Debt Management Strategy 1999-2000: 2
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1999-2000 Federal Debt Programs

The federal debt management strategy for each debt program is presented below. These plans are based on the 1999 budget outlook for financial surpluses (excluding foreign exchange transactions). The forecast is $5.0 billion for 1999-2000, and $7.0 billion for 2000-01.

The strategy has been developed in consultation with market participants. The federal government will continue to consult with market participants in fiscal year 1999-2000 on potential adjustments to maintain a well-functioning market in the changing debt management environment.

The federal government uses a variety of instruments to fund its domestic operations:

• Fixed-rate marketable bonds

• Real Return Bonds (RRBs)

• Treasury bills

• Retail non-marketable debt (primarily Canada Savings Bonds)

The foreign currency borrowing program is used to fund Canada's foreign exchange reserves.

The following table shows the composition of the government's market debt.

Composition of federal market debt¹

Fixed-rate marketable bonds

Fixed-rate marketable Government of Canada bonds are issued in Canadian dollars and pay interest semi-annually. In 1999-2000, about $45 billion of bonds will be maturing.

1999-2000 program

• The 1999-2000 bond program (i.e. gross issuance), which takes into account buyback operations, is planned to remain at a level similar to the 1998-99 program, which will be about $36 billion in total.

• Regular, quarterly issuance of the 2-, 5- and 10-year maturities and semi-annual issuance of the 30-year maturity will be maintained.

• The bond auction calendar, containing dates for each bond maturity to be auctioned, will continue to be published prior to the start of each quarter.

• To maintain liquidity, the target benchmark sizes for all maturities will be maintained at $7-10 billion.

• Buyback operations on a pilot basis will continue on selected bonds and auctions.

Real Return Bonds (RRBs)

The federal government plans to issue up to $2 billion in RRBs in 1999-2000, building a new benchmark. The maturity of the new benchmark will be announced later in 1999.

Treasury bills

Based on the fiscal plan in the budget, the Treasury bill stock in 1999-2000 is expected to fall by about 5 per cent, less sharply than in recent years. However, due to swings in the government's cash needs, the decline will be greater in certain periods during the year.

As noted earlier, in order to offset declining liquidity in the Treasury bill market, the government has commenced consultations with market participants on the program structure. Various options are under consideration, ranging from maintaining the status quo to changes to the frequency of issuance and changes in tranche structure. Consultations are ongoing and further details of the government's plans will be announced later in 1999.

Retail debt

Canada Investment and Savings (CI&S), the government's retail debt agency, plays an important part in the government's debt program, by targeting an investor base among the widest possible range of individual Canadians. Its long-term strategy is to provide products and services that will fulfil investor needs and encourage Canadians to invest in Canada.

The retail debt plan will be released by CI&S later in 1999.

Foreign currency debt programs

Principal sources of funding for the exchange reserves will depend on market conditions, but are expected to include medium-term note issuance in various markets, cross-currency swaps of domestic obligations, outright purchases of U.S. dollars and occasional large international bond issues. Key considerations underlying the choice of funding instruments are asset and liability management, minimization of cost and maintenance of a prudent maturity structure.

Glossary

bankers' acceptance (BA): Short-term negotiable commercial paper issued by a non-financial corporation but guaranteed by a bank.

BAX: See Futures contract.

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 ready to pay. The bid-offer spread is the difference between bid and offer prices.

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

Canada bills: Canada bills are promissory notes denominated in U.S. dollars, issued for terms of up to 270 days. Canada bills are issued for foreign exchange reserve funding purposes only.

Canada notes: Canada notes are promissory notes usually denominated in U.S. dollars and available in book-entry form. Notes can be issued for terms of nine months or longer, and can be issued at a fixed or a floating rate. Canada notes are issued for foreign exchange reserve funding purposes only.

Canada Savings Bonds (CSBs): Currently offered for sale by most Canadian financial institutions to individual Canadians. CSBs pay a competitive rate of interest which is guaranteed for one or more years. They may be cashed at any time and, after the first three months, pay interest up to the end of the month prior to encashment.

CGB: See Futures contract.

CGF: See Futures contract.

commercial paper: Short-term debt securities issued by non-financial corporations.

Contingency Reserve: The Contingency Reserve is included in the budget projections primarily to cover risks arising from: (i) unavoidable inaccuracies in the models used to translate economic assumptions into detailed budget forecasts, and (ii) unpredictable events. The Contingency Reserve also provides an extra measure of back-up against adverse errors in the economic forecast. The Contingency Reserve is not a source of funding for new policy initiatives.

coupon: The interest rate specified on a bond when it is originally issued.

discount notes: Short-term debt securities where the yield is provided through a discounted selling price relative to the face value of the note.

Euro Medium-Term Notes (EMTNs): Medium-term notes issued outside the United States and Canada. EMTNs are issued for foreign exchange reserve funding purposes only.

Exchange Fund Account: A fund maintained by the Government of Canada for the purpose of promoting order and stability of the Canadian dollar on 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/surplus (excluding foreign exchange transactions): Measures the difference between the cash received by the government and cash payments made. In the case of a financial requirement, it is therefore the amount of new borrowing required from outside lenders to meet the government's financing needs in any given year.

fixed-coupon marketable bond: A market debt instrument issued by the Government of Canada and sold via public tender. These issues have a specific maturity date and a specified interest rate. All Canadian dollar marketable bonds pay a fixed rate of interest semi-annually and are non-callable. They are transferable and hence can be traded in the secondary market.

fixed-rate debt: The share of the gross debt that is maturing or being repriced in more than twelve months.

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.

forward rate agreement (FRA): Short-term interest rate guarantee instruments that are negotiated by two parties, one of which is typically a chartered bank.

futures contract: Agreement to buy or sell a financial instrument at a particular price, for a specific quantity, on a stipulated future date. Fixed-income futures contracts are traded in the futures market at the Montreal Stock Exchange. The key fixed-income futures contracts are the 5- and 10-year Government of Canada bond futures contracts (the CGF and the CGB contracts) and the bankers' acceptance contracts (BAX).

gross public debt: Total amount the government owes. It consists both of 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.

hedge: A transaction intended to reduce the risk of loss from price fluctuations.

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 includes marketable bonds, Treasury bills, retail debt (primarily Canada Savings Bonds) and foreign currency denominated bonds and bills.

market transparency: Within the context of debt management, characterization of a bond market where debt management strategies and operations are visible and well understood by market participants.

net public debt: Consists of interest bearing debt and other liabilities, net of financial assets.

non-market debt: Includes the government's internal debt which is for the most part federal public sector pension liabilities, the government's current liabilities (such as accounts payable, accrued liabilities, interest and payment of matured debt), and bonds issued to the Canada Pension Plan.

primary market: Market for new issues of securities.

Real Return Bonds (RRBs): Government of Canada 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.

secondary market: Market where securities are bought and sold subsequent to original issuance.

sovereign market: Market for the debt issued by a government.

swap: An agreement that exchanges one type of return for another (e.g., a fixed for a floating rate of interest).

tranche: A portion of a bond offering, delineated by maturity.

Treasury bills: Treasury bills are short-term obligations, sold by public tender. Treasury bills with terms to maturity of three, six, or twelve months are currently auctioned on a bi-weekly basis.

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

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