The federal government is pledging to improve bond market transparency for retail investors.

The issue of transparency is noted in its debt strategy for 2005/2006, released on March 21 by Finance. Also, the Bank of Canada has released a summary of comments received on the strategy and debt distribution system.

The government says it will continue to target a gradual reduction in the fixed-rate share of the debt from two-thirds in 2002–03 to 60% in 2007–08. The change in the debt structure will continue to be made gradually through increases in the Treasury bill program and reductions in the bond program.

The outstanding amount of Treasury bills will increase from about $130 billion at the end of 2004–05 to approximately $140 billion by the end of 2005–06. The total amount of marketable bonds issued in 2005–06 will be about $33 billion, roughly $3 billion lower than in 2004–05. Net marketable bond issuance (net of buybacks) of about $23 billion will be about $1 billion lower than in 2004–05.

The government says it intends to forego the auction of a two-year fungible bond in the fourth quarter of 2005–06 to facilitate a reduction in gross bond issuance in the coming year.

And, it will begin to reduce the size of the bond buyback program to $9 billion to $10 billion, roughly $1.5 billion less than in 2004–05. The stock of marketable domestic bonds will decrease from an estimated $243 billion at the end of 2004–05 to about $235 billion, due to maturities and continued cash management buyback operations.

Annual bond issuance is expected to stabilize in the range of $30 billion to $35 billion once the 60% fixed-rate target has been reached. Annual issuance of this size will put into question the viability of the scope and structure of the current bond program. In 2005–06, the government says it will consult with market participants on potential changes to the structure of the bond program.

As for changes to debt distribution, the timing of bond auctions will be advanced from 12:30 p.m. to 12 p.m., and the time between bond auctions and cash buybacks will be reduced from 30 minutes to 20 minutes, beginning in April. The offering deadline for bond buybacks will be advanced from 1 p.m. to 12:20 p.m.

The government also says it will be actively working with market participants and securities regulators in 2005–06 to increase the level of transparency of secondary market trading information for Government of Canada securities, both for institutional and retail investors.

“Dealers and institutional investors who provided comments on the transparency of the market indicated that, in general, price transparency on Government of Canada securities is now satisfactory for institutional investors,” the government reports. “There was a recognition that price transparency needs to be improved for corporate bonds and for retail investors, but wholesale market participants did not offer any specific suggestions for improvements on these fronts. A number of participants were concerned about how higher levels of transparency on trade volumes would affect market liquidity.”

There was little comment from retail investors on primary distribution issues. “Dealers did not oppose changes to the distribution framework aimed at augmenting the access of retail investors to securities, such as raising the non-competitive bidding limit,” the Bank reports. “Dealers wondered, however, about the degree of interest on the part of retail investors in bidding directly at Government of Canada auctions.” And, it adds, the large dealers believed that retail investors had access to fairly priced Government of Canada securities through their proprietary retail networks.

The Bank reports that comments received on the debt distribution framework are being taken into consideration as the review of the framework continues. The conclusions of the review, including any changes to the distribution framework, will be outlined in a document to be published on the Bank of Canada’s website later in 2005.