{"id":1395,"date":"2018-03-20T00:00:00","date_gmt":"2018-03-20T00:00:00","guid":{"rendered":"http:\/\/webtransfer.loc\/2018\/03\/debt-management-strategy\/"},"modified":"2024-07-29T07:47:18","modified_gmt":"2024-07-29T07:47:18","slug":"debt-management-strategy","status":"publish","type":"post","link":"https:\/\/ifsd.ca\/fr\/2018\/03\/debt-management-strategy\/","title":{"rendered":"Budget 2018: Short and Medium-Term Implications of the New Debt Management Strategy"},"content":{"rendered":"\n

Major budget documents usually dedicate a section to the debt management and borrowing strategy of the federal government. And while those pages usually do not make headline news like the major policy announcements and bottom-line deficits, they are of tremendous importance. The financial markets\u2019 community, and taxpayers in general, can find useful information in that such a section about how the government borrows money to finance its budgetary balance, non-budgetary transactions and maturing pre-existing debt stock. In Budget 2018, while no major changes were brought to debt management objectives, several changes in their implementation going forward are worth highlighting.[1]<\/a>  Most importantly, the reference to \u201can increased focus on the issuance of short- and medium-term bonds (2-, 3- and 5-year maturities)\u201d has been dropped. Therefore, in the coming fiscal year, the issuances of bonds will be reduced while the issuances of treasury bills will increase.  In the near term, this will have an impact on the supply of those various types of Government of Canada securities available for sale. In the medium term, those decision, keeping everything else constant, will also have important fiscal implications through higher public debt charges (PDC).<\/p>\n\n\n\n

Fewer Bonds\u2026<\/em><\/p>\n\n\n\n

First, after having increased for the last two years, nominal bonds issuances will decline by $23 billion, from $138 billion in 2017-18 to $115 billion in 2018-19.[2]<\/a> Practically, this will be implemented through the reduction of benchmark bonds target ranges (Chart 1). The most important decline in benchmark target ranges occurs at the 3- and 5-year tenures, while the 2- and 10-year volume benchmark targets are also being reduced. This will be implemented with the same number of bond auctions across the whole bond yield curve except at the 3-year level which is to be reduced by 2, from 8 to 6.<\/p>\n\n\n\n

Consequently, using the planned numbers of bond auctions, the average of the benchmark ranges as actual targets, and a $113 billion bonds financing schedule[3]<\/a>, we estimate the issuances of 2-, 3-, 5- and 10-year bonds to fall by $9B, $6B, $4B, and $3B, respectively.[4]<\/a> The resulting volume of issuances at these respective yields is expected to be $50B, $19B, $27B, $12B, $4B and $2B (Chart 2).<\/p>\n\n\n\n

\"Chart<\/figure>\n\n\n\n

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\"Chart<\/figure>\n\n\n\n

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\u2026 But More Treasury Bills <\/em><\/p>\n\n\n\n

The supply of treasury bills in 2017-18 is short of the Government\u2019s expectations: $125B versus $131B expected in Budget 2017. That is because an improved revenue outlook stemming from stronger-than-expected economic growth has reduced borrowing requirements. Lower borrowing requirements in turn are absorbed in the near term through smaller treasury bill issuances. The latest comments from the debt management strategy consultations<\/a> revealed that market participants believe that the outstanding stock of treasury bills is approaching \u201ca level below which the well-functioning of the treasury bill market could be impacted\u201d and that \u201cdemand for very short-term product (\u2026) currently outpaces supply.\u201d <\/p>\n\n\n\n

To increase the 2018-19 year-end supply of treasury bills to $138 billion, we estimate that a 3-, 6-, and 12-month treasury bill issuance program of around $300 billion will be necessary (Chart 3).[5]<\/a> Since regular treasury bill auctions will continue to be held bi-weekly, the targeted average benchmark size for treasury bills will have to increase.[6]<\/a> <\/p>\n\n\n\n

\"Chart<\/figure>\n\n\n\n

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Overall, the debt management strategy inferred from Budget 2018 is different than what was expected in early February<\/a> and what was implemented in the 2017-18 fiscal year (Chart 4).<\/p>\n\n\n\n

\"Chart<\/figure>\n\n\n\n

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Implications for the Federal Fiscal Forecast<\/em><\/p>\n\n\n\n

Next, using our inferred debt management strategy for the 2018-19 fiscal year, as well as the primary balance and the yield curve forecasts out of our March 2018 economic<\/a> and fiscal<\/a> forecasts, we estimate public debt charges (PDC) on nominal bonds and treasury bills. Using the same methodology as described in February<\/a>, prior to Budget 2018, PDC on nominal bonds and treasury bills are expected to increase from $12.5 and $0.7 billion in 2016-17 to $21.4 and $6.3 billion in 2022-23, respectively (Chart 5). This will represent 1.1% of GDP, up from 0.7% in 2016-17.<\/p>\n\n\n\n

These PDC are higher than what one would obtain by using a strategy similar to the one used in the 2017-18 fiscal year e.g.\u2013\u2013 increasingly focused on medium-term nominal bonds. For instance, by the end of the forecast, PDC for nominal bonds are $1.1 billion lower and treasury bills are $1.0 billion higher under the projected 2018-19 fiscal year debt management strategy than under a simulation that uses our estimate of the fiscal 2017-18 strategy for fiscal 2018-19. Indeed, the higher allocation of funding requirements to treasury bills explain the larger PDC on them. As well, since January 2018, the yield curve has moved higher, increasing the costs of debt across all tenures. Moreover, as a larger share of funding requirements need to be rolled over more quickly, the issuances of nominal bonds has also increased, thereby inflating coupon payments on the latter.[7]<\/a> But, since the overall allocation to bonds has shifted down, their overall costs end-up slightly lower by the end of the forecast.<\/p>\n\n\n\n

\"Chart<\/figure>\n\n\n\n

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While this outlook is helpful in understanding implications of the change in the federal government\u2019s debt management strategy, any medium-term assessment using the approach outlined above is subject to some important caveats:<\/p>\n\n\n\n