Market Support Programs
Canada: Provincial Bond Purchase Program
Operational: May 7, 2020
Purpose
To “support the liquidity and efficiency of provincial government funding markets” by purchasing bonds in the secondary market (BoC 2020b).
Key Terms
- Launch DatesAuthorized: 1991 Announced: April 15, 2020
- Operational DateMay 7, 2020
- End DateMay 7, 2021
- Legal AuthoritySection 18(c) of the Bank of Canada Act
- Source(s) of FundingSettlement balances
- AdministratorBMO Global Asset Management
- Overall SizeCAD 50 billion
- Eligible Collateral (or Purchased Assets)CAD-denominated bonds issued by or guaranteed by a provincial or territorial government
- Peak UtilizationCAD 17.558 billion on May 6, 2021
In the beginning of 2020, the outbreak of the novel coronavirus placed significant strain on financial markets and especially affected commodity-producing countries like Canada. As the broad economy contracted, oil-exports fell, and the government imposed public health restrictions to contain coronavirus, the Bank of Canada (BoC) announced emergency measures to ensure functioning of financial markets and to “reach companies and households and foster a robust recovery” (Poloz 2020, 1). One market that faced acute strain was the Canadian provincial bond market. The BoC announced the Provincial Bond Purchase Program (PBPP) through a notice published on April 15, 2020. The stated aim of the PBPP was “to maintain well-functioning provincial funding markets in the face of significant demands for funding as governments implement their emergency measures, and businesses and households seek to bridge this difficult period” (BoC 2020g). The PBPP was authorized to purchase up to CAD 50 billion of provincial bonds in the secondary market through primary dealers. The program was funded through settlement balances and the Government of Canada indemnified the program, along with other COVID-19 facilities. The PBPP’s portfolio of provincial bonds reached a peak market value of CAD 17.6 billion on May 26, 2021. The PBPP had a minor impact on the overall size of the BoC balance sheet, but the announcement of the creation of the PBPP on April 15 had an immediate impact on provincial bond yields, which fell on average 21 basis points that day.
In the beginning of 2020, the outbreak of the novel coronavirus placed significant strain on financial markets and especially affected commodity-producing countries like Canada (Poloz 2020). As the broad economy contracted, oil exports fell, and the government imposed public health restrictions to contain coronavirus, the Bank of Canada (BoC) announced emergency measures to ensure functioning of financial markets and to “reach companies and households and foster a robust recovery” (Poloz 2020). One market that faced acute strain was the Canadian provincial bond market.
Three features of provincial debt in Canada make the market particularly critical: (1) provincial governments face large, open-ended expenditures (on healthcare for example); (2) revenue streams are highly cyclical; (3) provincial governments don’t face balanced-budget or indebtedness constraints like in the United States. These features have made the subnational bond market in Canada much larger than other countries and, since the Global Financial Crisis, its interest payments a larger burden than the interest on national debt (Hanniman 2020b). (See Figure 1.)
As the COVID-19 pandemic increased provinces’ expected costs, provincial bond markets deteriorated as investors rushed to liquidity. In the first two weeks of April 2020, Canadian provinces issued more than CAD 20 billion in bonds, far exceeding previous monthly records; they issued CAD 8 billion on April 14 alone (Hanniman 2020a). At the same time, the sector saw unprecedented interest rate hikes. On March 6, 2020, 10-year provincial bond spreads rose between 18 and 27 basis points, far higher than the largest increases during the financial crisis. High issuance and high yields coincided; Hanniman accounts for this by noting that almost all issuance went to a few large investors, with very little activity in secondary markets (Hanniman 2020a).
The BoC announced the Provincial Bond Purchase Program (PBPP) on April 15, 2020, stating that it would supplement the previously announced Provincial Money Market Purchase Program (PMMPP) (BoC 2020g; BoC 2020f). The aim of both the PBPP and the PMMPP was “to maintain well-functioning provincial funding markets in the face of significant demands for funding as governments implement their emergency measures, and businesses and households seek to bridge this difficult period” (BoC 2020g).
Figure 1: Subnational Debt to GDP/Annual Revenue, 2019
Source: Hanniman 2020b.
The PBPP was to purchase up to CAD 50 billion worth of provincial bonds in the secondary market through reverse auctions with primary dealers (BoC, n.d.a; BoC 2020b). The program was funded through settlement balances and indemnified by the Government of Canada (Beaudry 2020; BoC 2021a). The BoC imposed individual limits: it would not purchase more than 20% of an eligible issuer’s outstanding provincial bonds (BoC, n.d.a). The facility retained BMO Global Asset Management as asset manager for the program (BoC 2020b).
The PBPP began purchasing provincial bonds the week of May 7, 2020, and continued through May 6, 2021, at an average pace of CAD 400 million per week (Lovely and Schleich 2021). From May 7, 2020, through year-end, the PBPP purchased approximately 10% of gross bond supply, smaller than the 15% absorption of the Canada Mortgage Bond Purchase Program and nearly 70% absorption of the Government of Canada Bond Purchase Program (See Figure 2). This makes the BoC’s share of total domestic bonds in circulation at most 2% (Lovely and Schleich 2021).
Figure 2: Share of Gross Bond Supply Absorbed by BoC (since March 1, 2020)
Source: Lovely and Schleich 2021.
The PBPP’s portfolio of provincial bonds reached a peak market value of CAD 17.6 billion on May 6, 2021 (BoC, n.d.b). The PBPP had a minor impact on the overall size of the BoC balance sheet (See Figure 3).
Figure 3: The BoC’s Total Assets as of July 7, 2021, CAD billions
Source: BoC 2021d, 24.
Provincial yields began to flatten following the announcement of the Provincial Money Market Purchase Program (PMMPP) on March 24, 2020 (Hanniman 2020a). The PMMPP became operational on March 25, 2020, purchasing 40% of provincial short-term debt offerings (See Figure 4).
Figure 4: Ten-Year Yields (%) on Provincial and Federal Bonds
Note: provinces and territories: Alberta – AB; British Columbia – BC; Manitoba – MB; New Brunswick – NB; Newfoundland and Labrador – NL; Northwest Territories – NT; Nova Scotia – NS; Nunavut – NU; Ontario – ON; Prince Edward Island – PE; Quebec – QC; Saskatchewan – SK; Yukon – YT
Source: Hanniman 2020a.
The announcement of the PBPP had a strong impact on provincial yields. Hanniman (2020a) finds that on April 15 provincial bond yields fell on average 21 basis points.
Key Design Decisions
Purpose1
The BoC announced the Provincial Bond Purchase Program (PBPP) through a notice published April 15, 2020 (BoC 2020g). The BoC stated in the first press release that the PBPP would supplement the newly created Provincial Money Market Purchase Program (PMMPP), which had been announced on March 24, 2020 (BoC 2020f).
The first press release stated the aim of both the PBPP and the PMMPP: “to maintain well-functioning provincial funding markets in the face of significant demands for funding as governments implement their emergency measures, and businesses and households seek to bridge this difficult period” (BoC 2020g).
Part of a Package1
The PBPP was one of a number of liquidity programs announced in response to market stress caused by the COVID-19 pandemic (BoC, n.d.c). The BoC stated in the first press release that the PBPP would supplement the newly created Provincial Money Market Purchase Program (PMMPP), which had been announced on March 24, 2020 (BoC 2020f). The PMMPP supported liquidity in short-term provincial money markets through the primary market (BoC 2020a).
Legal Authority1
Section 18(c) of the Bank of Canada Act established the BoC’s right to buy and sell securities issued or guaranteed by Canada or any province (Bank of Canada Act 1985).
Governance1
Section 28 of the Bank of Canada Act (1985) enables the Minister of Finance to appoint auditors of the BoC and to require that those auditors report on bank affairs to the Minister “from time to time.”
Administration1
On April 23, 2020, the BoC announced that BMO Global Asset Management (BMO GAM) would serve as asset manager for the PBPP, which was “selected following a competitive procurement process” (BoC 2020h). BMO Global Asset Management was selected for “their capacity to quickly and effectively establish and manage this program, and their robust conflict of interest policies and processes” (BoC 2020h). The BoC retained BlackRock Financial Markets Advisory to advise the BoC and CIBC Mellon to serve as custodian (BoC 2020g).
Eligible participants—primary dealers for Government marketable bonds—could access the program by contacting BMO GAM (BoC 2020b).
Communication1
When it first announced the program on April 15, 2020, the BoC framed the PBPP as critical “to maintain[ing] well-functioning provincial funding markets in the face of significant demands for funding as governments implement their emergency measures, and businesses and households seek to bridge this difficult period” (BoC 2020g). A day later, on April 16, the governor of the BoC, Stephen Poloz, addressed the House of Commons Standing Committee on Finance and explained that the PBPP would help to “ensure proper functioning of provincial debt markets” (Poloz 2020).
Disclosure1
Section 29 requires that the BoC report weekly, on Fridays, its assets and liabilities (Bank of Canada Act 1985). Pursuant to Section 29, the BoC reported on its aggregate holdings of provincial bonds every Friday (BoC 2020b). However, it did not report individual transactions while the program was operating. While not required by law, the BoC published transaction-level data on June 29, 2021 (BoC 2021c).
A March 23, 2021, press release which announced that the PBPP would be discontinued on May 7, 2021, further stated that the BoC would publish transaction-level data for its asset purchase programs (BoC 2021b).
SPV Involvement1
This Key Design Decision does not apply to the BoC's PBPP.
Program Size1
The PBPP was authorized to hold up to CAD 50 billion par value of eligible assets (BoC 2020b). The BoC instituted individual participating limits: the BoC would not purchase more than 20% of an eligible issuer’s outstanding eligible assets (BoC, n.d.a).FNSection 18(j) of the Bank of Canada Act states that the BoC may extend loans to provincial governments but that outstanding loans must not exceed: 1) one-third of the Government of Canada’s annual revenue and 2) one-fourth of the borrowing provincial government’s revenue. All loans must be repaid by the first quarter of the following year (BoC 2020d, sec. 18[j]).
Source(s) of Funding1
An explanatory note from Deputy Governor Paul Beaudry explained that the BoC funded its acquisition of provincial bonds through settlement balances—by crediting primary dealers upon purchase “with a deposit of settlement balances in” BoC accounts paying the policy interest rate of 25bps (Beaudry 2020).
The Government of Canada entered into indemnity agreements with the Bank of Canada covering the PBPP, as well as other COVID-19 asset purchase programs. Under these agreements, realized losses would be indemnified by the Government of Canada, and realized gains would be remitted (BoC 2021a, 21).
Eligible Institutions1
Eligible participants were primary dealers for Government of Canada marketable bonds (BoC 2020e). See Figure 5 for a complete list of eligible primary dealers.
Auction or Standing Facility1
The BoC purchased provincial bonds through reverse auction. Prior to February 22, 2021, auctions were to be held twice a week, though published operations data indicates that auctions were occasionally held three times a week. After February 22, 2021, the BoC held weekly auctions (BoC, n.d.b). A BoC spokesperson said that the change was “consistent with the gradual reduction approach” that the BoC favored with other programs (Gordon 2021).
Loan or Purchase1
The BoC purchased provincial bonds through primary dealers from provinces and territories (BoC 2020b).
Eligible Collateral or Assets1
Eligible assets were CAD-denominated bonds with maturation dates on or before April 15, 2031, issued or guaranteed by a provincial or territorial government and sold in the secondary market. Non-guaranteed agency bonds, municipal bonds, real return bonds, FRNs, strip/residuals, T-Bills, and promissory notes were not eligible for the program (BoC 2020b). A full list is presented in Figure 5.
Figure 5: Eligible Issuers
Provincial/Territorial issuers
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Northwest Territories
Nova Scotia
Nunavut
Ontario
PEI
Quebec
Saskatchewan
Yukon
Bond primary dealers
BMO Nesbitt Burns Inc.
Casgrain & Company Limited
CIBC World Markets Inc.
Desjardins Securities Inc.
HSBC Securities (Canada) Inc.
Merrill Lynch Canada Inc.
Laurentian Bank Securities Inc.
National Bank Financial Inc.
RBC Dominion Securities Inc.
Scotia Capital Inc.
The Toronto-Dominion Bank
Source: BoC 2020c.
The BoC instituted individual participating limits: the BoC would not purchase more than 20% of an eligible issuer’s outstanding eligible assets. The facility did not impose a minimum rating requirement (BoC, n.d.a).
The BoC aimed to create a portfolio of assets “based in equal weight on each province or territory’s share of eligible bonds outstanding and their share of Canadian GDP” (BoC, n.d.a, 2). This weighting was recalculated on a monthly basis. Figure 6 contains the portfolio by issuer as of May 10, 2021.
Figure 6: Target Portfolio and Actual Portfolio, as of May 10, 2021
Province or Territory
Portfolio
Actual Portfolio
Actual Amount
Alberta
12.76%
12.77%
$2242.8
British Columbia
10.37%
10.42%
$1828.8
Manitoba
4.21%
4.39%
$771.3
New Brunswick
1.96%
1.90%
$333.4
Newfoundland and Labrador
1.87%
1.88%
$330.1
Northwest Territories
0.02%
0.03%
$5.0
Nova Scotia
1.79%
1.78%
$313.4
Nunavut
0.01%
0.00%
$0.0
Ontario
42.56%
42.65%
$7488.7
Prince Edward Island
0.20%
0.18%
$31.6
Quebec
21.30%
21.48%
$3770.9
Saskatchewan
2.95%
2.52%
$442.1
Total
100%
100%
$17558.0
Source: BoC, n.d.a.
Loan Amounts (or Purchase Price)1
The BoC determined pricing through a tender offer process, informed by market conditions. The BoC “reserved the right to adjust its pricing and portfolio requirements and objectives to meet policy objectives” (BoC 2020b).
Other Conditions1
Research did not reveal other restrictions on participants.
Haircuts1
This Key Design Decision does not apply to the BoC's PBPP.
Interest Rate1
This Key Design Decision does not apply to the BoC's PBPP.
Fees1
This Key Design Decision does not apply to the BoC's PBPP.
Term1
This Key Design Decision does not apply to the BoC's PBPP.
Regulatory Relief1
This Key Design Decision does not apply to the BoC's PBPP.
International Cooperation1
This Key Design Decision does not apply to the BoC's PBPP.
Duration1
The BoC announced on March 23, 2021, that it would discontinue the PBPP on May 7, 2021, consistent with the BoC’s intentions to operate the program for one year (BoC 2021b).
Key Program Documents
(BoC 2020a) Bank of Canada (BoC). 2020. “Provincial Money Market Purchase Program.”
BoC webpage describing operational terms and conditions of the PMMPP.
(BoC, n.d.a) Bank of Canada (BoC). No date. “Provincial Bond Purchase Program.” Accessed September 21, 2021.
Bank of Canada page containing information and overview on PBPP.
Key Program Documents
(BoC 2020c) Bank of Canada (BoC). April 29, 2020. “Eligible Provincial and Territorial Issuers under the Bank of Canada’s Standing Liquidity Facility.”
List of eligible issuers of provincial and territorial bonds.
Key Program Documents
(Bank of Canada Act 1985) 1985. c. B-2 Revised Statutes of Canada §18.
Law establishing the powers of the Bank of Canada.
(BoC 2020d) Bank of Canada (BoC). January 31, 2020. “Bank of Canada Act – Version from 2020-01-31 to 2021-09-11.”
Version of the Bank of Canada Act from January 1, 2020 to September 2021.
(BoC 2021a) Bank of Canada (BoC). May 1, 2021. “Government Notices.” Canada Gazette Part I: Vol. 155 (18).
Government notice regarding regulatory changes made by Bank of Canada, as of May 2021.
Key Program Documents
(Gordon 2021) Gordon, Julie. February 23, 2021. “Bank of Canada Scales Back Provincial Bond-Buying Program.” Yahoo Finance.
Newspaper article on scaling back of provincial bond purchases.
Key Program Documents
(Beaudry 2020) Beaudry, Paul. August 2020. “Our COVID-19 Response: Large-Scale Asset Purchases.” Bank of Canada. Yale Program on Financial Stability Resource Library.
Public-facing summary describing the BoC’s large-scale asset purchase program operations.
(BoC 2020e) Bank of Canada (BoC). 2020. “Government Securities Auctions.” Webpage.
Webpage listing primary dealers and Government of Canada securities distributors.
(BoC 2020f) Bank of Canada (BoC). March 24, 2020. “Bank of Canada Announces New Program to Support Provincial Funding Markets.” Bank of Canada. Yale Program on Financial Stability Resource Library.
BoC press release announcing the PMMPP to support market liquidity for provincial short-term borrowing.
(BoC 2020g) Bank of Canada (BoC). April 15, 2020. “Bank of Canada to Introduce a Provincial Bond Purchase Program.”
Press release announcing PBPP.
(BoC 2020h) Bank of Canada (BoC). April 23, 2020. “Bank of Canada Announces Asset Manager for Provincial Bond Purchase Program.”
Press release announcing selection of asset manager for PBPP.
(BoC 2021b) Bank of Canada (BoC). March 23, 2021. “Bank of Canada Announces the Discontinuation of Market Functioning Programs Introduced During COVID-19.”
Press release announcing discontinuation of PBPP, as well as other COVID-19 programs.
(BoC 2021c) Bank of Canada (BoC). June 29, 2021. “Bank of Canada Publishes Transaction-Level Data for Its Discontinued Asset Purchase Programs.” Bank of Canada/Central Bank of Canada/La Banque du Canada. Yale Program on Financial Stability Resource Library.
Press release announcing publication of transaction-level data for asset purchase programs.
(BoC, n.d.c) Bank of Canada (BoC). No date. “COVID-19: Actions to Support the Economy and Financial System.” Accessed May 10, 2021.
Press release detailing actions taken in response to COVID-19 pandemic to support economy.
(Poloz 2020) Poloz, Stephen S. April 16, 2020. “Opening Statement before the House of Commons Standing Committee on Finance.” Opening Statement presented at the House of Commons Standing Committee on Finance, Ottawa, April 16.
Opening statement delivered to Canada’s House of Commons Standing Committee on Finance regarding the BoC’s monetary policy and liquidity actions.
Key Program Documents
(BoC 2021d) Bank of Canada (BoC). July 2021. “Monetary Policy Report - July 2021.” Bank of Canada. Yale Program on Financial Stability Resource Library.
Quarterly report of the BoC’s Governing Council presenting the Bank’s base-case projection for inflation and growth in the Canadian economy, and its assessment of risks.
(Hanniman 2020a) Hanniman, Kyle. April 28, 2020. “Backstopping Provincial Debt: How the Bank of Canada Made Its Move.” C.D. Howe Institute.
Report on the provincial debt market, and the PBPP.
Key Program Documents
(Hanniman 2020b) Hanniman, Kyle. June 2020. “COVID-19, Fiscal Federalism and Provincial Debt: Have We Reached a Critical Juncture?” Canadian Journal of Political Science 53 (2): 279–85.
Article discussing nature of provincial debt market and issuance in Canada.
Taxonomy
Intervention Categories:
- Market Support Programs
Countries and Regions:
- Canada
Crises:
- COVID-19