List of References
Boisvert, S., and Harvey, N., 1998, “The Declining Supply of Treasury Bills and the Canadian Money Market,” Bank of Canada Review, Summer 1998, pp. 53–69.
European Central Bank, 1998, “The Single Monetary Policy in Stage Three: General Documentation on ESCB Monetary Policy Instruments and Procedures,” September.
Fleming, M., Hall, G., and Krieger, S., 2000, “The Macroeconomic and Financial Market Implications of the Pending Debt Paydown,” Draft prepared for the Brookings Panel on Economic Activity, September.
Fleming, M., 2000, “The Benchmark U.S. Treasury Market: Recent Performance and Possible Alternatives,” in Federal Reserve Bank of New York Economic Policy Review, April, Volume 6, Number 1, pp. 129–145.
Gravelle, T., 1999, “Markets for Government of Canada Securities in the 1990s: Liquidity and Cross-Country Comparisons,” Bank of Canada Review, Autumn 1999, pp. 9–18.
Harvey, N., 1999, “Recent Initiatives in the Canadian Market for Government of Canada Securities,” Bank of Canada Review, Summer 1999, pp. 27–35.
Jones, D., 2000, “The Demise of the 30-Year Treasury Bond as a Benchmark for Pricing Fixed-Income Securities,” Business Economics, October, pp. 16–24.
Morrow, R., 1995, “Repo, Reverse Repo, and Securities Lending Markets in Canada,” Bank of Canada Review, Winter 1994-95, pp. 61–70.
O’Regan, V., 2000, “Commentary” on “Enhancing the Liquidity of U.S. Treasury Securities in an Era of Surpluses,” by Bennett, P. et al., in Federal Reserve Bank of New York Economic Policy Review, April, Volume 6, Number 1, pp. 121–122.
Zamsky, S., 2000, “Diminishing Treasury Supply: Implications and Benchmark Alternatives,” Business Economics, October, pp. 25–32.
Prepared by Vivek Arora, Rodolfo Luzio, and Anders Matzen.
This would require decisions on whether and how the Government would manage investments in private assets.
In Canada, the fiscal year begins April 1.
In Canadian terminology, marketable debt is debt which the Government raises in financial markets and which is sold via public tender or syndication and can be traded among investors. It comprises marketable bonds, treasury bills, bonds and bills in foreign currencies, and bonds issued to the Canada Pension Plan. Nonmarketable debt is not tradable, and is issued to retail investors; it mainly comprises Canada Savings Bonds. Both marketable and nonmarketable debt are categorized officially as “market debt,” since they are raised in financial markets, and are distinct from “nonmarket debt,” which consists of past federal public sector pension liabilities (not funded in the public markets) and the Government’s current liabilities (such as accounts payable). See Department of Finance Canada (2000a) and Auditor General of Canada (2000).
In this respect, the approach to debt reduction in Canada is different from that in the United States, where efforts have been directed instead toward avoiding a lengthening in the maturity structure of the debt.
The main advantages of longer-term fixed-rate debt, which is generally more costly than short-term floating rate debt (since long-term interest rates are usually higher), were seen to be greater predictability in interest costs and lower rollover risk (see Auditor General of Canada (2000)).
See Harvey (1999) for a further discussion of recent initiatives to maintain liquidity, efficiency, and integrity in the market for Government of Canada securities.
Several other industrial countries have also implemented buyback programs during the past ten years, including the United States, France, Italy, the United Kingdom, Australia, and New Zealand.
The differential treatment of public pension plans in Canada and the United States also has some bearing on the pace of debt reduction in the two countries. The Canada Pension Plan (CPP), which is not part of the federal government budget, has no impact on the borrowing requirement of the federal government and its debt management operations. In contrast, in the United States, Social Security is included in the unified federal government budget, and its surpluses contribute to reducing the Government’s borrowing requirement. This differences in the treatment of the public pension plans in the two countries would contribute to a slower pace of reduction of marketable debt in Canada compared to the United States.
The Bank of Canada does not impose reserve requirements on the credit institutions (see Bank of Canada, 1996).
Repurchase agreements comprise liquidity-providing “special purchase and resale agreements” (SPRA) and liquidity-absorbing “sale and repurchase agreements” (SRA).
Bank of Canada, Weekly Financial Statistics (various issues).
Gravelle (1999) argues that liquidity in longer-term bonds has benefited from the Government’s debt management strategy, including the efforts to lengthen the maturity structure of outstanding debt and to maintain adequate size in benchmark issues, as well as from greater competition among dealers.
The most important instruments are refinancing operations in the form of reverse transactions, which are conducted on the basis of either repurchase agreements or collateralized loans (ECB, 1998). In addition to refinancing operations, the European System of Central Banks (ESCB) may use outright transactions, issuance of debt certificates, foreign exchange swaps, and collection of fixed-term deposits (see European Central Bank (1998)). These instruments have not, however, been used thus far.
Under the Federal Reserve Act, the Federal Reserve is also allowed to buy agency securities, some municipal securities, foreign exchange, and sovereign debt. In practice, however, its holdings of these assets are very small.
A so-called “broad gauge” study, launched by the Federal Reserve to examine in detail the implications of debt reduction for monetary policy operations, will help to provide further guidelines on how monetary policy operations should respond to further debt reduction.
In 1997, treasury bills represented 50 percent of the money market in Canada, compared with 31 percent in the United States, 21 percent in Japan, and 2 percent in the United Kingdom (Boisvert and Harvey (1998)). By 1999, the proportion had declined to 20 percent in Canada.
The monthly volume of trading in short-term interest derivatives increased from $193 billion in 1995 to $504 billion in 1999. Interest rate derivatives provide a useful hedging vehicle for security dealers and thus improve dealers’ ability to conduct inventory risk management in the cash market, which in turn promotes market liquidity (Gravelle (1999)).
Asset-backed securities represent commercial bank issues of short-term paper collateralized by high quality (investment grade) assets, such as mortgages and auto loans.
See Fleming et al. (2000), Jones (2000), Wojnilower (2000), and Zamsky (2000) for further analytical discussion, and market perspectives, on the implications of debt reduction for financial markets in the United States.
Steps that would widen the tradability and accessibility of swaps could include the establishment of a clearing house as well as of a swap futures market.