Fixed Income Trading Desk Research Quick Hit GoC T-bills the ultimate fiscal shock absorber PLEASE SEE END OF DOCUMENT FOR IMPORTANT DISCLOSURES October 17, 17 - (Vol. 1, No. 53) The Government of Canada auctions $ billion treasury bills Tuesday: $. billion of 3s and $1. billion apiece of s and s. When it comes to the federal government s bi-monthly offering, that s at the paltry end of the spectrum. You have to go back almost a decade (i.e., before the global financial crisis really flared) to find a smaller bill auction (Chart 1). Moreover, with $. billion maturing, we ll see a net reduction for a ninth straight operation. Put another way, the federal T-bill stock has been shrinking since the end of June, falling from ~$15 billion to $5 billion. That s an outsized rate of decline, plunging a bit more than two standard deviations below the average level recorded over the past months (Chart ). The bill stock has fallen below the $131 billion 17-1 fiscal year-end target set out in Budget 17. Moreover, it stands in stark contrast to federal bonds, which have become more plentiful of late (Chart 3). Thus, T-bills now comprise the smallest share of Ottawa s publicly available marketable debt stock in 5 years (Chart ). And it s not as though there s been an abundant stock of cash management bills (CMBs) floating around this year to counter shrinkage in the regular bill program (Chart 5). These supply developments are proof positive that T-bills remain Ottawa s preferred near-term fiscal shock absorber. Fact is, there s been much greater relative variation in treasury bills than in Canada bonds over the past number of years. We ve looked at this a couple different ways, showing coefficients of variation (i.e., standard deviation over mean) in monthly outstandings in Chart and absolute rates of change on a fiscal year-over-year or fiscal half-year basis in Chart 7. Any way you slice it, bills bounce up and down with relatively greater amplitude than bonds, generally moving in inverse direction to federal fiscal health. Consider fiscal 17-1: robust GDP growth and hearty job creation have seen revenue growth gather steam. Meanwhile, spending growth has moderated, relative to this time last fiscal year or what federal infrastructure pledges might have suggested (Chart ). The result is a betterthan-expected budget balance or lighter net financing requirement. Rather than throwing the brakes on the domestic bond program where transparency and predictability are highly valued the net fiscal improvement manifests itself in a rapidly shrinking bill stock. Generally speaking, using bills to cushion economic ups and downs has a number of advantages. As noted, it allows for greater stability/predictability in all-important and much larger GoC bond market, preventing a drop off in supply that might negatively impact bond market liquidity, give rise to/accentuate repo pressures and/or distort credit/swap spreads. A declining bill stock is another way to manage refi risk, particularly should rates continue to normalize in Canada. Nothing rolls like a bill after all. And at the risk of being a downer, a smaller bill stock creates financial flexibility to respond to an unexpected market disruption or rapid deterioration in federal finances. Thinking back to the financial crisis, the feds were able to raise an extraordinary amount of money from the general public in very short order over $ billion in less than months via bills alone in part because the government entered the downturn with a lean T-bill stock. (There were barely $9 billion of bills floating around in early.) Saying all this, there s a limit to how far the federal government might wish to go, lest it imperil front-end liquidity. We generally resist putting a hard floor on outstanding federal bills. Truth is, there are myriad demand and supply side factors that make for a well-functioning market. Still, the outstanding bill stock now comprises the lowest share of GDP in decades, while the pool of other short-term paper remains well below pre-crisis levels (outright or as a share of the economy) (Chart 9). Notwithstanding some big Canada bonds that are rolling down, there s evidence that federal bills are less freely available and thus relatively more expensive, with tight supply aggravated by an apparent investor desire to hide in the front end on rate volatility (Charts and 11). So if fiscal fortunes have brightened on a sustained basis, Ottawa s bond program may well have to share in the downward adjustment to net financing requirements from here. Chart 1: Feds auctioning fewer T-bills of late Government of Canada treasury bills: Amount auctioned by tenor 1 1 Oct-7 Nov- Dec-9 Feb-11 Mar- Apr-13 Jun- Jul-15 Aug-1 Oct-17 Source: NBF, Bank of Canada (BoC) Note: Regular auctions only, excludes cash management bills 1Y M 3M Warren Lovely Fixed Income Trading Desk Research 1 1. 1..
October 17, 17 Chart : Fewer bills publicly available GoC treasury bills: Outstanding amount held by general public 3 19 17 15 13 1 9 7 Outstanding 5 Oct-7 Oct-9 Oct-11 Oct-13 Oct-15 Oct-17 Source: NBF, BoC Note: Excludes BoC holdings +/- SDs vs M avg Chart 3: but more and more bonds GoC marketable bonds: Outstanding amount held by general public 55 5 5 35 3 5 Outstanding 15 Oct-7 Oct-9 Oct-11 Oct-13 Oct-15 Oct-17 Source: NBF, BoC Note: Excludes BoC holdings +/- SDs vs M avg Chart : Bills account for smaller debt share Treasury bill share of publicly held GoC bills/bonds* 55 5 5 35 3 5 15 197 1977 197 1997 7 17 Source: NBF, BoC Note: Based on amount o/s held by public, excl. CSB/retail Chart 5: Cash management bills hardly plentiful Value of GoC cash management bill auctions: Year-to-date (Jan-Oct) 9 7 5 3 YTD sum Source: NBF, BoC Note: Y average based on 7 to 1 Prior Y avg 7 9 11 13 15 17 Chart : T-bill stock relatively more volatile Coefficient of variation (CV) in GoC s publicly held debt stock 5 15 5 T-bills Bonds Yrs 7Yrs 5Yrs 3Yrs Yrs 1Yr Source: NBF, BoC Note: CV = (standard deviation / mean) x ; based on monthly outstandings held by general public Chart 7: any way you look at it Avg absolute chg in outstanding GoC T-bills & bonds: Last years* 1 -pts/year Fiscal yr/yr (i.e., Mar vs Mar) Source: NBF, BoC Note: Based on to 17 T-bills Bonds Fiscal mid-yr (i.e., Sep vs Mar) Warren Lovely Fixed Income Trading Desk Research
October 17, 17 Chart : Ottawa s fiscal fortunes have improved Change in federal revenues & program spending: Fiscal YTD to July - chg 1-17 17-1 Chart 9: Not an abundance of other S-T paper Corporate & provincial short-term paper outstanding 5 5 175 15 5 Level (L) of GDP (R) 1 1 - Revenues Program expenses 7 9 11 13 15 17 Source: NBF, Government of Canada Source: NBF, Statistics Canada Note: Quarterly averages to 17:Q Chart : Front-end bills see less of a selloff Change in GoC benchmark T-bill/bond yields 9 7 5 3 - - bps 1M 3M M 1Y Y 3Y 5Y 7Y Y 3Y Source: NBF, BoC 1M chg 3M chg YTD chg Chart 11: Investors hiding in very front end? GoC yield curves: 3M vs 1Y & 1Y vs Y 5 3-3M1Y 1YY Jan-1 Aug-1 Mar-17 Oct-17 Source: NBF, BoC bps (5D mov avg) Warren Lovely Fixed Income Trading Desk Research 3
Fixed Income Trading Desk Research Public Sector Research Public Sector Research Corporate Credit Warren Lovely Connor Sedgewick +1 1-9-59 Warren.Lovely@nbc.ca +1 5-79-3 Connor.Sedgewick@nbc.ca Relative Value Models Drew Lloyd + ()-7-9379 Drew.Lloyd@nbc.ca Important Disclosures General October 17, 17 This Report was prepared by National Bank Financial, Inc. (NBF), (a Canadian investment dealer, member of IIROC), an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete and may be subject to change without notice. The information is current as of the date of this document. Neither the author nor NBF assumes any obligation to update the information or advise on further developments relating to the topics or securities discussed. 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