Finance Committee on March 1st, 2018

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Okay.

[The Chair, Liberal, Wayne Easter]

Yes.

[Adelle Laniel]

Sorry.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

No, no.

[The Chair, Liberal, Wayne Easter]

That clears it up. Thank you.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you very much for that.

I have just a quick follow-on question, On the back page, in terms of the initial shares of the Asian Infrastructure Bank, the purchase of $53.4 million, I would assume that we'll see this as a recurring item for a number of years up to the amount that we've committed to within the Asian Infrastructure Bank.

[Adelle Laniel]

Yes.

[Rick Stewart, Assistant Deputy Minister, International Trade and Finance Branch, Department of Finance]

That is correct. We are planning to make our capitalization contribution as a member of the bank through five instalments in successive years. This is the first instalment.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Okay. My final question is on the largest item, the $503-million decrease in interest. I take it these are real return bonds that we're looking at and just the inflation component. Is this an actual cash charge? I would assume it's a non-cash charge, but I want clarification on that.

[Adelle Laniel]

The real return interest is paid, I believe, annually, but I will confirm.

It's paid annually so it is a cash saving and an expense saving. So the timing can be slightly different due to accruals, but it does match.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you very much, and again good morning.

Chair, I'm done.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Sorbara.

Who's on? Pat? Or is it Pierre?

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Pierre's going to start.

[The Chair, Liberal, Wayne Easter]

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

Can you talk to us about the debt-management strategy of the Department of Finance? In particular, how big will be the bond offering in this coming fiscal year, 2018-2019? And what proportion of the bonds that we offer the market will be two, three, five, 10, and 30 years?

[Nicolas Moreau, Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance]

I can answer this question. I'm Nicolas Moreau. I'm the General Director of the Funds Management Division. It's a very good question. Thank you.

We will have a larger share in the two-, three-, and five-year sectors. This is strictly by construction. As you know, when we issue a two-year bonds in order to have about the same amount for 10 years, we need to do five times more two-year than 10-year bonds. When you look at the overall structure of our debt right now, we have about 40% that have been issued in the 10-year and 30-year sectors. For the rest of the debt, it's about 40% in a two-year to five-year sector and 20% in T-Bills.

For this year, we will increase our T-Bill issuance, because last year we were surprised on the upside with revenues, which have resulted in a lower financial requirement. When we do our adjustments, we always do our adjustments on the T-Bill sector. Since we want to be as transparent as possible for the market in terms of bond programs, we always adjust on the more liquid secto, the T-Bill, and we leave the rest of the bond program unadjusted for the year. Therefore, for this year in terms of proportion, we'll keep our share of 20-40-40 about constant, relative to last year.

[Pierre Poilievre, Conservative, Carleton, ON]

You'll keep the overall share of...? Twenty will be T-bills, 40 will be short-term, and 40 will be long-term?

[Nicolas Moreau]

Approximately, yes.

[Pierre Poilievre, Conservative, Carleton, ON]

The long-term, the 40% in longer-term issuances, when were most of them issued? I mean, obviously they were issued at various times. The reason I ask is that I noticed in the last several years that there has been much more issuance of shorter-term debt and less of long-term debt. Are these 10s and 30s earlier issuances from five or ten years ago, or are they more recent?

[Nicolas Moreau]

There are some that are more recent. Every year we are issuing 10-years and 30-years. When we go back to those shares, the 10-years and above have been growing over the past few years. We used to have a much shorter-term debt in circulation, especially after the financial crisis when the market was really asking for short-term products, T-bills of two years or five years. Since then, we have increased our benchmarks in the 10-years and 30-years. We also have issued some 50-year bonds. Overall, when you look at the share of our debt in circulation right now, we have increased the portion that is 10-years and above.

[Pierre Poilievre, Conservative, Carleton, ON]

In the last three years we've increased...? Of the issuances over the last three years, what percentage have been in 10s and 30s and 50s, and what percentage have been in twos, threes, and fives? Just give me a ballpark figure. I know I'm putting you on the spot, but you mentioned the 40, 40, 20, and I think that's the whole portfolio of debt. I'm just talking about the issuances in the last three years.

[Nicolas Moreau]

In the last three years, I will say it's about 45% in long, two to five is about 35%, and then 20% in T-bills.

[Pierre Poilievre, Conservative, Carleton, ON]

Is there not an argument to up the long-term above that 40% to 45% right now? The two-year U.S. Government bond has almost doubled in the last five months. We know interest rates really can't go much further down than they have, and there's plenty of upside. Therefore, if we're all in the gambling business, we know that we bet on higher interest rates over the medium-term and long-term. Would it not be wise for the future of Canada to lock in, just like Canadians lock in when rates are low on their personal mortgages?

[Nicolas Moreau]

It's one way of looking at it. When we look at the market, we see there's a lot of volatility and uncertainty about where the rates will be in the future. When we plan our debt strategy, we want to plan it to be able to face different economic circumstances. We also need to make sure there's sufficient liquidity in all the sectors.

As a sovereign issuer, we need to make sure we're creating sufficient benchmarks in all the different sectors where we are issuing debt, in order to help the provincial, municipal, and also the corporate sector to be able to borrow on their side.

Like I said, we've been slightly increasing our issuance in the long-term, 10-year, and above, but at the end of the day we need to ensure that we still issue sufficient amounts in the two-year, three-year, five-year, and the T-bill sector in order to have a sufficiently liquid market. The market prefers shorter issuances to the long-term, because it's a more liquid instrument right now.

[Pierre Poilievre, Conservative, Carleton, ON]

How much of a discount are they giving us for those short...? If the market prefers shorter-term issuances, then surely they would be giving us a discount on the interest they charge. How big is that discount?