Canada to bolster short-term debt sales as Bank of Canada action looms

Canada plans to increase sales of short-term debt this fiscal year, even as government finances improve and overall debt issuance declines for the second year in a row.

Canada plans to increase sales of short-term debt this fiscal year, even as government finances improve and overall debt issuance declines for the second year in a row. 

The federal government plans to increase the stock of treasury bills by 14 per cent to $213 billion (US$169 billion), according the documents released as part of Finance Minister Chrystia Freeland’s budget on Thursday. 

Sales of two-year debt are expected to rise 10 per cent from last year’s levels, while the government plans to reduce issuance of 10-year and 30-year bonds.  

The government is increasing its reliance on shorter-term debt even as the government yield curve has been flattening. Bond traders are focused on the Bank of Canada’s future plan for reducing its holdings of government debt. The central bank accumulated hundreds billions on its balance sheet as part of emergency programs during the COVID-19 pandemic. 

The government’s decision to borrow short lowers the risk of the market being flooded with longer-dated securities, said Angelo Manolatos, a rates strategist at Bloomberg Intelligence. 

“The issuance shift towards the front end of the curve means less interest-rate risk the market needs to absorb as the Bank of Canada exits its reinvestment phase,” said Manolatos. “If issuance was skewed toward the long end of the market, there would be more interest-rate risk for investors to buy -- risking an increase in bond yields.”