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Debt Management Report - 1999-2000: 1
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Foreword by the Minister of Finance

The federal government registered a budgetary surplus of $12.3 billion in 1999-2000, the largest ever recorded by the Government. This is also the third consecutive year the Government has recorded a budgetary surplus.

These surpluses, resulting from continued restraint on the spending side and strong economic growth, have allowed the Government to reduce the net public debt by almost $19 billion over the last three years. Net public debt currently stands at $564.5 billion and now represents 58.9 per cent of gross domestic product (GDP) compared to 71.2 per cent in 1995-96. After more than a quarter of a century of deficits, all Canadians can take pride in this remarkable fiscal turnaround.

Yet the fact remains that servicing the debt is the largest spending program of the federal government. For every dollar of revenue it collects, the federal government spends 25 cents to pay interest on the public debt. Although this is a big improvement over the 36 cents the Government was paying in 1996, debt servicing costs still limit the Government's ability to address other priorities such as health care, education and lower taxes.

That is why the Debt Management Report is so important. It provides a detailed account of the federal government's debt operations, including the composition of the debt, its distribution, and the mechanisms and activities through which it is prudently managed in the interests of Canadians. This edition of the report, for example, provides details on a number of specific measures aimed at continuing the Government's efforts to maintain transparency, liquidity and efficiency in the market for Government of Canada securities in a declining debt environment and to improve its treasury operations.

Timely and transparent information of this kind enables Canadians to hold the Government accountable for its actions and decisions. It was in this spirit that this Government amended the Financial Administration Act last year, making it mandatory that the Debt Management Report be tabled in Parliament every year shortly after the tabling of the Public Accounts of Canada – the Government's financial statements.

The Government remains fully committed to managing the debt prudently to provide stable, low-cost financing for the programs that Canadians value. Continued diligence in the management of public finances is a key plank in the Government's strategy to sustain economic growth so that Canadians can have more jobs, higher incomes and a better quality of life.

The Honourable Paul Martin, P.C., M.P.
Minister of Finance
Ottawa, December 2000

Highlights of 1999-2000

• In 1999-2000, the federal government recorded a budgetary surplus of $12.3 billion after surpluses of $3.5 billion in 1997-98 and $2.9 billion in 1998-99.

• Net public debt has declined by $18.7 billion from its peak in 1996-97 to stand at $564.5 billion. At year-end 1999-2000, it stood at 58.9 per cent of GDP, down from its peak of 71.2 per cent in 1995-96.

• The Government spent about 25 cents of every dollar of revenue in 1999-2000 to pay the interest on the public debt. The cost of servicing the debt underscores the importance of prudent debt management.

• As of March 31, 2000, the federal government's market debt totalled $456.4 billion (see Table 1). During 1999-2000, the federal government retired $4.0 billion of its market debt. Since 1997-98 the Government has retired $20.4 billion of market debt.

Table 1
1999-2000 Market Debt Program

• The Government maintained the fixed-rate share of the debt stock at two-thirds of total interest-bearing debt. A prudent debt structure protects the Government's fiscal position from unexpected increases in interest rates and limits refinancing risk.

• Improved sensitivity analysis suggests that this structure provides assurance that the direct impact of most interest rate shocks on the fiscal balance would be contained within the budget framework with a high degree of certainty.

• Continuing its efforts to maintain transparency, liquidity and efficiency in the market for Government of Canada securities in a declining debt environment and to improve its treasury operations, the Government took a number of further steps in 1999-2000, including:

• the bond buyback program was implemented on an ongoing basis, contributing to the maintenance of primary bond market liquidity;
• a market proposal to remove the ceiling on the reconstitution of government securities was reviewed and approved in June 2000; and
• a new framework for the investment of the Government's cash balances aimed at broadening participation by investors and enhancing risk management was developed and subsequently published for comment in July 2000.

Debt Management Environment

Fiscal Developments in 1999-2000

In 1993-94, the federal deficit stood at $42 billion. The actions taken in the 1994, 1995 and 1996 budgets, coupled with sustained economic growth, resulted in the elimination of the deficit in just four years. In 1997-98, a budgetary surplus of $3.5 billion was recorded, the first surplus in 28 years. This was followed by surpluses of $2.9 billion in 1998-99 and $12.3 billion in 1999-2000.

The 1999-2000 budgetary surplus of $12.3 billion, combined with a net source of funds from non-budgetary transactions of $2.3 billion, produced a financial source (excluding foreign exchange transactions) of $14.6 billion, following a financial source of $11.5 billion in 1998-99. The results for 1999-2000 marked the fourth consecutive year that the federal government recorded a financial source (excluding foreign exchange transactions). Including foreign exchange transactions, primarily relating to supplementing foreign exchange reserves, the net financial source was $7.7 billion for 1999-2000.

Financial requirements/source is a measure of the Government's financial position that is broadly comparable to the measure of budgetary balance used by other major industrialized countries, including the United States. On this basis, Canada is the only Group of Seven (G-7) country to report a financial source for four consecutive years.

The budgetary surplus of $12.3 billion recorded in 1999-2000 brings the federal government's net public debt down to $564.5 billion. As a share of GDP, the net public debt dropped to 58.9 per cent from a peak of 71.2 per cent in 1995-96. This ratio is generally recognized as the most appropriate indicator of the debt burden as it measures debt relative to the ability of the Government and the country's taxpayers to finance it. In 1999-2000 alone the net debt-to-GDP ratio declined by 5.1 percentage points, the largest drop since 1948-49. This is the fourth consecutive year in which the debt-to-GDP ratio has declined, and it is at its lowest level since 1990-91 (see Chart 1).

Market Developments in 1999-2000

The overall financial market environment was much more stable in 1999-2000 than in 1998-99, a period marked by considerable international uncertainty related to the Asian financial crisis, the Russian debt default and losses at a number of large international investment ("hedge") funds. In Canada, economic growth remained very healthy through 1999-2000, the Canadian dollar rebounded from its record lows of the previous year and inflation remained well within the 1 to 3 per cent target range. Short-term interest rates rose through the latter part of the year as monetary policy became less accommodative as the economy began to approach its estimated capacity. The Bank of Canada raised the target rate for overnight loans three times from 4.5 per cent in November 1999 to 5.25 per cent in March 2000. Short-term interest rates in the United States were increasing over the same period (see Chart 3).

Government yield curves (i.e. the structure of interest rates from short term to long term) in both countries were in the unusual situation of being "inverted" or downward sloping for much of the latter part of the year (for Canada, see Chart 2). This reflected a number of factors, including expectations regarding the direction of monetary policy, concerns about reductions in the supply of government securities in an environment of budgetary surpluses, especially at longer terms to maturity, as well as a high degree of confidence in long-term inflation performance. Canadian interest rates were generally below U.S. interest rates for most of the year (see Charts 3, 4 and 5). Longer-term interest rates increased in both Canada and the United States for most of the year although they began to decline around January 2000 (see Charts 4 and 5).

Composition of the Federal Debt

The 1999-2000 budgetary surplus brought the federal government's net public debt – gross public debt net of the Government's financial assets (primarily cash and international reserves) – down to $564.5 billion from $576.8 billion in 1998-99 (see Chart 6). Net public debt has declined by $18.7 billion from its peak in 1996-97.

Gross public debt at the end of March 2000 totalled $638.7 billion. Gross public debt is made up of two major components: market debt and non-market debt. Market debt is the portion of debt that is funded in the public markets. It consists of marketable bonds, Treasury bills, Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs), foreign-currency-denominated bonds and bills, and bonds issued by the federal government to the Canada Pension Plan (CPP). At March 31, 2000, market debt outstanding was $456.4 billion. In 1999-2000, the level of market debt declined by $4 billion. Over the past three fiscal years, $20.4 billion of market debt has been retired. Non-market debt consists of past federal public sector pension liabilities, which are not funded in the public markets, and the Government's current liabilities (such as accounts payable, accrued liabilities, interest and payment of matured debt). At March 31, 2000, non-market debt totalled $182.3 billion.

At March 31, 2000, outstanding market debt comprised $280.6 billion of fixed-coupon nominal bonds, $13.3 billion of real return bonds (RRBs), $99.9 billion of Treasury bills, $26.5 billion of CSBs and CPBs, $3.6 billion of CPP bonds and $32.6 billion of foreign-currency-denominated securities (see Chart 7). In addition, the Government had $2.5 billion of interest-rate swaps and $20.1 billion of cross-currency swaps outstanding as of March 31, 2000. For further information on swaps and other programs, see the section entitled "1999-2000 Debt and Cash Management Operations by Program."

Federal Debt Management Strategy: 1999-2000 Initiatives

The fundamental debt management objective is to raise stable, low-cost funding for the Government. Key strategic objectives are to maintain a prudent debt structure, maintain a diversified investor base, and maintain and enhance a well-functioning market for Government of Canada securities. The federal government uses a number of key measures and operational targets to evaluate its debt management performance against these objectives and to guide debt management decisions to achieve them. (Debt Management Strategy 2000-2001 outlined the debt management plan for 2000-2001 and is available on the Department of Finance Web site at: www.fin.gc.ca.) For background information on the general framework within which the federal debt is managed, see Annex 1.

Maintaining a Prudent Debt Structure

Managing a large stock of debt exposes the Government to financial risk arising from changes in interest rates. Exposure to interest rate risk is managed by maintaining a prudent debt structure that balances costs, or annual debt charges, and risks, or the long-term variability in annual debt charges. The capacity of debt managers to assess risk is continually being upgraded in line with the best practices of other sovereigns.

There is generally a trade-off between costs and risks. Costs can be reduced by financing a greater portion of the debt through shorter-term instruments since long-term debt is often more costly than short-term debt. On the other hand, the variability of future debt servicing costs is reduced when the debt is financed largely through long-term instruments, as a smaller portion of the debt matures each year and needs to be refinanced at the then-prevailing market interest rates.

Fixed-Rate Share

Over the 1990s, the Government put in place a more prudent debt structure by altering the term structure of its debt, issuing more long-term debt and reducing the stock of outstanding short-term debt. While there are a number of indicators that can be used to assess the debt structure, the key operational target for the Government is the fixed-rate share. That is, the Government targets the share of interest-bearing debt issued at fixed rates (i.e. debt that does not mature or need to be repriced within a year) relative to the entire interest-bearing debt stock. In moving to a more prudent debt structure, the Government increased the share of the debt stock issued at fixed rates from one-half in 1990 to two-thirds in 1998-99. Over 1999-2000, the debt was managed to preserve the average target fixed-rate portion of the debt at the two-thirds level (see Chart 8).

Cost/Risk Tradeoff

A prudent debt structure lessens the sensitivity of the budget balance to changes in interest rates.

As noted, there can be a trade-off between the costs and risks related to alternative debt structures. By establishing a more prudent debt structure, the Government has lessened the sensitivity of its underlying budgetary balance to changes in interest rates. However, a higher fixed-rate share of debt gives rise to increased debt servicing costs.

Table 2 provides an illustration of this trade-off using the current debt structure and two alternative debt structures, with 5 per cent more and 5 per cent less fixed-rate debt. It is important to note that the comparisons of alternative debt structures are only indicative because it is impossible to specify what debt issuance decisions would have been taken had the Government been operating with alternative debt targets. Therefore, certain assumptions need to be made regarding the composition of the alternative portfolios. The general approach is to notionally transfer debt between the domestic marketable bond portfolio and the domestic Treasury bill portfolio, which implicitly assumes that any decision to operate with more or less fixed-rate debt would have been reflected in these two portfolios.

As noted in Table 2, the first-year direct impact on the budgetary balance (i.e. the increase in debt service costs net of increased earnings on interest-bearing assets) of a 100-basis-point shock in interest rates in 1999-2000 would be $900 million under the current structure, compared to $1,080 million under a lower fixed-rate share of 62 per cent – some $180 million higher. With a more severe 300-basis-point shock, the degree of protection afforded by alternative debt structures is much larger. For example, debt charges with a 62-per-cent fixed-rate share would be about $540 million higher than with a 67-per-cent fixed-rate share.

On the other hand, fixed-rate debt issued since 1996-97 generally paid higher interest rates than Treasury bills paid in 1999-2000, so costs might have been lower by about $190 million¹ in 1999-2000 had the Government not increased the fixed-rate share beyond the 62-per-cent level achieved in 1996-97. Note that this cost differential will vary substantially from year to year based on the term structure of interest rates. The calculations in Table 2, for example, reflect a term structure that has been flatter than historical averages in recent years, which would tend to reduce the cost difference between shorter- and longer-term securities.

It is important to note that these observations merely provide a short-term view of the cost/risk tradeoff. The Government takes a long-term strategic view of the debt portfolio and does not focus solely on the short-term impact of debt management decisions. While the fiscal situation has improved considerably in recent years, the stock of outstanding debt that is exposed to interest rate changes remains very large. A large stock merits prudent attention as adjustments to the maturity structure can only be made gradually over time. Medium-term secular increases in interest rates such as those that occurred during the late 1980s have the potential to undermine the Government's fiscal plan. Therefore, the Government's debt strategy is intended to ensure that volatility in interest rates could be contained within the fiscal plan over a longer-term horizon. In general, the Government takes a very prudent approach, a practice that is followed by most other major sovereign borrowers.

Table 2
Sensitivity Analysis of Fixed-Rate Ratio in Early 2000-2001

Average Term to Maturity

Increasing the fixed-rate component of the debt structure has led to an increase in the average term to maturity of marketable debt from 4.1 years in March 1990 to 6.4 years in March 2000 (see Chart 9). This occurred as the outstanding stock of Treasury bills was reduced and relatively more bonds were issued. These changes have brought the term structure of Canada's debt more in line with the debt structures of many other sovereign borrowers (see Chart 10).

Maturity Profile

The Government manages the maturity profile of the debt (i.e. the amount that matures, or comes due, in any given year) to limit its refinancing risk. A stable maturity profile reduces the risk that a relatively large proportion of the debt will mature and need to be refinanced in a period of higher interest rates.

In 1999-2000, for example, some $216 billion of the market debt stock rolled over and was issued at new prevailing interest rates, compared to $422 billion in 1994-95. To a large extent, this reflects the decline in Treasury bill issuance in the late 1990s. The entire stock of Treasury bills matures each year and a substantial portion of, but not all, maturing Treasury bills are reissued. Thus, in 1995, the Government was required to refinance, on average, $8 billion per week in maturing Treasury bills compared to an average of $4 billion per week in 1999. (Treasury bill issuance was changed to biweekly in 1998.)

In addition, as illustrated in Chart 11, initiatives to regularize bond issuance into predictable benchmark securities have led to a gradual smoothing-out of the maturity profile of the bond stock – in particular, the move to building large benchmark bond issues for four maturities of domestic bonds (2-, 5-, 10-year, and long-term) and issuing bonds at regular, quarterly intervals.

Maintaining a Diversified Investor Base

A diversified investor base helps to reduce funding costs. The federal government pursues diversification of its investor base by maintaining a liquid and transparent domestic wholesale debt program that is attractive to investors, and in foreign borrowings through the use of a broad array of sources of funds. In addition, Canada Investment and Savings, the Government's retail debt agency, provides diversification by offering savings products designed to suit the needs of individual Canadians. The retail debt share of the Government of Canada's total market debt was estimated at 21 per cent last year, including estimated individual holdings of marketable securities.

Domestic Holdings of Government of Canada Debt

In 1999 (the latest year for which figures are available) life insurance companies and pension funds accounted for the largest share of domestic holdings of Government of Canada market debt (30.6 per cent), followed by public and other financial institutions such as investment dealers and mutual funds (see Chart 12). Taken together, they accounted for 53.5 per cent of domestic holdings.

Bonds and bills held by public and other financial institutions increased sharply over the 1990-1999 period – from 10.6 per cent in 1990 to 22.9 per cent in 1999. Much of the increase can be attributed to a significant increase in holdings by mutual funds.

Chartered banks' share of holdings of market debt increased from 9.5 per cent in 1990 to 15.4 per cent in 1999, while the share of persons and unincorporated businesses decreased by almost 23 percentage points since 1990 to 10.4 per cent of domestic holdings.

Reference Table IV shows the evolution of the distribution of domestic holdings of Government of Canada debt since 1976.

Non-Resident Holdings of Government of Canada Debt

Non-resident holdings of the Government of Canada's total market debt decreased by $6.5 billion in fiscal year 1999-2000. Total non-resident holdings were estimated to be $101.2 billion at the end of March 2000, representing about 22.2 per cent of the Government of Canada's total market debt. Since 1992-93, the share of total market debt held by non-residents has been steadily declining (see Chart 13).

Non-residents held $84.6 billion in government bonds in 1999-2000, a decrease of $1.3 billion from the previous year. Non-resident holdings of bills (Treasury bills and Canada Bills) declined by $5.2 billion over the fiscal year to $16.6 billion (see Reference Table V).

Maintaining a Well-Functioning Market

A well-functioning Government of Canada securities market provides low-cost financing for the federal government by promoting broader participation in the market. Transparency, liquidity and regularity are the principles underlying the maintenance of a well-functioning market. Borrowing in the domestic market on a regular, pre-announced basis and building bond benchmarks reflects these principles. Given the key role played by federal government securities in Canada's fixed-income market, adjustments to the domestic debt programs are made in consultation with market participants. In recent years the Government has made adjustments to its operational framework to enhance the liquidity of the Government of Canada securities market, such as moving to biweekly Treasury bill auctions and reducing the frequency of 30-year bond issuance from quarterly to semi-annually. In 1999-2000, no major adjustments were made to the domestic borrowing programs.

Bond Buyback Program

To enhance the liquidity of Government of Canada securities, a pilot bond buyback program was implemented in 1998-99. The program allows the Government to buy back less liquid, older outstanding bonds, financed through the issuance of replacement current benchmark bonds, thus supporting a liquid new issue bond market.

An evaluation of the pilot, which included feedback from market participants, took place in early 2000. The evaluation indicated that the program has been successful in meeting its stated objectives and has been generally helpful to the market. The repurchase program enabled the Government to conduct larger auctions in both 1998-99 and 1999-2000 than would have resulted in the absence of a buyback program, helping to support the maintenance of liquidity in the primary market for Government of Canada securities. An additional benefit of the program was improved secondary market liquidity as demand increased for previously issued bonds.

As a result, the program was implemented on an ongoing basis as of March 2000.

Stripping and Reconstitution of Bonds

In June 1999, the Investment Dealers Association of Canada (IDA) requested that the federal government approve removal of the ceiling on the reconstitution of Government of Canada securities. The ceiling limited the amount of a given bond, held in the Canadian Depository for Securities Limited (CDS), that could be reconstituted to the amount previously stripped.

Stripping involves separating bonds into individual interest and principal payment components, while reconstitution involves collecting individual components to create whole bonds, the opposite of stripping. For example, if two bonds share the same maturity date, an investor could strip the principal component of the second bond and use it to reconstitute synthetically the first bond (with the appropriate stripped coupon cash flows from any stripped bond). Stripping is done to create new investment and risk management opportunities and is used to take advantage of price differences in markets. The effect of the ceiling on reconstitution was essentially to limit the liquidity of the market.

The federal government reviewed the proposal during 1999-2000, a review that included consultations with market participants, and in June 2000 announced its support for the IDA's proposal. This means that where there are two Government of Canada securities with matching maturity dates, market participants will be able to strip one to synthetically recreate the other without being limited by the original issue sizes. The greatest practical benefit will be in cases where smaller, less liquid securities share the same maturity dates as benchmark securities, in which cases additional supply of the benchmark securities can be created. The federal government views this initiative as an additional tool for enhancing liquidity in the Government of Canada securities market, particularly for benchmark securities, and as a complement to the bond buyback program. CDS is currently working on the implementation of the proposal, which is subject to regulatory approval.

Cash Management Framework

The main objectives of the federal government's cash management operations are to ensure that the Government has sufficient cash available to meet its operating and liquidity requirements, and to invest cash in a prudent, cost-effective manner. Currently, the federal government invests its cash balances with a limited number of deposit-taking institutions (participants in the Large Value Transfer System) through a twice-daily auction process.

In 1999-2000, the Department of Finance and the Bank of Canada undertook a review of the investment framework for the Government's domestic cash balances, as part of ongoing efforts to ensure that the Government's financing and investing operations are efficient and cost-effective, and meet the standards of best practices appropriate for a sovereign government. This culminated in a discussion paper entitled "Proposed Revisions to the Rules Pertaining to Auctions of Receiver General Term Deposits," which was released in July 2000. (The document is available on the Internet at the following address: http://www.bankofcanada.ca/en/cash-bal.htm).

The proposals outlined in the paper are designed to increase competition in the Receiver General auction process and to strengthen the management of risks, in particular the credit risks involved in the investment of cash balances. In summary, it is proposed that access to the auctions be opened to all significant players in the domestic money market. Broadening access will likely have a positive effect on returns earned on cash balances and diversify the Government's counterparties. The paper also proposes to introduce a credit risk management system through the use of credit lines, credit ratings and collateral. These proposals will make the market for federal cash balances more transparent, active and competitive, thereby enhancing the efficient functioning of the domestic financial system. In the coming months, the Department of Finance and the Bank of Canada will consult and work with market participants on the implementation of the new framework, scheduled for early 2001.

Auditor General Review of the Debt Management Program

In April 2000, the Office of the Auditor General of Canada tabled as part of its annual Report of the Auditor General of Canada to the House of Commons a report on its audit of the Government's debt management program entitled Managing Canada's Debt: Facing New Challenges. (The report can be found on the Auditor General's Web site at www.oag-bvg.gc.ca.) This report is the second in recent years on the debt management program (in 1996, the Auditor General released a report entitled Federal Debt Management). The objectives of the 1999-2000 audit were to assess the degree to which the Government reviews the performance of its debt management practices against objectives and to assess the adequacy of the program's current governance structures and practices.

The report concluded that Canada's debt management program is a well-run operation overall, but highlighted some challenges ahead in a changing debt management environment. These include suggestions that the Government review issues related to the federal debt management governance structure, increased transparency of costs and benefits of debt management decisions, and enhanced performance measurement.

The Government is addressing issues raised by the Auditor General's audit. As a first step, Debt Management Strategy 2000-01, released in March 2000, included a more complete discussion of the costs and risks associated with different fixed-rate debt structures. This work has been expanded with this year's Debt Management Report, which sets out the key measures and operational targets that the Government uses to assess debt management performance and guide debt management decisions. Also, in 2000, the Government initiated a review of the governance frameworks of comparable sovereign borrowers to determine whether there are best practices that are relevant for Canada.

Collective Action Clauses

In April 2000, the Government announced that Canada would be adopting collective action clauses in its foreign currency bond and note issues. Collective action clauses in bond contracts facilitate debt restructuring by providing an orderly framework for debtors and creditors. These clauses are an important part of Canada's effort to promote international financial stability and reduce the risk and severity of global financial crises. By adopting collective action clauses, Canada is helping to lead the process of having them adopted by all countries. The wider adoption of collective action clauses was first recommended in the 1996 G-10 report, The Resolution of Sovereign Liquidity Crises (the Rey Report), and again in the 1998 report of the G-22 Working Group on the Resolution of Financial Crises.

The documentation governing Canada's two foreign currency note programs (the Canada Note and Euro Medium-Term Note programs) is being modified to ensure that all future issuance under these programs includes collective action clauses. Future global bond issues by Canada will also include these clauses.

Government of Canada Securities Market

Turnover and Liquidity

The Government of Canada securities market has traditionally enjoyed very high levels of efficiency in terms of turnover and liquidity. An efficient Government of Canada securities market contributes to lower interest costs for the federal government and is also of general benefit to the domestic capital market, where federal securities are key benchmarks for pricing and act as hedging tools.

In the aftermath of the Asian crisis in 1998, the Canadian fixed-income market, like all major fixed-income markets around the world, experienced reductions in turnover and liquidity from peak levels of previous years. The decline is a product of many factors. Among those cited by market participants are that institutional investors are generally trading securities less frequently, and fixed-income funds are increasingly managed in a "passive" indexed manner. Moreover, some major trading funds ("hedge funds") have withdrawn completely from the market. Market intermediaries have also generally reduced capital allocations to risk-taking trading activities and are therefore less willing to provide liquidity to the market. The Government of Canada securities market has been affected by these trends.

As a result, bond turnover has declined from an average of 3.7 (equivalent to 3.7 times the outstanding stock) in 1998-99 to 2.9 in 1999-2000. Treasury bill turnover declined from an average of 4.1 in 1998-99 to 3.4 in 1999-2000. Nevertheless, Canada's fixed-income market continues to be one of the most efficient in the world. Indicators of the efficiency, liquidity and depth of the market include tight bid-offer spreads for the various instruments, the large volume of transactions and turnover ratios comparable to those of other G-7 countries, with the exception of the U.S. (see Charts 14 to 17).

Important complements to an efficient Government of Canada securities market are the availability of futures contracts, as well as the ability to strip and reconstitute bonds and enter into repurchase agreements.

Regulatory Developments

The Canadian Securities Administrators (CSA) issued a concept release on the regulation of "Alternative Trading Systems" (ATSs) in July 1999 and a subsequent regulatory proposal in July 2000. ATSs are market intermediaries that serve many of the functions of traditional stock exchanges. The rapid development of information technology has caused ATSs to assume a much more prominent role in capital markets than in the past. The CSA policy proposal was aimed at addressing issues related to market fragmentation, price discovery, transparency and regulation.

The Government of Canada responded to the CSA's proposal, raising questions about the potential implications for fixed-income markets. As there are no ATSs currently operating in Canada in the fixed-income market under the proposed CSA definitions, the major impacts of the proposal are with respect to the proposed changes to the transparency rules governing the debt market. Canada now fully meets international standards for government bond market transparency through the CanPX system. The Government is working with the CSA on these important regulatory issues.

Futures

In Canada, the trading volume of futures contracts maintained the levels of previous years. There is an active futures contract based on 3-month bankers' acceptance rates (the BAX contract), as well as 5- and 10-year Government of Canada bond futures contracts (the CGF and CGB contracts). The futures contract on 3-month bankers' acceptances, which is the most actively traded contract on the Montreal Exchange, has become a highly liquid security. In 1997, the value of BAX open interest² surpassed the amount of Treasury bills outstanding. Daily BAX trading volume rose 150 per cent to 23,934 contracts between 1996 and 1999, with an average daily open interest of 216,209 contracts. In addition, the open interest of the futures contract on 10-year Government of Canada bonds almost quadrupled from 1993 to 1999.

1999-2000 Debt and Cash Management Operations by Program

This section provides details on the operations of each major debt program (see Table 3). In 1999-2000, the amount of market debt held in short-term instruments, primarily Treasury bills, increased while the amount held in longer-term instruments decreased slightly.

Table 3
Composition of Federal Market Debt, 1999-2000

Domestic Debt

A key principle of domestic debt management is that the funding required for the Government's domestic operations is raised in the domestic market.

Fixed-Coupon Marketable Bonds and Bond Repurchase Transactions

Fixed-coupon marketable Government of Canada bonds are issued in Canadian dollars and pay interest semi-annually.

In 1999-2000, gross issuance of nominal bonds consisted of $14.2 billion of 2-year bonds, $13.95 billion of 5-year bonds, $12.9 billion of 10-year bonds and $3.7 billion of 30-year bonds. Marketable bonds represent the largest share (61.5 per cent) of the federal government's outstanding market debt (see Chart 7).

The Government repurchased through the bond buyback program $3.3 billion of marketable bonds – $1.1 billion in the 2-year maturity area, $1.1 billion in the 5-year maturity area and $1.1 billion in the 10-year area (see Reference Table X).

Net new issuance of fixed-coupon marketable bonds during the year, taking into account buybacks and maturities, totalled -$3.5 billion (gross issuance less repurchases less maturing issues), bringing the stock of outstanding marketable bonds down to $280.6 billion as at March 31, 2000.

The distribution of the outstanding stock of fixed-coupon marketable bonds at the end of 1999-2000 is shown in Table 4.

Table 4
Outstanding Fixed-Coupon Marketable Bonds as at March 31, 2000

Real Return Bonds

Real return bonds (RRBs), introduced in 1991, provide cost-effective diversification of the marketable bond program for the Government. RRBs are used to diversify the Government's funding sources and serve the needs of investors such as indexed pension funds, which need long-term inflation-protected investments. They are issued via quarterly single-price auctions.

Issuance of RRBs in 1999-2000 totalled $1.25 billion through four auctions, bringing the level of outstanding RRBs to $13.25 billion as at March 31, 2000, including $0.3 billion in consumer price index adjustment (see Reference Table IX).

Treasury Bills

Treasury bills with terms to maturity of 3, 6 and 12 months are offered on a biweekly basis. Cash management bills of shorter maturities are issued from time to time to facilitate the management of the Government's cash balances.

The stock of outstanding Treasury bills increased by $2.9 billion during the 1999-2000 fiscal year to a level of $99.9 billion at March 31, 2000 (see Reference Table VI).

Foreign Debt

The Government of Canada borrows in foreign currencies exclusively to raise foreign exchange reserves for the Exchange Fund Account. The Exchange Fund Account is a pool of assets available for use to promote order and stability of the Canadian dollar in the foreign exchange market and for general liquidity purposes. The key objectives of Canada's reserve program are to:

• ensure that an appropriate level of reserves is maintained while minimizing the cost of carrying reserves; and

• immunize to the extent possible currency and interest rate risks by selecting reserve assets that match the liabilities in currency and duration.

The Government has made a steady effort to increase Canada's international reserves to bring the level more in line with that of comparable sovereigns. Reserves have been increased from US$11.9 billion at December 31, 1992 to US$31.1 billion at March 31, 2000 (see Chart 18). In 1999-2000, international reserves increased by US$6.1 billion, while foreign currency debt fell by US$0.9 billion. Foreign exchange reserves increased as a result of cross-currency swaps of domestic obligations and purchases of US dollars in the spot foreign exchange market. With the increases since 1996, the Government has made substantial progress in meeting its objectives.

Foreign currency liabilities came to exceed liquid foreign currency assets (i.e. cash, deposits and securities) in the Exchange Fund Account in recent years, largely as a result of extensive foreign exchange intervention and important commitments to the International Monetary Fund in 1998. Consistent with the Government's policy of immunizing currency and interest rate risk in Canada's reserve program, the Government is taking steps to bring foreign currency liabilities in line with foreign currency assets.

In December 1998, the Department of Finance, in collaboration with the Bank of Canada, implemented a program of purchases of US dollars in the foreign exchange markets. The proceeds of sales of Canadian dollars are used to reduce US-dollar-denominated liabilities. This program is conducted by the Bank in its role as fiscal agent for the Government in its management of the federal debt. Purchases of US dollars are small in relation to the large daily flows in foreign exchange markets and are undertaken with sensitivity to market conditions. The objective is to close the gap between foreign currency assets and liabilities over the next few years. When the program was implemented, the gap was some US$13 billion, and substantial progress has been made in closing it: as of March 31, 2000, the gap between foreign currency liabilities (US$36.1 billion) and liquid foreign currency assets (US$27.6 billion) stood at some US$8.5 billion.

As of March 31, 2000, total foreign currency liabilities stood at US$36.1 billion – US$22.9 billion in foreign currency debt and US$13.2 billion in cross-currency swaps (see Table 5). Canada's direct foreign currency debt represents 7.1 per cent of its total outstanding market debt. Taking into account the effect of cross-currency swaps, foreign currency obligations represent 11.4 per cent of total market debt.

Foreign currency debt outstanding consists of Canada Bills, Canada Notes, Euro Medium-Term Notes and foreign bonds, along with swaps of domestic liabilities. 1999-2000 highlights by program are provided below.

Table 5
Foreign Currency Liabilities

Canada Bills and Canada Notes

Canada Bills, which are short-term promissory notes denominated in US dollars, are issued in the US market as a source of low-cost US dollar funding. The level of outstanding Canada Bills decreased from US$6.7 billion to US$4.1 billion during 1999-2000.

Canada Notes are used as required to raise fixed- and floating-rate funding for terms longer than nine months. The stock of outstanding Canada Notes, which the Government began to issue in March 1996, fell slightly from US$0.8 billion to US$0.7 billion during 1999-2000. There were no new Canada Note issues in 1999-2000.

Euro Medium-Term Notes

The Euro Medium-Term Note (EMTN) program was introduced in March 1997 to diversify the sources of cost-effective funding for Canada's foreign exchange reserves. Notes issued under the new program can be denominated in a range of currencies and structured to meet investor demand. Obligations are usually swapped to US dollars, the primary currency held in the foreign exchange reserves. In 1999-2000, there were no new EMTN transactions and the total outstanding decreased from US$3.3 billion to US$3.0 billion.

Foreign-Currency-Denominated Bonds

At the end of 1999-2000, Canada had US$15.0 billion equivalent in fixed-rate bonds outstanding. The federal government issued a US$2.0-billion, five-year global bond in November 1999. The issue was well received by investors and broadly distributed around the world.

Cross-Currency Swaps

A cross-currency swap is an agreement that exchanges one type of return for another (e.g. a fixed for a floating rate of interest) and the principal amount for the term of the swap. Cross-currency swaps of domestic obligations are a cost-effective alternative to foreign-currency-denominated bond issues, as a means of meeting the Government's targets for longer-term foreign currency funding. In 1999-2000, the federal government raised US$3.2 billion in foreign exchange reserves at cost-effective funding levels by entering into 57 cross-currency swaps. This is a decrease from the previous fiscal year, when the Government entered into 59 cross-currency swaps to raise US$4.7 billion in foreign exchange reserves. The total amount of cross-currency swaps outstanding as at March 31, 2000 stood at US$13.2 billion.

Retail Debt

Retail debt is broadly defined as Government of Canada securities held by individual Canadians, and includes both non-marketable and marketable debt denominated in Canadian dollars. The level of outstanding non-marketable debt – Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs) – decreased from $27.7 billion to $26.5 billion during 1999-2000.

In 1999-2000, CSBs and CPBs were concurrently on sale for a second six-month pilot. The CSB featured one-year pricing and cashability of the principal at any time with interest cashable only three months after purchase. The CPB featured longer-term pricing higher than the CSB but with cashability reduced to once a year. Both bonds have registered retirement savings plan and registered retirement income fund options. Introduced in the fall of 1998, the CPB continued to be successful and further diversified the Government's investor base. For further information on retail debt operations, see the Canada Investment and Savings Web site at: http://www.csb.gc.ca/.

Management of the Government's Cash Balances

Management of the Government's cash balances requires forecasting and monitoring of its daily receipt and disbursement flows, as well as an ongoing borrowing program to refinance maturing debt and maintain the balances at targeted levels. There are inherent and large uncertainties in forecasting daily changes in cash balances, owing to the scope of the Government's financial operations, the operations of the Bank of Canada and changes in market conditions. An adequate level of cash balances must be maintained at all times to meet these operational requirements and provide an appropriate liquidity cushion for the Government's financial operations.

The level of the Government's daily cash balances averaged $9.0 billion in fiscal 1999-2000, up from $7.1 billion in 1998-99.

Cash balances are invested as term deposits with participants of the recently established Large Value Transfer System. These deposits are placed with the institutions through an auction process in order to earn competitive market rates of return. In 1999-2000, earnings on term deposits averaged 4.78 per cent versus 5.06 per cent the previous year.

Annex 1 - Federal Debt Management Framework

Legal Authorities

The Financial Administration Act (the "FAA") provides the statutory framework under which the Minister of Finance borrows money for the Government in financial markets. The FAA states that the Minister cannot borrow money without the authority of Parliament. Parliament authorizes the Minister to borrow new funds through borrowing authority acts. The Minister is authorized by the FAA to refinance maturing debt without further parliamentary authority. The Act provides the Minister with the authority to use modern financial and risk management tools and techniques such as interest rate and currency swaps, options, futures and forwards in the conduct of the Government's financial operations and for risk management purposes. In addition, the Act provides the Minister of Finance with legislative authority to establish rules governing the sale of its debt.

In addition to the FAA, the Bank of Canada Act provides statutory authority for the Bank of Canada to act as the Government's fiscal agent. The Currency Act establishes the Exchange Fund Account and provides statutory authority for the Minister of Finance to manage the Account.

Institutional Responsibilities

The Department of Finance, including Canada Investment and Savings (CI&S), the Government's retail debt agency, manages federal market debt in conjunction with the Bank of Canada. The Financial Markets Division of the Department of Finance provides analysis and develops policies and recommendations for the federal government's borrowing programs, for the investment of the Government's cash and reserve assets, and for the management of financial risks.

The Division works with the Bank of Canada, the Government's fiscal agent, on all aspects of debt management. As fiscal agent, the Bank of Canada is specifically responsible for the operational aspects of debt management, e.g. conducting the auctions of government debt, issuing debt instruments, making interest payments and conducting foreign currency borrowing operations. The Bank also has responsibility for monitoring market activities and advising on debt management policy issues, as well as operating the Government's Risk Management Unit.

CI&S is a special operating agency of the Government, and its primary responsibility is the day-to-day management of the Retail Debt Program. CI&S, working in consultation with the Bank of Canada and Financial Markets Division, is responsible for developing the Retail Debt Program's strategic direction and managing the front office aspects of the program.

Domestic Debt Operations

Domestic borrowings are done strategically, i.e. securities are issued on a regular, transparent basis to maximize investor interest and participation. Marketable bonds, real return bonds and Treasury bills are sold via auction, with the Bank of Canada operating as the Government's fiscal agent, to Government of Canada securities distributors and end-investors. Tenders are submitted to the Bank of Canada via the electronic auction system CARS (Communications, Auctions and Reporting System).

Bonds are auctioned on a quarterly basis in the 2-, 5- and 10-year maturities, and on a semi-annual basis in the 30-year maturity. Bonds may be either new maturities, or reopenings of previously auctioned bonds. New issues are generally reopened several times in order to increase the size of the issue to the target benchmark bond size.

The bond auction calendar, setting out details of the planned quarterly issuance of marketable bonds, is published prior to the start of each quarter. Final details, including the amounts to be auctioned, the maturity date, and the amount outstanding in the case of bond reopenings, are released one week prior to the auction.

Bond sales take place via multiple-price auctions, with the exception of real return bonds, which are sold via single-price auctions. Government securities distributors and investors may submit competitive tenders or non-competitive tenders. For multiple-price auctions, competitive bids are accepted in rising order of yield (declining order of price) until the full amount of the issue being auctioned is allotted, while non-competitive bids are allotted at the average of the accepted competitive bids. For single-price auctions of real return bonds, bonds are allotted at the price equivalent of the highest real yield of accepted competitive tenders, plus accrued interest and inflation adjustment.

Treasury bills are sold via auction on a discount basis. Treasury bills with terms to maturity of approximately 3, 6 and 12 months are currently auctioned on a biweekly basis, generally on a Tuesday for delivery Thursday. Under the biweekly issuance pattern, new 3-month Treasury bills are issued at each biweekly auction; new 6- and 12-month Treasury bills are offered in the same week and then reopened once at the next regular auction two weeks later.

The terms for auctions for Government of Canada securities, the terms of participation at auctions and the quarterly bond auction schedule and auction results are available on the Bank of Canada's Web site at: www.bankofcanada.ca.

Domestic Distribution System

The participation of distributors and end-investors at Government of Canada debt auctions is governed by a set of auction rules and terms of participation introduced in October 1998.

There are 25 government securities distributors³ (GSDs) that participate in the primary distribution of bonds and Treasury bills. All GSDs must be either members or affiliate members of the Investment Dealers Association of Canada (IDA) and have their core trading and sales operation for Government of Canada securities in Canada.

Under the auction rules and terms for participants, there are specific bidding limits which apply to GSDs and end-investors at Treasury bill and bond auctions. The limits vary by distributor based on the firms' relative market activity in the primary and secondary market for the securities. Separate bidding limits apply for Treasury bill and bond auctions. All GSDs also have ongoing reporting responsibilities to provide the Bank of Canada with market information involving Government of Canada securities. In addition, all bidders at auction of Government of Canada securities, including customers, must abide by IDA Policy No. 5⁴ governing standards for trading of debt securities in Canada.

GSDs that maintain a certain threshold of activity in the primary and secondary market for Government of Canada securities become primary dealers, and form part of the core group of distributors of Government of Canada securities. The primary dealer classification can be attained in either Treasury bills or marketable bonds, or both. Primary dealers assume a number of responsibilities with respect to Government of Canada securities – they must comply with minimum bidding requirements for every auction so as to provide coverage at auctions as a group, and consistently make two-sided markets to a broad customer base.

Foreign Debt Operations

Foreign currency debt is made up of a short-term US-dollar commercial paper program (Canada Bills), two medium-term Note programs (Canada Notes and Euro Medium-Term Notes) and large public bond issues. These securities are issued on an opportunistic basis when required and when market conditions are favourable. The Government also obtains foreign-denominated funding through purchases of US dollars in the spot foreign exchange market and through cross-currency swaps of domestic obligations.

Retail Debt Operations

The Government sells Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs), referred to as non-marketable savings instruments, directly to individuals, or "retail" investors, who are Canadian residents.

Two principal channels are used for direct sales of CSBs and CPBs: the Payroll Savings Program and financial institutions. The Payroll Savings Program allows employees of employers sponsoring the program to purchase CSBs during the sales campaign through payroll deduction.

Canadians can also purchase CSBs and CPBs wherever they bank or invest, including banks and trust companies, investment dealers, savings and loan companies and credit unions. Additionally, Canadians, on a pilot basis, can purchase CSBs and CPBs directly by telephone from the Bank of Canada.

Annex 2 - Government of Canada Market Debt Instruments

Fixed-Coupon Marketable Bonds

Effective October 1995, Government of Canada marketable bonds are issued in global certificate form only whereby a global certificate for the full amount of the bonds is issued in fully registered form in the name of CDS & Co., a nominee of the Canadian Depository for Securities Limited (CDS). The bonds must be purchased, transferred or sold, directly or indirectly, through a participant of the Debt Clearing Service, which is operated by CDS, and only in integral multiples of $1,000 (face value). Prior to December 1993, Government of Canada bonds were issued in coupon-bearer and fully registered form, and were available in denominations ranging from $1,000 to $1,000,000. Between December 1993 and September 1995, Government of Canada bonds were issued only in fully registered form. All Canadian dollar marketable bonds are non-callable and pay a fixed rate of interest semi-annually.

Treasury Bills

Effective November 1995, all new issues of Treasury bills are issued is global certificate form only whereby a global certificate for the full amount of the Treasury bills is issued in fully registered form in the name of CDS & Co., a nominee of the CDS. Treasury bills must be purchased, transferred or sold, directly or indirectly, through a participant of the Debt Clearing Service, which is operated by CDS, and only in integral multiples of $1,000 (face value). Prior to November 1995, Treasury bills were issued in bearer form and were available in denominations ranging from $1,000 to $1,000,000.

The Government of Canada also periodically issues cash management bills (CMBs). CMBs are Treasury bills with maturities of less than three months (they can be as short as one day) used as a source of short-term financing for the Government. CMB auctions can take place on any business day, typically for next-day delivery, but on some occasions for same-day delivery.

Government of Canada Real Return Bonds

Government of Canada real return bonds (RRBs) pay semi-annual interest based upon a real interest rate. Unlike standard fixed-coupon marketable bonds, interest payments on RRBs are adjusted for changes in the consumer price index (CPI). The CPI, for the purposes of RRBs, is the all-items CPI for Canada, not seasonally adjusted, published monthly by Statistics Canada. The semi-annual nominal coupon payments are calculated as follows:

coupon payment_i = real coupon rate/2 x (principal + inflation compensation_i) where inflation compensation_i = ((principal x reference CPI_i/reference CPI_base) – principal).

Reference CPI for the first day of any calendar month is the CPI for the third preceding calendar month. The reference CPI for any other day in a month is calculated by linear interpolation between the reference CPI applicable to the first day of the month in which such day falls and the reference CPI applicable to the first day of the month immediately following. The reference CPI_base for a series of bonds is the reference CPI_i applicable to the original issue date for the series.

At maturity, bondholders will receive, in addition to a coupon interest payment, a final payment equal to the sum of the principal amount and the inflation compensation accrued from the original issue date – i.e. final payment = principal + ((principal x reference CPI_maturity/reference CPI_base) – principal).

These bonds must be purchased, transferred or sold, directly or indirectly, through a participant of the Debt Clearing Service and only in integral multiples of $1,000 (face value).

Canada Savings Bonds

Canada Savings Bonds (CSBs) are offered for sale by most financial institutions in Canada. In addition, a significant number of organizations sponsor the Payroll Savings Program, thus allowing many Canadians to purchase CSBs through payroll deductions.

Except in certain specific circumstances, CSBs can be registered only in the name of residents of Canada. They are available in both regular interest and compound interest forms. For those CSBs which are certificated, denominations range from $100 ($300 for a regular interest bond) to $10,000. All CSBs are non-callable and, except in certain limited circumstances, non-transferable.

CSBs provide minimum guaranteed annual interest rates. The minimum guaranteed annual interest rates will be increased if market conditions warrant, but the bondholder will not earn less than the rates announced for that series for the posted period. CSBs are cashable at any time and, after the first three months, pay interest up to the end of the month prior to encashment. Principal and interest are fully backed by the Government of Canada.

Canada Premium Bonds

The Canada Premium Bond (CPB) was introduced by the Government of Canada in 1998. Like CSBs, CPBs are offered for sale at most financial institutions in Canada.

CPBs offer a higher rate of interest at the time of issue compared to the CSB on sale at the same time, and are redeemable once a year on the anniversary date of the issue and during the 30 days thereafter without penalty. Once an issue date has passed, the announced interest rates for the posted period will not be changed. CPBs are available in both regular interest and compound interest forms. The compound interest bond is available for as little as $100 while the regular interest bond is available starting from $300. Principal and interest are fully backed by the Government of Canada and this bond is non-callable.

Canada Bills

Canada Bills are promissory notes denominated in US dollars and issued only in book-entry form. They mature not more than 270 days from their date of issue and are discount obligations with a minimum order size of US$1,000,000 and a minimum denomination of US$1,000. Delivery and payment for Canada Bills occur in same-day funds through Chase Manhattan Bank in New York City.

Primary distribution of Canada Bills occurs through five dealers: CIBC Wood Gundy Inc., CS First Boston, Goldman, Sachs & Co., Lehman Brothers and RBC Dominion Securities Inc. Rates on Canada Bills are posted daily for terms of one to six months.

Canada Bills are issued for foreign exchange reserve funding purposes only.

Canada Notes

Canada Notes are promissory notes usually denominated in US dollars and available in book-entry form. Canada Notes are issued in denominations of US$1,000 and integral multiples thereof. At present, the aggregate principal amount outstanding issued under the program is limited to US$10.0 billion. Notes can be issued for terms of nine months or longer, and can be issued at a fixed or a floating rate.

The interest rate or interest rate formula, issue price, stated maturity, redemption or repayment provisions, and any other terms are established by the Government of Canada at the time of issuance of the notes and will be indicated in the Pricing Supplement. Delivery and payment for Canada Notes occur through the Bank of New York.

The notes are offered on a continuous basis by the Government through five dealers: CS First Boston, Goldman, Sachs & Co., Lehman Brothers, Nesbitt Burns Inc. and Scotia Capital Markets. The Government may also sell notes to other dealers or directly to investors.

Canada Notes are issued for foreign exchange reserve funding purposes only.

Euro Medium-Term Notes

Euro Medium-Term Notes (EMTNs) are medium-term notes issued outside the United States and Canada. Government of Canada EMTNs are sold either by dealers in the dealer group, or by dealers who are not in the dealer group but who are acting as the Government's agent for the particular transaction (called reverse inquiry). EMTNs are sold on a bought-deal basis (i.e. the dealer purchasing EMTNs is responsible for the sale of the notes) and on an intermittent basis.

The Arranger for the EMTN program is Morgan Stanley Dean Witter. The London-based dealer group includes CIBC World Markets plc, Goldman Sachs International, J.P. Morgan Securities Ltd., Nomura International, TD Securities, Deutsche Bank, Merrill Lynch International, Morgan Stanley Dean Witter, RBC Dominion Securities and Warburg Dillon Read.

The EMTN program further diversifies the sources of cost-effective funding for the foreign exchange reserves. Notes issued under this program can be denominated in a range of currencies and structured to meet investor demand.

Annex 3 - Glossary

benchmark bond: Specific issue outstanding within each class of maturities. It is considered by the market to be the standard against which all other bonds issued in that class are evaluated.

bid: Price a buyer is willing to pay.

bid-offer spread: The difference between bid and offer prices. It is typically measured in basis points (hundredths of a per cent).

budgetary surplus: Occurs when government annual revenues exceed annual budgetary expenditures. A deficit is the shortfall between government revenues and budgetary spending.

Exchange Fund Account: A fund maintained by the Government of Canada for the purpose of promoting order and stability of the Canadian dollar in the foreign exchange market. This function is fulfilled by purchasing foreign exchange (selling Canadian dollars) when there is upward pressure on the value of the Canadian dollar and selling foreign exchange (buying Canadian dollars) when there is downward pressure on the currency.

financial requirements/source: Measures the difference between the cash coming in to the Government and the cash going out. In the case of a financial requirement, it is the amount of new borrowing required from outside lenders to meet the Government's financing needs in any given year.

foreign exchange reserves: Stocks of foreign exchange assets (e.g. interest-earning bonds) held by sovereign states to support the value of the domestic currency. Canada's foreign exchange reserves are held in a special account called the Exchange Fund Account.

gross public debt: Total amount the Government owes. It consists of both market debt in the form of outstanding securities such as Treasury bills and Canada Savings Bonds, and internal debt owed mainly to the superannuation fund for government employees and other current liabilities.

interest-bearing debt: Consists of unmatured debt, or market debt, and the Government's liabilities to internally held accounts such as federal employees' pension plans.

market debt: For debt management purposes, market debt is defined as the portion of debt that is funded in the public markets, and consists of marketable bonds, Treasury bills, retail debt (primarily Canada Savings Bonds), foreign-currency-denominated bonds and bills, as well as bonds issued to the Canada Pension Plan.

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.

net public debt: Consists of gross public debt, net of financial assets.

non-market debt: Consists of 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 and payment of matured debt).

non-marketable debt: Market debt that is not tradable and that is issued to retail investors (Canada Savings Bonds and Canada Premium Bonds).

offer: Price at which a seller is willing to sell.

term structure of interest rates: The levels of interest rates from short- to long-term maturities.

turnover ratio: Volume of securities traded as a percentage of securities outstanding.

¹   This is based on the difference between the weighted average yield on fixed-rate bonds issued since April 1997 (about 5.65 per cent) and the weighted average yield on Treasury bills issued during 1999-2000 (about 5.0 per cent). This difference is multiplied by $30 billion, which is equivalent to about 5 per cent of the total interest-bearing debt stock.

²   The total value or number of contracts outstanding at any given time.
Source: the Montreal Exchange.

³   More information on government securities dealers and IDA Policy No. 5 is available on the Bank of Canada's Web site at www.bankofcanada.ca.

⁴   More information on government securities dealers and IDA Policy No. ⁵ is available on the Bank of Canada's Web site at www.bankofcanada.ca.

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