Canada to Boost Bond Sales to C$95 Billion to Ease Repo SqueezesCecile Gutscher
Canada plans to increase bond issuance by 8 percent this year as it seeks to ease a shortage of Canadian government securities available for loan in money markets and cuts its stock of Treasury bills.
Canada will issue C$95 billion ($86 billion) of bonds in the year ending in March 2015, up from C$88 billion, with increased supply of two-year notes, according to budget documents released by the finance ministry today. Demand by foreign buyers for the notes to use as collateral in the market for repurchase agreements, or repos, last year drained liquidity and distorted yields as the issues traded on special.
“They’re shifting more into the two-year part of the spectrum,” David Tulk, chief Canada macro strategist at TD Securities, said in an interview in Ottawa, where he was attending the budget briefings. “Part of it is to reduce rollover risk and part of it is to target issues in the two-year market where some issues have gone on special amid intense foreign demand.”
Chronic shortages of debt have prompted the Bank of Canada to intervene in the market through loans from its own inventory. Canada’s dollar leapfrogged Australia’s to become the fifth-most popular reserve currency in the second quarter, and foreigners now hold about 28 percent of marketable government debt, according to data from the Bank of Canada.
The finance ministry is earmarking some of the extra funding to retire Treasury bills, reducing supply in the market to C$130 billion from C$152 billion, which it says will reduce refinancing risks. About C$70 billion of new bond borrowings will be used to replace maturing bonds, according to the budget.
The repo market, where banks and investors borrow and lend Treasuries and other fixed-income securities, expedites trading in everything from Treasuries to junk bonds. A shortage can drain liquidity for all bonds.
A doubling of foreign investment led by central banks may be creating a shortage of securities being loaned out to back repos, the Bank of Canada said in an Oct. 2 report, citing comments from market participants.
Securities that can be borrowed at interest rates close to the central bank’s 1 percent target rate are called general collateral. Bonds that are in the highest demand are called “special” by traders because rates on loans secured by these securities are lower than the general-collateral rate.
Canada’s two-year government bond yielded 0.98 percent today, below the Bank of Canada’s benchmark 1 percent interest rate.
Canada wants to lengthen its average maturity to 8 years in 2018 from about 7 1/2 years, according to the budget.
The country is still considering an “ultra-long” bond with a 50-year maturity, a plan it first detailed a year ago in the 2013-2014 budget. The finance ministry has discussed the plan with market participants and studied 50-year bond sales by Canadian provinces, according to this year’s budget.
“Any decision to issue an ultra-long bond would be subject to favorable market conditions and would be communicated by the government to market participants during the course of the year,” according to the budget.
This year’s enlarged borrowing program is temporary, and the government said it will target C$85 billion in annual issuance in coming years “as a result of diminishing financial requirements.”
The Bank of Canada will hold five 10-year auctions in the fiscal year, including an extra sale in the first quarter, and three 30-year auctions, according to the budget. Issuance of 10 and 30-year notes will be in line with 2013-14 levels.
“The government has pursued a tactical strategy of reallocating short-term issuance towards long-term bonds since 2012-13,” according to the budget. Even with an increase in long-term yields in the past year “it continues to remain advantageous and prudent for the government to lock in additional long-term funding.”