Archived - Annex 2:
Debt Management Strategy

Introduction

The 2021-22 Debt Management Strategy sets out the Government of Canada’s objectives, strategy, and borrowing plans for its domestic debt program and the management of its official reserves

The Financial Administration Act (FAA) requires that the Minister of Finance table, in each House of Parliament, a report on the anticipated borrowing to be undertaken in the fiscal year ahead, including the purposes for which the money will be borrowed and the management of the public debt, no later than 30 sitting days after the beginning of the fiscal year. The2021-22 Debt Management Strategy fulfills this requirement.

This year’s Debt Management Strategy takes an important step forward in continuing to implement the government’s approach, first outlined last summer in the 2020 Economic and Fiscal Snapshot, by issuing long-term debt to finance the emergency support to Canadians and Canadian businesses through the pandemic. As a result of these actions, and the path forward outlined in this year’s strategy, the government has a plan to more than double, compared to 2019, the share of its annual bond issuance dedicated to long-term debt. Over the next several years, these actions will result in the government’s average term to maturity for its domestic market debt to reach a level not seen in over 40 years. Despite the significant increase in total debt the government has taken on as a result of COVID-19, total public debt charges are projected to be lower both in 2021-22 and 2022-23, than was forecast in December 2019 in the 2019 Economic and Fiscal Update.

Objectives

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

For 2021-22, the government will seek to maximize the financing of COVID-19-related debt through long-term issuance. This is a fiscally prudent approach that provides security by lowering debt rollover and providing more predictability in the cost of servicing debt. It involves maintaining a shift towards long-term debt issuance, which began in 2020-21, re-opening the ultra-long 50-year bond in 2021-22, and continuing to issue in this sector in coming years. The government will closely monitor financial markets and may issue more long-term debt if market conditions are favourable. Having access to a well-functioning government securities market contributes to lower costs and less volatile pricing for the government, ensuring that funds can be raised efficiently over time to meet the government’s financial requirements. Moreover, to support a liquid and well-functioning market for Government of Canada securities, the government strives to promote transparency and consistency.

The government plans to update financial markets on the debt program in the fall.

Outlook for Government of Canada Debt

Canada entered the pandemic in a position of fiscal strength which enabled the government to provide extraordinary support to Canadians and Canadian businesses to weather the impact of the pandemic, and better position the economy for recovery. The cost of inaction in the face of this pandemic would have been much higher than that of not doing enough.

Prudent fiscal management means Canada continues to have an enviable fiscal position relative to international peers, with the lowest net debt-to-GDP ratio in the G7. Furthermore, the government has already issued an unprecedented level of long-term bonds, at historically low interest rates, to ensure Canada’s debt is sustainable and will not weigh on future generations.

Rating agencies have indicated that Canada's effective, stable, and predictable policymaking and political institutions, economic resilience and diversity, well-regulated financial markets, and its monetary and fiscal flexibility contribute to Canada's strong current credit ratings: Moody's (Aaa), S&P (AAA), DBRS (AAA), and Fitch (AA+).

Planned Borrowing Activities for 2021-22

The projected sources and uses of borrowings for 2021-22 are presented in Table A2.1. Actual sources and uses of borrowings compared with the projections will be reported in the Debt Management Report for 2021-22. This document will be released soon after the Public Accounts of Canada 2022, which provides detailed accounting information on the government’s interest-bearing debt.

Sources of Borrowings

The aggregate principal amount of money to be borrowed by the government in 2021-22 is projected to be $523 billion.

This is consistent with the borrowing limits previously proposed by the government in December 2020, with the tabling of Bill C-14, the Economic Statement Implementation Act, 2020.

Uses of Borrowings

The government’s borrowing needs are driven by the refinancing of debt and projected incremental financial requirements. The size of the program reflects both requirements to refinance debt of $332 billion, including the large maturing stock of short-term debt issued in 2020-21 in response to the COVID-19 pandemic, as well as the projected financial requirement of $191 billion to support the recovery in 2021-22. All borrowings will be sourced from domestic and foreign wholesale markets (Table A2.1). The long-term outlook of the government’s cash balances is not expected to change since new borrowings are expected to meet all financing requirements.

Despite record borrowings to support Canadians and the economy during the COVID-19 pandemic, public debt charges are projected to remain sustainable at $22.1 billion for 2021-22, representing 0.9 per cent of GDP. Even though interest rates are forecasted to increase throughout the forecast horizon, public debt charges are projected to only rise to 1.4 per cent of GDP by 2025-26 to a level of $39.3 billion. This is still substantially lower than the average cost of financing debt over the last two decades, even with a significantly higher public debt load because of COVID-19.

Public debt charges remain on a sustainable long-term path and are still projected to be $1.6 billion lower in 2022-23 than forecast in the December 2019 Economic and Fiscal Update (forecast of $27.3 billion at that time), before the onset of COVID. This is in spite of a substantial increase in federal debt as a result of the pandemic.

Throughout 2021-22, the government will closely monitor conditions and issue more long-term debt if market conditions are favourable. In addition, actual borrowings for the year may differ 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 corporation borrowings. To adjust for these unexpected changes in financial requirements, debt issuance can be altered during the year, typically through changes in the issuance of treasury bills.

2021-22 Borrowing Program

As Canada moves towards economic recovery, the shift towards long-term debt issuance, which began in 2020-21, will continue. Funding more COVID-19-related debt through long-term issuance will help provide security and stability to the government balance sheet by lowering debt rollover while remaining fiscally prudent. Issuances with a maturity of 10 years or greater will be higher in 2021-22 than 2020-21 in both relative and absolute terms (Table A2.2). As part of this move towards longer-term issuance, the government will re-open issuance of the ultra-long 50-year bond for 2021-22.

Before the pandemic, 15 per cent of the bonds issued by the government were issued at maturities of 10 years or greater. Over the course of 2020, federal government allocations of long bonds rose to about 29 per cent. The government is now proposing to increase that proportion to 42 per cent. This will result in the longest average term to maturity in four decades, and will protect Canada from rollover risks.

The government also plans to issue its first ever green bond in 2021-22 to support the environment and climate change plan. The inaugural green bond issuance will target $5 billion, subject to market conditions, and will be the first of many issuances. More details are provided in Chapter 5 of this budget.

In addition, the government proposes to explore, through Debt Management Strategy consultations this fall, the potential for the issuance of social bonds. More details are provided in Chapter 6. Social bonds can support investments in a variety of areas that promote greater social inclusion and broad-based economic prosperity, such as the historic investments in early learning and child care proposed in Budget 2021.

Composition of Market Debt

The total stock of market debt is projected to reach $1,305 billion by the end of 2021-22 (Table A2.3)

Over the next three years, the average term to maturity for outstanding domestic marketable bonds and treasury bills is expected to increase to nearly 8 years, a level that is significantly higher than the historical average of 5.9 years seen in the period from 1981-82 to 2019-20.

Gross debt issuance will fall in 2021-22 compared to 2020-21, reflecting lower financial requirements. However, as illustrated in Table A2.4, the total level of issuance of bonds with a term to maturity of 10 years or more is planned to be higher than in 2020-21.

Treasury Bill Program

Bi-weekly issuance of 3-, 6-, and 12-month maturities are planned for 2021-22, with auction sizes planned to be largely within the $12 billion to $32 billion range. As financial requirements in 2021-22 and following years are expected to be lower than 2020-21, the government will target a year-end stock of treasury bills of $226 billion for 2021-22. This approach is intended to support a liquid and well-functioning market for Canadian federal government treasury bills, which helps investors, as a whole, who need access to short-term, interest-bearing securities in lieu of cash. This approach is also informed by consultations with market participants held in September and October 2020. Market participants indicated that treasury bills were currently in high demand due to excess cash in the financial markets, both from domestic and international investors. Further highlights from these consultations are outlined in the 2020 Fall Economic Statement.

Cash management bills (i.e., short-dated treasury bills) help manage government cash requirements in an efficient manner. These instruments will also be used in 2021-22 when needed.

2021-22 Bond Program

Annual gross bond issuance is planned to be about $286 billion in 2021-22, $88 billion lower than the $374 billion issued for 2020-21 (Table A2.4), and the total stock of bonds is projected to be $1,062 billion by the end of 2021-22. The reduction in annual bond issuance reflects the decrease in expected financial requirements over the next few years as the economy recovers from the COVID-19 pandemic. The approach balances liquidity requirements in both the treasury bill and core benchmark bond sectors, while also satisfying the government’s objective of placing COVID-19-related debt in long-term sectors.

Throughout 2021-22, the government will closely monitor financial markets and, subject to favourable market conditions, will seek opportunities to issue more long-term debt. Along with treasury bills, issuance in the 3-year sector may be adjusted to address potential larger issuance in long-term issuances or unexpected changes in financial requirements. Given the Bank of Canada’s purchases of Government of Canada bonds in the secondary market, regular, switch, and cash management bond buyback operations are not planned for 2021-22.

Maturity Date Cycles and Benchmark Bond Target Range Sizes

For 2021-22, benchmarks in core sectors will be lower in many sectors relative to 2020-21, reflecting the decreased overall issuance in bonds (A2.5).

Bond Auction Schedule

In 2021-22 there will be quarterly auctions of 2-, 3-, 5-, 10-, 30-, and 50-year bonds. Some of these bonds may be issued multiple times per quarter. The number of planned auctions in 2021-22 for each sector is shown in Table A2.6. The actual number of auctions for 2021-22 may be different from the planned number due to unexpected changes in borrowing requirements. In addition, the government may increase the number of long-term bond auctions if market conditions are favourable for more long-term issuance.

The dates of each auction will continue to be announced through the Quarterly Bond Schedule, which is published on the Bank of Canada’s website prior to the start of each quarter.

Management of Canada’s Official International Reserves

The Exchange Fund Account (EFA), which is held in the name of the Minister of Finance, represents the largest component of Canada’s official international reserves. It is a portfolio of Canada’s liquid foreign exchange reserves and special drawing rights (SDRs)^{Footnote 1} used to aid in the control and protection of the external value of the Canadian dollar and provide a source of liquidity to the government. In addition to the EFA, Canada’s official international reserves include Canada’s reserve position held at the International Monetary Fund.

The government borrows to invest in liquid reserves, which are maintained at a level at or above three per cent of nominal GDP. Net funding requirements for 2021-22 are estimated to be around US$15 billion, but may vary as a result of movements in foreign interest rates and exchange rates.

Foreign debt is used exclusively to provide funding for Canada’s official international reserves. The anticipated rise in foreign funding in fiscal year 2021-22 is due to swap and bond maturities that need to be financed.

The mix of funding sources used to finance the liquid reserves in 2021-22 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, cross-currency swaps involving the exchange of Canadian dollars for foreign currency to acquire liquid reserves, and the issuance of global bonds.

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 money 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. 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 are managed to normally cover at least one month of net projected cash flows, including coupon payments and debt refinancing needs.

Owing to the government's ample fiscal capacity and continued access to funding markets, the government did not need to access liquidity from its Prudential Liquidity Plan.