12.2.2 Canadian Government Issues

Introduction

The Canadian Government regularly issues new fixed-coupon marketable bonds and Treasury bills to the market through a competitive tender system. These securities are issued by way of an auction, whereby the allocation is based on bids submitted. Only institutions recognized as government securities distributors can submit bids, both for their accounts and on behalf of their customers, to the Bank of Canada.

• Government Securities Distributors: Include Schedule I and II banks, investment dealers, and foreign dealers active in the distribution of government securities. Distributors maintaining a certain activity threshold are known as primary dealers.
• Non-Competitive Tenders: These bids are accepted in full by the Bank of Canada, with securities awarded at the auction average yield.

Auction Details

To ensure regularity and transparency in debt operations, the Government holds scheduled auctions for various bond maturities.

Auction Schedule

• Quarterly: Benchmark bonds of 2, 5, and 10 years.
• Semi-annual: 30-year benchmark bond.
• Denominations: $1,000, $5,000, $100,000, and $1 million.

Example Auction Process

Consider an auction for $2.5 billion of 10-year Government of Canada bonds, where ten government securities distributors submitted the following bids:

Bonds are allocated first to bidders submitting the lowest yields, a necessary approach due to the inverse relationship between bond yield and price: lower yield bids indicate a higher price offer for the bonds. Thus, bonds are allocated to the first five competitive bidders. Each of the four lowest-yield competitive bidders receives the full $500 million. The fifth bidder benefits, albeit at a lower rate, receiving $475 million (modified by the $25 million from non-competitive tenders). Price determination for winners is solely based on their bid yields while non-competitors are granted bonds at the averagely accepted yield.

Key Takeaways

• Reliability and Transparency: Regularly timed auctions build trust and reliability in the markets.
• Bidding Process Analysis: Insight into how bids are structured and prioritized gives an edge in future participations.
• Practical Example: Learning through example auctions consolidates theoretical wisdom.
• Yield Price Relationship: Vital concept involving the fundamental price-yield inverse relationship for bonds.

Frequently Asked Questions (FAQs)

1. What are government securities distributors?

These are recognized financial institutions authorized to submit bids for government securities in auctions. They include banks, investment and foreign dealers, actively participating in farm-out bond distributions.

2. What happens during a non-competitive tender?

Non-competitive tenders are assured full acceptance by the Bank of Canada, with bonds awarded at auction average yields, representing a lower-risk entry into government securities against competitive tender participants.

3. Why are primary dealers significant?

Primary dealers are entities with exceeding levels of transaction activity, embodying heightened importance and liquidity assurance within the securities market.

4. What denominations are available for subscription in government bond auctions?

Bonds are issued in denominations of $1,000, $5,000, $100,000, and $1 million with performance confidentionality uploaded to maintain equitable participation rights.

Diagrams

    graph TD;
	    A[Government Securities Distributors] -->|Submit Bids| B(Auction Process);
	    B -->|Evaluates Bids| C(Bond Allocation);
	    C -->D[Bond Issuance];
	    D --> E[Primary Dealers & Participants];

Glossary

• Bond Yield: The return an investor realizes on a bond.
• Competitive Tender: An auction process where bids describe both quantities and rates at which investors are ready to purchase government securities.
• Primary Dealers: Government securities distributors who uphold the activity levels and obligations essential for inflowing liquidity in market scenarios.
• Non-Competitive Tender: Submissions that receive full participation without specification of a bid, awarded at the average auction result yield.
• Fixed-Coupon Marketable Bonds: Regularly interest-paying long-term debt securities, circulated in a public domain by the issuing government.

Key References

• Bank of Canada for a detailed durative on ‘Standard Terms for Auctions of Government of Canada Securities’.