible with outstanding bonds are planned to be forgone. The forgone 5-year auction will be in the third quarter while the forgone 2-year auction will be in the fourth quarter of the fiscal year.
While maintaining two 30-year bond auctions, the auction cycle of the 30-year bond will be changed to the first and third quarters of the fiscal year to facilitate cash management operations (Table A2.4).
The order of bond auctions within each quarter may be adjusted to facilitate cash management operations, with any changes announced before the start of each quarter through the release of the Quarterly Bond Schedule.
As in the past, for small variations in funding requirements, the Government may adjust its borrowing plans intra-year as needed by fine-tuning either auction or buyback operation sizes. If foreign funding needs or Crown corporation borrowings are larger than planned, adjustments to the bond auction plan are possible, e.g. one or both of the forgone 2-year and 5-year auctions may be restored. Any change would be announced in conjunction with the release of the Quarterly Bond Schedule.
Table A2.4
Bond Auctions by Quarter
| Fiscal Year 2007–08 | Fiscal Year 2008–09 | ||||||
|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 |
| 2-year | 2-year | 2-year | – | 2-year | 2-year | 2-year | – |
| 5-year | 5-year | – | 5-year | 5-year | 5-year | – | 5-year |
| 10-year | 10-year | 10-year | 10-year | 10-year | 10-year | 10-year | 10-year |
| – | 30-year | – | 30-year | 30-year | – | 30-year | – |
Bond Buyback Programs
Two types of bond buyback operations will continue to be conducted: regular bond buybacks and cash management bond buybacks. Regular bond buybacks permit the maintenance of a liquid new bond issue program by buying existing bonds with a remaining term to maturity from 18 months to 25 years. Effective April 1, 2008, the lower bound for bonds eligible for the bond buyback program will be changed to 12 months. Cash management bond buybacks aid in the management of cash balances by repurchasing bonds maturing within the next 18 months.
Regular Bond Buyback Operations
The size of the regular bond buyback program will be scaled back. A reduction in buybacks is appropriate as the bond stock becomes concentrated in fewer old benchmark bonds. While buybacks have helped support the maintenance of gross bond issuance, the need for buybacks has diminished with the consolidation of the borrowings of three Crown corporations.
The target for 2008–09 is to conduct $6 billion in regular bond buyback operations, $1 billion less than in 2007–08. The date of each operation will be announced through the Quarterly Bond Schedule.
Cash Management Bond Buyback Operations
The cash management bond buyback program helps manage the Government’s cash requirements by reducing the high levels of cash balances needed ahead of large bond maturities. No major change is planned to cash management bond buyback operations in 2008–09.
Operational Changes
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Minor operational changes will be made to the bond buyback
program to broaden the eligible basket of securities available for
buyback operations. These changes will be updated in Details on
Bond Buyback Operations on the Bank of Canada website (
www.bankofcanada.ca/en/auction/bond_back_070406.pdf)
effective April 1, 2008.
Treasury Bill Program
By the end of 2008–09, the treasury bill stock is projected to reach an estimated level of $140 billion, about $23 billion more than at the end of 2007–08 (Chart A2.2). The Government plans to continue issuing 3-, 6- and 12-month maturities.
Cash management bills (CMBs) (i.e. short-dated treasury bills) help the Government manage its cash requirements in an efficient manner. The Government intends to continue to actively use CMBs in 2008–09.
Retail Debt Program
The objectives of the retail debt program for 2008–09 are to deliver cost-effective funding to the Government and to maintain public awareness of and access to current products (Canada Savings Bonds and Canada Premium Bonds). These products provide Canadians with a safe and secure investment option.
The volume of new sales is expected to remain stable. Redemptions are expected to exceed sales in an environment of increased competition from other retail savings instruments in the marketplace. As a result, the retail debt stock is expected to decline. Over the coming year, the Government will look for opportunities to reduce overall program delivery costs.
Further information on the retail debt program is available at www.csb.gc.ca.
Foreign Currency Funding
The Government’s foreign currency reserves are financed through foreign currency liabilities to minimize exposure to currency risk. The purpose of the Exchange Fund Account (EFA) is to aid in the control and protection of the external value of the Canadian dollar. EFA assets are held to provide foreign currency liquidity to the Government and to promote orderly conditions for the Canadian dollar in the foreign exchange markets, if required.
The Government has access to a range of direct sources of funding for its foreign currency assets. These include a short-term US-dollar paper program, medium-term note issuance in various markets, international bond issues, and short-term purchases and sales of US dollars in foreign exchange markets. Cross-currency swaps, which are derivatives that involve exchanging domestic liabilities for US-dollar and euro-denominated liabilities, have proven to be a cost-effective alternative to issuing government debt in foreign currencies and have been actively used in recent years. They currently total some $30 billion, and represent 76 per cent of total foreign currency liabilities.
The mix of funding sources used in 2008–09 will depend on a number of considerations, including relative cost, market conditions, and the objective of maintaining a prudent foreign-currency-denominated debt maturity structure. A significant amount of foreign liabilities are maturing during the year, and the Debt Management Strategy assumes that all of these maturities will be refinanced. However, the amount of foreign currency funding may vary from the plan, depending on market conditions and government foreign currency needs. It is expected that cross-currency swaps of domestic obligations will continue to be the primary source of reserves funding.
Further information on foreign currency reserves management and funding objectives is provided in the Report on the Management of Canada’s Official International Reserves, which is available on the Department of Finance website.
1 Approved Orders in Council are available on the Privy Council Office website at www.pco-bcp.gc.ca/oic-ddc/oic-ddc.asp?LANG=en. [Return]
2 Netting these liabilities, of which a large proportion is fixed-rate, has the impact of reducing the fixed-rate share of the debt by approximately 1 percentage point as at March 31, 2007. [Return]
3 An evaluation of the CMB program, begun in 2006–07, is expected to be completed in the spring of 2008. The evaluation assesses the effectiveness of the program during its first five years in achieving its objectives of improving the competitiveness of the mortgage sector and helping ensure Canadians have access to affordable mortgage financing. [Return]
4 Estimated borrowings on behalf of the three Crown corporations in 2007–08 is roughly $4 billion. [Return]
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