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Ottawa, April 3, 1996
1996-031
Government of Canada 1996-97 Debt Strategy
Related document:
Secretary of State (Finance) Doug Peters today announced on behalf of the Minister of Finance, Paul Martin, Canada's debt strategy for the 1996-97 fiscal year. The overriding objective of the debt strategy is to provide stable, low-cost funding for the Government of Canada.
The management of the federal government's public debt is of major importance to Canadians. At the end of 1995-96, the net public debt is estimated to have reached $578.4 billion or 74.2 per cent of GDP. Public debt charges in 1995-96 are estimated at $47 billion, the largest single expenditure item for the federal government. Fiscal actions taken by the government in its budgets will stop the rise in the debt to GDP ratio and put it on a firm downward track. This progress means that Canada's reliance on foreign savings will continue to be reduced.
Greater debt cost stability is being achieved by increasing the percentage of the debt stock financed at fixed interest rates and for longer terms. For 1996-97, longer-term financing will be modestly larger than in 1995-96. This modest increase, in combination with declining financial requirements, will increase the fixed-rate proportion of the debt stock to 65 per cent within a few years. As a result of the higher fixed proportion of the debt, the stock of Treasury bills will gradually decrease.
A new retail strategy has been put in place to stop the decline in the retail investor base and provide Canadians a greater opportunity to invest in a range of Government of Canada debt products. Jacqueline Orange was recently appointed founding President of the Canada Retail Debt Agency.
Another key objective of federal debt management is to improve the functioning of the fixed-income market. Liquidity will be improved by increasing the target range for all benchmark bonds, and transparency will be enhanced by pre-announcing the maturity dates of all offerings in the quarterly auction calendar.
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For further information:
Jon Cockerline
Financial Markets Division
(613) 992-4468
Backgrounder
Focus of Debt Strategy
The major focus for the past several years has been on achieving greater stability of debt servicing costs. Canada's large debt stock is exposed to interest rate changes originating from events in Canada and around the world.
Some $250 billion of federal debt will be maturing or repriced over the next 12 months. If interest rates are 1 percentage point (100 basis points), higher than forecast over the coming year, debt costs will increase by some $1.3 billion in the first year.
65 Per Cent Fixed Target
Greater cost stability has been pursued by increasing the size of the bond program. Since 1989-90, the fixed share of the government's debt has been increased from a low of 50 per cent to the present level of 57 per cent. Because of declining financial requirements, the 65 per cent fixed target can now be achieved within the next few years.
A 65 per cent fixed share for the government's debt structure will bring Canada more in line with other G-7 sovereigns and will bring more stability to debt charges.
Program Implications
The federal government's bond program in 1995-96 was just over $50 billion. In 1996-97, the bond program will be modestly increased in size, in part by moving to regular quarterly three-year bond issues (from two issues last year). Given the government's relatively low 1996-97 financing requirements of $14.7 billion (taking into account Exchange Fund Account profits), the larger bond program will have the effect of reducing the amount of Treasury bills outstanding. While a number of factors may affect the outcome, achievement of a 65 per cent fixed stock is expected to reduce the size of the Treasury bill stock by up to 25 per cent from its current level of around $165 billion within the next few years.
Improving Market Function
A number of measures have been taken by the government over the last few years to improve the liquidity, efficiency and transparency of the Canadian fixed-income market. A well-functioning market improves the cost-effectiveness of government funding and is of benefit to other borrowers and the economy.
(i) Benchmarks
Improved liquidity has been attained by building large benchmark bonds at the maturities of two, three, five, 10 and 30 years. For 1996-97, the benchmark target ranges have been increased by $1 billion; i.e. two- and three-year issues will be reopened to achieve a target size of between $5 billion and $7 billion, while five-, 10-, and 30-year issues will be built through reopenings to a target size of between $7 billion and $10 billion. This change is in keeping with the desire expressed by market participants for greater liquidity.
(ii) Quarterly Auction Calendar
The quarterly auction schedule now announces the dates of all auctions and the maturities of the regular quarterly auctions of two-, five-, 10- and 30-year maturities. In 1996-97, transparency will be further improved by including the three-year maturity as a regular quarterly auction, and pre-announcing the maturities of all auctions in the quarterly auction schedule.
(iii) Market Development
Greater efficiency has been achieved by adopting an all-auction, book-based system for Canadian dollar-denominated debt. Support has also been provided for the development of futures contracts in Government of Canada bonds, the repo and strip markets, and for enhancing the visibility of trading information (current best bid-offered price quotations and amounts purchased and sold) on Government of Canada bonds.
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