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12.2.2 Canadian Government Issues

An in-depth look at Canadian Government Issues, including the competitive tender system for marketable bonds and Treasury bills, types of bonds, bid structures, and the example auction process.


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:

Bidder Competitive Bid Yield (%) Size ($ millions)
1 5.041 500
2 5.043 500
3 5.043 500
4 5.044 500
5 5.047 500
6 5.048 500
7 5.048 500
Non-Competitive Tenders 25

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.


    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];


  • 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’.

CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## Who is allowed to submit bids for Canadian Government securities at the auctions? - [ ] Any individual investor - [x] Only institutions recognized as government securities distributors - [ ] Private companies unrelated to finance - [ ] Mortgage brokers > **Explanation:** Only institutions recognized as government securities distributors, including Schedule I and Schedule II banks, investment dealers, and foreign dealers active in the distribution of government securities, can submit bids. ## How can bids be submitted for Canadian Government bond auctions? - [ ] Only on a competitive tender basis - [ ] Only through direct purchase - [x] On a competitive and non-competitive tender basis - [ ] By negotiation with Bank of Canada > **Explanation:** Bids can be submitted on a competitive or non-competitive tender basis. Competitive bids are based on yields, while non-competitive tenders guarantee full acceptance at the average yield. ## What are the regular intervals for auctions of benchmark 30-year Canadian bonds? - [ ] Quarterly - [ ] Annually - [ ] Monthly - [x] Semi-annually > **Explanation:** The Government holds semi-annual auctions for the benchmark 30-year bonds. ## What is the significance of the yield in competitive bidding for Canadian Government bonds? - [ ] Higher yield bids are always accepted first - [x] Lower yield bids are awarded first - [ ] Yield has no impact on the allocation - [ ] Bids with the highest dollar amount are accepted first > **Explanation:** In competitive bids, the government awards bonds starting with the lowest yield, as lower yields imply a higher price the bidder is willing to pay. ## What are the available denominations for Canadian Government securities? - [ ] $10, $100, $1,000, $10,000 - [ ] $50, $500, $5,000, $50,000 - [x] $1,000, $5,000, $100,000, $1 million - [ ] $1,000, $10,000, $100,000, $10 million > **Explanation:** The available denominations for Canadian Government securities are $1,000, $5,000, $100,000, and $1 million. ## What happens to bidders whose competitive yields are too high? - [x] They do not receive any bonds - [ ] They receive bonds at the average yield - [ ] They receive bonds at their own bid yield - [ ] They are allowed to revise their bids > **Explanation:** Bidders with yields that are too high do not receive any bonds because the allocation is based on awarding bonds to the lowest yield bids first. ## Who approves and provides non-competitive tenders for auctions? - [ ] Commercial banks - [ ] Investment dealers - [ ] Foreign governments - [x] Bank of Canada > **Explanation:** Non-competitive tenders are accepted in full by the Bank of Canada, and bonds are awarded at the auction average yield. ## During an auction, if the total amount allocated to competitive bids is less than 100%, how is the remainder allocated? - [ ] It's carried over to the next auction - [ ] It is lost - [x] It is allocated to non-competitive bids - [ ] The auction is invalidated > **Explanation:** Any remaining amounts from competitive bids are allocated to non-competitive bidders. ## What role do primary dealers play in the Canadian Government securities market? - [ ] Only acting as advisors - [ ] Submitting bids exclusively for their clients - [ ] Trading only in the secondary market - [x] Maintaining a threshold of activity and submitting bids for their own accounts and customers > **Explanation:** Government securities distributors that maintain a certain threshold of activity, known as primary dealers, can submit bids for their own accounts and on behalf of their customers. ## How are successful bidders determined in a competitive auction for Canadian Government bonds? - [ ] By submitting the largest dollar amount bids - [ ] By randomly selecting among bidders - [x] By the lowest yield bids until the bond supply is exhausted - [ ] By prioritizing bids from primary dealers > **Explanation:** Bonds are allocated to the lowest yield bids first until the bond supply is exhausted, reflecting the highest price the bidder is willing to pay.

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Sunday, July 21, 2024