Annex 3 - Debt Management Strategy for 2016–17

Purpose

The Debt Management Strategy presents the Government of Canada’s plans for the management of its domestic and foreign debt, other financial liabilities and related assets in 2016–17. The borrowing activities covered by the Strategy include the refinancing of government debt coming to maturity, the execution of the budget plan and the ongoing financial operations of the Government. This includes borrowing on behalf of certain Crown corporations.

The Financial Administration Act requires that the Government table in Parliament, prior to the start of the fiscal year, a report on the anticipated borrowing to be undertaken in the year ahead, including the purposes for which the money will be borrowed. The Debt Management Strategy fulfills this requirement.

Planned Borrowing Activities for 2016–17

Borrowing Authority

The Financial Administration Act provides the authority for the Government to conduct market borrowings subject to approval by the Governor in Council.

In 2016–17, the Government will propose legislative amendments to require Parliamentary approval of Government borrowing to enhance transparency and accountability to Parliament.

The expected sources and uses of borrowings are set out below. Actual borrowings and uses of funds compared with the forecast will be reported in the 2016–17 Debt Management Report, and detailed information on outcomes will be provided in the 2017 Public Accounts of Canada.

Sources of Borrowings

The aggregate principal amount of money to be borrowed by the Government from financial markets in 2016–17 is projected to be $278 billion.

Uses of Borrowings

Refinancing needs, projected to be $241 billion during the year, are mainly comprised of $136 billion for maturing treasury bills and $92 billion for maturing bonds.

The other determinant of borrowing needs is the Government’s financial source/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 into 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.

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).

For 2016–17, a financial requirement of approximately $37 billion is projected. As the amount the Government plans to borrow is equivalent to the borrowing requirements, the year-end cash position is not projected to change (Table A3.1).

Actual borrowings 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 and Crown borrowings.

Debt Management Strategy for 2016–17

Objectives

The fundamental objective of debt management is to raise stable and low-cost funding to meet the financial needs of the Government of Canada. Achieving stable low-cost funding involves striking a balance between the cost and the risk associated with the debt structure as funding needs change and under various market conditions.

An associated objective is to maintain a well-functioning market in Government of Canada securities, which helps to keep debt costs low and stable. Having access to a well-functioning government securities market ensures that funding can be raised efficiently over time to meet the Government’s needs. To support a liquid and well-functioning Government of Canada securities market, the Government strives to promote transparency and regularity.

Increasing Bond Issuance

The Government is increasing issuance in all existing nominal bond sectors, including the 2- and 5-year sectors, and also re-introducing the 3-year sector for 2016–17. This approach considers the liquidity needs of the market for core existing sectors while ensuring the Government has access to an additional sector.

Market Consultations

As in previous years, market participants were consulted in 2015–16 as part of the process of developing the debt management strategy.

Overall, market participants indicated that liquidity in Government of Canada securities has declined relative to previous years, particularly but not exclusively in off-the-run (non-benchmark) bonds. Market participants expressed the importance of maintaining a bond program that has large liquid benchmarks for key sectors, particularly the 2-year and 5-year sectors, and a minimum stock of treasury bills to support market well-functioning.

Debt Structure Planning

The Debt Management Strategy for 2016–17 is informed by analysis that reflects a wide range of economic and interest rate scenarios and forecasts for the debt structure over a medium-term horizon.

Specifically, the Government seeks to strike a balance between keeping funding costs low and mitigating risks, as measured by metrics such as debt rollover, the variation in annual debt-service charges and the variation in the annual budgetary balance. Consequently, the debt strategy, while increasing issuance in all nominal bond sectors, has an increased focus on the issuance of short- and medium-term bonds (2-, 3- and 5-year maturities).

Over the next decade the share of bonds with original terms of 10 years or more is projected to remain around 40 per cent, with the level of refinancing risk of domestic market debt projected to decline over the medium term. The net annual refinancing amount of domestic market debt as a percentage of gross domestic product (GDP), which measures the amount of all domestic market debt that matures within one year relative to Canada’s GDP, is projected to decline from about 8 per cent in 2016–17 to under 6 per cent over the coming decade.

The average term to maturity of domestic market debt, net of financial assets, is projected to remain relatively stable at around 7 to 7.5 years over the medium term.

Composition of Market Debt

Total market debt is projected to reach $706 billion by the end of 2016–17 (Table A3.2).

The treasury bill stock is not projected to change materially by the end of the fiscal year. This will serve to reduce overall refinancing and rollover risk for the market debt portfolio, while taking advantage of historically low interest rates to continue to achieve low funding costs.

Bond Program

In 2016–17, gross bond issuance is expected to be $133 billion, representing an increase of about $41 billion from 2015–16 levels (Table A3.3).

Given the strong demand for long-term bonds and with long-term yields remaining well below their historical average, the Government may consider issuing additional 50-year bonds in 2016–17. Any decision to reopen the 50-year bond would be subject to favourable market conditions. Consultations were undertaken in 2015 on auctions of 50-year bonds and this is an option that could be used by the Government.

Maturity Dates and Benchmark Bond Target Range Sizes

For 2016–17, no changes to the bond maturity pattern are planned, while benchmark target range sizes are increasing for the 2-, 5- and 10-year sectors.

The maturity date pattern and benchmark size range for the 3-year bond sector will be made public following discussions with market participants in the first quarter of the fiscal year.

Bond Auction Schedule

In 2016–17, there will be quarterly auctions of 2-, 3-, 5- and 10-year bonds and Real Return Bonds.¹ Five 10-year bond auctions will occur—two in the first quarter of 2016–17 and one in each of the remaining quarters of 2016–17. Two 30-year nominal bond auctions will occur—one in each of the first and third quarters of 2016–17.

The order of bond auctions within each quarter may be adjusted to support the borrowing program, and there may be multiple auctions of the same bonds in some quarters. The dates of each auction will continue to be announced through the Quarterly Bond Schedule that is published on the Bank of Canada website prior to the start of each quarter.

Bond Buyback Programs

Two types of bond buyback operations are conducted from time to time: regular bond buybacks on a switch basis and cash management bond buybacks.

Buyback operations on a switch basis may be continued in the 30-year sector. However, no regular buyback operations on a cash basis are expected for 2016–17.

Weekly cash management bond buyback operations will be continued in 2016–17. The cash management bond buyback program helps to manage government cash requirements by reducing the high levels of cash balances needed ahead of large bond maturities.

Treasury Bill Program

Over the course of 2016–17, the share of treasury bills is projected to decline to just under 20 per cent of domestic market debt. This decline is consistent with the medium-term objective of reducing the treasury bill target share to around 20 per cent to contain debt rollover and maintain issuance stability in the bond program.

In accordance with this objective, the stock of treasury bills is projected to decline slightly, moving from $136 billion at the start of this fiscal year to about $134 billion by the end of 2016–17.

Bi-weekly issuance of 3-, 6- and 12-month maturities will be continued in 2016–17, with bi-weekly auction sizes projected to be largely in the $8 billion to $14 billion range. Cash management bills (i.e., short-dated treasury bills) help manage government cash requirements in an efficient manner. These instruments will also continue to be used in 2016–17.

Retail Debt

Over 2 million Canadians hold Canada Savings Bonds (CSBs) or Canada Premium Bonds (CPBs). CSBs are offered exclusively through the Payroll Savings Program while CPBs are available for sale through financial institutions and dealers, as well as directly by phone. Further information on the retail debt program is available on the Canada Savings Bonds website.

Foreign Currency Funding

The Exchange Fund Account (EFA) aids in the control and protection of the external value of the Canadian dollar, and provides a source of liquidity to the Government. The Government borrows in foreign currencies to invest in EFA assets. Liquid foreign exchange reserves are maintained at a level at or above 3 per cent of nominal GDP, and the Debt Management Strategy assumes that all foreign liabilities maturing during the year will be refinanced. Foreign currency funding requirements for 2016–17 are estimated to be around US$10 billion, but may vary as a result of movements in foreign interest and exchange rates.

The mix of funding sources used to finance the reserves in 2016–17 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. Potential funding sources include a short-term US-dollar paper program (Canada bills), medium-term notes, international bond issues (global bonds), purchases and sales of Canadian dollars in foreign exchange markets, and cross-currency swaps involving the exchange of domestic liabilities for foreign-currency-denominated liabilities.

Further information on foreign currency funding and the foreign reserve assets is available in the Report on the Management of Canada’s Official International Reserves and in The Fiscal Monitor.

Cash Management

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 with the Bank of Canada, chartered banks and other financial institutions. Cash with the Bank of Canada includes operational balances and balances held for prudential liquidity. Cash balances are projected to remain stable at $36 billion at the end of the fiscal year. Periodic updates on the liquidity position are available in The Fiscal Monitor.

Prudential Liquidity

The Government holds liquid financial assets in the form of domestic cash deposits and foreign exchange reserves to safeguard its ability to meet payment obligations in situations where normal access to funding markets may be disrupted or delayed. The Government’s overall liquidity levels cover at least one month of net projected cash flows, including coupon payments and debt refinancing needs.

Prudent Management of Canada’s Finances

In 2016–17, the Government will review the Financial Administration Act and related statutes to ensure that they continue to reflect and accommodate modern market practices for the prudent management of Canada’s finances.