Annex 3
Archived - Debt Management Strategy for 2020-21

Canada’s Debt in Context

The Government of Canada has increased its borrowing in order to make the necessary temporary investments to stabilize the Canadian economy amidst the extraordinary circumstances of the COVID-19 pandemic. The current environment provides a unique opportunity for the government to issue an unprecedented level of long-term bonds at historically low interest rates. This will ensure Canada’s debt remains affordable and is less vulnerable to increases in interest rates for future generations. Despite an increased deficit for 2020-21, public debt charges are expected to decline, and the country is retaining its low-debt advantage (Chart A3.1). As noted in Annex 2, Canada’s public debt charges are expected to be more than $4 billion lower this year compared to the forecast in the 2019 Economic and Fiscal Update.

In addition, Canada has a diversified investor base that promotes more certainty of access to funding markets over time, contributes to lower and less volatile yields for government securities, and provides flexibility to meet changing financial requirements. Canadian investors, such as insurance companies, pension funds and financial institutions, hold more than two-thirds of outstanding Government of Canada securities, which helps provide a buffer against potential fluctuations in foreign demand. In addition, Canada has a balanced portfolio of debt instruments with a wide range of maturities. This helps meet the needs of many different types of investors and provides the government more funding options.

In pursuing a historic level of issuance in long-term bonds, the government will consult over the coming months with market participants to assess the market’s capacity for long-term debt. Reflecting feedback from our primary dealers and other market participants, the government will make adjustments as warranted to maintain stability in Canada’s fixed-income markets in these evolving circumstances, taking into account the requirements of other issuers, such as provinces, municipalities and corporations.

The 2020-21 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 international reserves. Borrowing activities support the ongoing refinancing of government debt coming to maturity, the execution of planned spending measures and the financial operations of the government. The 2020-21 Debt Management Strategy reflects fiscal projections in the 2020 Economic and Fiscal Snapshot.

The Financial Administration Act (FAA) requires that the Minister of Finance table 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 generally, in each House of Parliament, no later than 30 sitting days after the beginning of the fiscal year. The 2020-21 Debt Management Strategy fulfills this requirement.

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.

Achieving stable and low-cost funding involves striking a balance between the cost and risk associated with the debt structure as funding needs and market conditions vary. 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 and flexibly 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.

With this Debt Management Strategy, the government intends to issue a historic level of long-term bonds to manage the significant increase in debt resulting from the response to COVID-19. In light of the unique situation posed by the COVID-19 crisis, the government will continue to review the Debt Management Strategy for opportunities to borrow at longer maturities and lock in historically low interest rates, as well as enhance the predictability of debt servicing costs. Future decisions will be guided by the need to maintain liquid and well-functioning markets for Government of Canada securities, taking into consideration the requirements of other market participants such as the borrowing needs of provincial governments. More information on the government’s long-term approach will be shared in the fall.

Outlook for Government of Canada Debt

To address the current economic challenges, the Government of Canada has taken immediate action to help Canadians facing hardship as a result of the COVID-19 outbreak. As such, this temporary increase in new borrowing will be undertaken in 2020-21 to finance the government’s COVID-19 Economic Response Plan.

The government is well-positioned to support Canadians and the Canadian economy to meet funding challenges in response to the COVID-19 pandemic. Entering into the crisis, Canada had the lowest net debt-to-GDP (gross domestic product) ratio among the Group of Seven (G7) countries, reflecting significant holdings of financial assets. Due to COVID-19 related spending, the federal debt-to-GDP ratio is expected to rise from 31 per cent in 2019-20 to 49 per cent in 2020-21. Even with this adjustment, Canada is expected to maintain its low-debt advantage.

In addition, given higher borrowing requirements, the government is taking a prudent approach by issuing an unprecedented level of long-term bonds in order to lock in funding at historically low interest rates. This will ensure Canada’s debt remains affordable and sustainable for future generations and will help retain our low-debt advantage.

Canada remains among the top rated countries in the G7 and continues to hold a AAA rating, with a stable outlook, from all major credit rating agencies except Fitch. Rating agencies indicate that Canada's strong credit ratings are supported by its economic and institutional strengths, well-capitalized and developed financial markets, and monetary and fiscal buffers, which underpin its resilience to economic shocks such as COVID-19. They also note that the country’s effective, stable and predictable policy-making contributes to steady demand from long-term investors.

Highlights of the Government of Canada’s Debt Management Strategy 2020-21

• The Government of Canada’s debt program will increase in 2020-21 in order to finance the forecasted financial requirement of $469 billion. Borrowings will increase so that the government can make the necessary investments to stabilize the Canadian economy.
• The government is taking a prudent approach to financing the deficit by significantly increasing long-term bonds to lock in funding at historically low interest rates. This will ensure Canada’s debt remains affordable and sustainable for future generations and less vulnerable to increases in interest rates.
• Given a historic level of issuance overall and particularly in long-term bonds, the government will consult with market participants and experts to assess and review the market’s capacity for long-term debt. Adjustments to the debt strategy may be made as warranted to maintain stability in Canada’s fixed-income markets in these evolving circumstances, taking into account the requirements of other issuers, such as provinces, municipalities and corporations.
• The aggregate principal amount to be borrowed in 2020-21 is $713 billion, which is $437 billion higher than the issuance for 2019-20.
• The extraordinary borrowing authority under the Financial Administration Act enabled necessary financing to implement the COVID-19 Economic Response Plan in a timely manner. These COVID-19 extraordinary borrowings are the largest contributor to the rise in the government’s market debt from $765 billion as of March 2020 to an expected $1.2 trillion by March 2021.
• A significant proportion of extraordinary borrowings to date in 2020-21 has consisted of short-term instruments, mainly treasury bills, given the ability to issue these instruments in volume quickly to raise needed funding.
• The government has been conducting treasury bill auctions on a weekly basis, and plans to continue to do so for the remainder of the fiscal year.
• By the end of the fiscal year, the treasury bill stock is expected to be $294 billion, about $142 billion higher than the level at the end of 2019-20.
• The government has also been increasing bond issuances steadily to help manage rollover risk, reduce pressure on the treasury bill sector, and ultimately rebuild contingency capacity in the event that significant funding is needed again in short order.
• Reflecting this, the bond program for 2020-21 has increased across all terms, and up to an unprecedented combined amount of $106 billion in the 10-year and 30-year sectors alone (i.e. roughly five and seven times more than previous years’ issuances, respectively).
• Annual gross bond issuance is planned to be about $409 billion in 2020-21, as compared to $124 billion issued in 2019-20. This represents $285 billion more bonds this year and is much larger than the planned increase of $142 billion in treasury bills (see Table A3.4).
• To support higher bond issuance and help smooth the cash flow profile of upcoming maturities, three new maturity dates will be introduced, two new maturity dates by promoting 3-year bonds to their own maturity dates and one new maturity date in the 10-year sector. These changes will improve bond issuance capacity and help extend the average maturity of the debt at low interest rates.
• Given extraordinary borrowing requirements, the government has made temporary adjustments to standard terms and conditions governing government securities auctions to promote participation at auctions.
• The Bank of Canada has also launched a number of measures and facilities to support well-functioning markets, including increasing the amount of Government of Canada securities it purchases at treasury bill auctions and introducing a secondary market bond purchase program. Reflecting the Bank of Canada’s secondary market purchases, the government does not plan to conduct bond buyback operations in 2020-21.

Debt Structure Planning

In developing its debt strategy, the government seeks to strike a balance between keeping funding costs low, mitigating rollover risk and supporting well-functioning markets. With this Debt Management Strategy, the government also intends to issue a historic level of long-term bonds to manage the significant increase in debt resulting from the response to COVID-19.

Analytical Framework

The government sets its debt issuance plan using a balanced portfolio of instruments with different maturities with the goal of meeting its objectives over a medium-term horizon under a wide range of economic and interest rate scenarios and projections. In selecting maturities, the benefits of reducing rollover risk are assessed against the marginal costs of issuing more long-term bonds, as yields are typically higher at longer terms. In an upward sloping yield curve environment, as the maturity of debt issuance is extended relative to the 3-month treasury bill, the marginal cost of debt increases while the marginal reduction in rollover risk declines, particularly beyond the 5-year sector (Chart A3.4).

Prior Market Consultations

Market participants and experts are also consulted as part of the process of developing the debt management strategy. In light of the evolving environment and risks given the COVID-19 pandemic, the government will continue to consult market participants and experts regularly as it pursues this historic increase in long-term bonds and will make appropriate adjustments to its debt management strategy, if warranted, to maintain well-functioning markets for the benefit of all Canadians.

During the October 2019 consultations, the majority of market participants and experts commented that the market for Government of Canada securities were generally well-functioning and that there remains a strong demand for Canadian debt. A summary of the October 2019 consultations can be found at the following link: https://www.bankofcanada.ca/wp-content/uploads/2020/03/consultations-summary-dms-2020-21.pdf.

Borrowing Authority

The authority to manage public debt flows from the Borrowing Authority Act (BAA) and Part IV of the FAA, which together allow the Minister of Finance to borrow money up to a maximum amount as approved by Parliament, subject to certain exceptions including borrowing in extraordinary circumstances. Parliament granted its approval of a maximum stock of outstanding government and agent Crown corporation market debt of $1,168 billion via the BAA, which came into force on November 23, 2017. Under section 8 of the BAA, the Minister must table a report in Parliament on the government’s and agent Crown corporations’ borrowings, including the Minister’s assessment of whether the maximum amount should be increased or decreased, by November 23, 2020 (i.e. every three fiscal years).

On March 25, 2020, Bill C-13, the COVID-19 Emergency Response Act, received Royal Assent, enabling the rapid implementation and administration of measures to protect Canadians’ health and safety and stabilize the Canadian economy. The COVID-19 Emergency Response Act enacted section 47 of the FAA. Under the authority of section 47 of the FAA, the Minister of Finance financed the financial requirements resulting from the extraordinary circumstances of the COVID-19 outbreak. The FAA requires the Minister to table a report in Parliament within the first 30 sitting days of each respective House following the first day of such borrowings.

Planned Borrowing Activities for 2020-21

The projected sources and uses of borrowings for 2020-21 are presented in Table A3.1. Actual sources and uses of borrowings compared with the projections will be reported in the Debt Management Report for 2020-21, and detailed accounting information on the government’s interest-bearing debt will be provided in the Public Accounts of Canada 2021.

Sources of Borrowings

The aggregate principal amount of money to be borrowed by the government in 2020-21 is projected to be $713 billion. The size of the program reflects significant additional financial requirements as a result of government initiatives to respond to the COVID-19 pandemic. All borrowings will be sourced from domestic and foreign wholesale markets (Table A3.1).

Uses of Borrowings

The government’s borrowing needs are driven by the refinancing of debt and projected financial requirements, which are principally related to COVID-19.

In 2020-21, the refinancing of debt is projected to be $245 billion, and the financial requirement is expected to be $469 billion. The government’s cash balances are not expected to change as new borrowings are expected to meet all financing requirements.

Financial requirement projections include measures under the COVID-19 Economic Response Plan (the Plan). The Plan includes more than $211 billion in direct support measures to Canadian workers and businesses and an additional $85 billion in tax and customs duty payment deferrals to meet liquidity needs of businesses and households to help stabilize the economy. Chapter 2 of this report (2020 Economic and Fiscal Snapshot) provides more information on the Plan.

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 unexpected changes in financial requirements, debt issuance can be altered during the year, typically through changes in the issuance of treasury bills.

2020-21 Borrowing Program

Given higher financial requirements related to COVID-19, the government is increasing its debt issuance in all core sectors, including an unprecedented amount in long-term bonds. The aggregate principal amount to be borrowed in 2020-21 is $713 billion, which is $437 billion higher than the issuance for 2019-20, and the total stock of market debt is projected to reach $1,236 billion by the end of 2020-21 (Table A3.2). Issuance in the treasury bill sector can be adjusted effectively to address unexpected changes in financial requirements.

Treasury Bill Program

Due to higher borrowing requirements, issuance of 3-, 6- and 12-month maturities have been moved to a weekly frequency, with auction sizes projected to be largely in the $10 billion to $35 billion range. The government plans to continue to conduct treasury bill auctions on a weekly basis for the remainder of the fiscal year.

To mitigate debt rollover and respond to market demand for longer dated treasury bills, a higher proportion of treasury bill issuance in 2020-21 will be allocated to the 6- and 12-month maturities relative to 2019-20. By the end of 2020-21, the treasury bill stock is expected to increase to $294 billion, about $142 billion higher than the level at the end of 2019-20.

Cash management bills (i.e., short-dated treasury bills) help manage government cash requirements in an efficient manner. These instruments continue to be used in 2020-21.

Bond Program and Historic Increases in Long-term Issuances

Given the rapid increase in the stock of treasury bills, the bond program for 2020-21 is also significantly increasing across all nominal bond sectors, including an unprecedented level of 10-year and 30-year bonds, to make Canada’s borrowings less vulnerable to increases in interest rates and maintain issuance capacity in the treasury bill sector.

Annual gross bond issuance is planned to be about $409 billion in 2020-21, $285 billion higher than the $124 billion issued for 2019-20 (Table A3.3). The total bond stock is planned to increase by $317 billion to $915 billion. As 2020-21 progresses, almost 70 per cent of financial requirements is projected to be funded with bonds. The government is issuing a combined $106 billion in 10-year and 30-year bonds, compared to $17 billion in 2019-20 (Chart A3.5). Given the historic level of issuance in the 10-year and 30-year sectors, the government will consult regularly with market participants and make appropriate adjustments, if necessary, to maintain well-functioning markets.

In pursuing much higher bond issuances, the government is introducing three new maturity dates to increase issuance capacity in the bond program: two by promoting 3-year bonds to their own maturity dates and one new maturity date in the 10-year sector (see section on Maturity Date Cycles).

Canada entered the crisis with by far the lowest federal market debt stock among the G7 (also lowest based on market debt-to-GDP) – less than half that of Germany, which has the second lowest federal market debt among the G7. This results in market conditions that favor treasury bills and shorter-term debt to respond to funding shocks.

A significant proportion of Canada’s extraordinary borrowings to date in 2020-21 have consisted of short-term instruments, mainly treasury bills, given the ability to issue these instruments in volume quickly to raise needed funding. France, the United States, and Japan have followed a similar issuance approach to fund their initial COVID-19 responses (Chart A3.6). With the Debt Management Strategy the government will begin shifting issuances toward long-term bonds in order to take advantage of low interest rates. As this occurs, Canada’s debt structure will be prudently positioned against G7 peers in order to maximize flexibility, predictability and liquidity.

In contrast, Germany and Italy, whose response to the crisis was smaller relative to the size of their outstanding market debt, funded a larger share of their initial crisis debt through medium- and long-term bonds.

Going forward, like most other countries, Canada’s debt management strategy is already increasing bond issuances steadily to help manage rollover risk (Table A3.4), with significantly more 10-year and 30-year bond issuances, to reduce pressure on the treasury bill sector, and ultimately rebuild contingency capacity in the event that significant funding is needed again quickly. To put the government’s focus on long-term bonds into perspective, the share of bond issuances allocated to long maturities (10-years or greater) will nearly double this year, rising from 14 per cent of annual issuance in 2019-20 to 26 per cent in 2020-21.

Maturity Date Cycles and Temporary Benchmark Bond Target Range Sizes

Due to much higher issuance levels in core sectors, particularly in 10-year and 30-year bonds, the benchmark bond target ranges have been increased relative to fiscal year 2019-20 (Table A3.6). The ranges serve as a temporary guide to the potential final size of each benchmark in the context of evolving borrowing requirements in 2020-21.

In pursuing much higher bond issuance and help smooth the cash flow profile of upcoming maturities, in 2020-21 the government will add a new December 1^st maturity date in the 10-year sector and two new maturity dates in the 3-year bond sector, April 1^st and October 1^st, by promoting the 3-year bond sector to its own maturity dates (previously fungible with 5-year bonds).

The first opening of the new 10-year December 1^st 2030 bond and of the 3-year April 1^st 2024 bond are expected to take place in the third quarter of fiscal year 2020-21. The government plans to continue issuing the 10-year June 1^st 2030 bond and the 3-year Sept 1^st 2023 bond in the second quarter. The 3-year October 1^st 2024 bond will be opened in early 2021-22. These changes will improve issuance capacity in the bond program and help to extend the average maturity of the debt at low interest rates.

Bond Auction Schedule

In 2020-21, there will be quarterly auctions of 2-, 3-, 5-, 10 and 30-year bonds. Some of these bonds may be issued multiple times per quarter. The number of planned auctions and the number of planned auctions per benchmark bond in 2020-21 for each sector is shown in Table A3.7. The actual number of auctions that occur may be different from the planned number of auctions due to unexpected changes in borrowing requirements.

The government led a specific market consultation on Real Return Bonds. A large portion of market participants reported that the demand for the Real Return Bonds has declined and that the liquidity in the sector is poor and worsening. Reflecting comments received during these consultations, the planned annual issuance will be $400 million less than in 2019-20, but the number of planned Real Return Bond auctions will increase from three to four auctions in 2020-21 as per market participants’ preference. A summary of the Real Return Bonds Consultations is available at the following link: https://www.bankofcanada.ca/wp-content/uploads/2020/03/governement-canada-rrb-consultations-summary.pdf.

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.

Bond Buyback Programs

In light of the Bank of Canada’s purchases of Government of Canada bonds in the secondary market, regular and cash management bond buyback operations are not planned for 2020-21.

Promoting Well-Functioning Markets

Given extraordinary borrowing requirements in 2020-21, the government has put in place temporary measures to promote participation at government securities auctions. These include temporarily increasing bidding limits for primary dealers, which was set to 25 per cent of auction size, to a maximum of 40 per cent. The aggregate bidding limit (limit on behalf of dealers and customers) has also increased from 40 per cent to 50 per cent. In addition, the government has lowered obligations for dealers by temporarily widening the range of yields at which they are required to bid to meet their minimum obligations.

The Bank of Canada has also launched a number of measures and facilities to promote the efficient and continuous functioning of funding markets, including increasing the amount of Government of Canada securities it purchases at treasury bill auctions and introducing a secondary market bond purchase program. The Bank of Canada has also expanded its term repo operations to support liquidity in the financial markets. These measures have helped the government borrow at or near record low interest rates.

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)^[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 IMF.

The government borrows to invest in liquid reserves, which are maintained at a level at or above 3 per cent of nominal GDP. Net funding requirements for 2020-21 are estimated to be around US$9 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 rise in foreign funding anticipated in fiscal year 2020-21 is due to the likelihood that Canada’s IMF commitments will rise and to replace the use of LIBOR-based cross-currency swap funding.

The mix of funding sources used to finance the liquid reserves in 2020-21 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 moneys on deposit with the Bank of Canada, chartered banks and other financial institutions. Cash with the Bank of Canada includes operational balances and balances held for prudential liquidity. Periodic updates on the liquidity position are available in The Fiscal Monitor.

Prudential Liquidity

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

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.

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^[1]   SDRs are international reserve assets created by the IMF whose value is based on a basket of international currencies.

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