Canada: Government Bond Purchase Program

The GBPP started with two purposes: to support the functioning of the GoC bond market and to replace some technical liquidity management operations. Later in 2020, the BoC added a new mandate for quantitative easing.

First, the GBPP supported the functioning of the GoC bond market by narrowing bid-ask spreads on GoC bonds and providing a buyer for less-liquid bond issues. When the program was announced, BoC officials fielded questions from journalists who wondered if the GBPP was a form of quantitative easing. Governor Poloz emphasized that the central bank would label programs as QE if it were implementing a program for such purpose. Poloz acknowledged that GBPP and QE were “closely related” and shared methods. However, he said they had separate ends and stated that market functioning and price clearing were the GBPP’s original objectives (Poloz and Wilkins 2020).

Second, the GBPP permanently replaced the BoC’s long-standing bond buyback operations. The first of these operations fell under the BoC’s role as fiscal agent to the GoC, a role that sought to ensure GoC accounts had enough liquidity to meet daily needs (BoC 2020c). These operations tried to smooth the redemptions of government bonds by purchasing short-dated securities that would mature on dates when many other securities would also mature (BoC 2012, 1). The BoC said that the GBPP would lend “significant support to the liquidity and efficiency of the government bond market, reducing the need for these fiscal agent operations” (BoC 2020c). The other buyback operations aimed to improve the liquidity of the government bond market by purchasing bonds from less-liquid issues or swapping those with bonds from more-liquid issues. The BoC had conducted these operations since at least 1998 (Gravelle 1998, 10–17). The BoC did not signal why it chose to adopt the GBPP in favor of these buybacks.

On June 22, 2020, the new BoC governor, Tiff Macklem—appointed June 3, 2020—signaled that the purpose of GoC bond purchases had shifted. His speech referred to the GBPP as macroeconomic stimulus and labeled it as QE. Subsequently, the BoC described the GBPP’s mission as “supporting the resumption of growth in output and employment” (BoC 2020a). On October 27, 2021, the BoC announced that it would stop QE but maintain the GBPP at its current size, then CAD 290 billion, by reinvesting maturing bonds (BoC 2021c).

Figure 2: Yield Change and Purchase Amounts for GoC Securities of Various Maturities

The GBPP also lent support to the rest of the Bank’s programs. Starting March 13, the BoC launched programs to purchase corporate debt, provincial debt, and mortgage-backed securities, and to enter term repurchase agreements, while the GoC announced a large package of fiscal measures (see Department of Finance 2020; Runkel 2021). These markets faced much more acute pressure than the GoC bond market. Governor Poloz argued that “a firefighter has never been criticized for using too much water” (Poloz and Wilkins 2020, 37:15). BoC officials had explained that closing bid-ask spreads in GoC bonds would relieve pressure in other markets as investors reallocated their portfolios in search of yield.

Section 18(c) of the Bank of Canada Act (1985) explicitly authorized the BoC to purchase securities issued by the Government of Canada.

The BoC Governing Council—composed of the Governor, Senior Deputy Governor, and four Deputy Governors—met virtually each day throughout the crisis. They decided on the path of secondary-market purchases (Poloz and Wilkins 2020).

The Bank of Canada Act (1985, vol. c. B-2, sec. 28) also enabled 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”. The Bank of Canada Act required the BoC to publish its policy allowing outright transactions in the Canada Gazette. It was then required to wait seven days before enacting its policy.

The GBPP purchased securities directly from primary dealers through the CDSX platform.

During the press conference in which the BoC announced the GBPP, Governor Stephen Poloz and Deputy Governor Carolyn Wilkins walked through the policy and parsed its objectives. The contents of this press conference, which set out the GBPP’s purpose, are discussed further in Key Design Decision No. 1, Purpose.

Following this press conference, the BoC spoke little about the GBPP until Macklem’s June 22, 2020, speech announcing that the program would continue as the country’s first-ever attempt at QE. Thereafter, BoC officials and official documents reflected the change by referring to the program as QE (Beaudry 2020, 2; BoC 2020e, 28).

The BoC was required to publish its balance sheets but not any more granular data (Bank of Canada Act 1985, vol. c. B-2, sec. 29). The BoC exceeded the requirements imposed by Section 29 by publishing details of each purchase on its website, including size, time, and price paid (BoC 2020–2021).

No documents suggest that the BoC used a special-purpose vehicle to administer the GBPP.

The BoC committed to purchasing CAD 5 billion weekly when it announced the GBPP (BoC 2020b). In practice, its weekly purchases averaged CAD 4 billion and varied between CAD 1 billion and CAD 8 billion. This average was an order of magnitude larger than the BoC’s previous purchases of government bonds, as shown in Figure 3 (BoC 2020–2021). Before COVID-19, the BoC averaged purchases in the hundreds of millions of dollars and had never purchased more than CAD 2.2 billion in any single week (BoC 2001–2020; BoC 2002–2020; BoC 2020–2021). The GBPP added substantial size to the BoC’s balance sheet and reflected a change in appetite favoring outright purchases over repurchase agreements. As of October 2021, when the BoC ended new net purchases of GoC securities, the GBPP had CAD 290 billion outstanding.

Sources: BoC 2001–2020; BoC 2002–2020; BoC 2020–2021.

To fund the GBPP, the BoC credited government securities distributors’ settlement balances (BoC 2020b). The GBPP was indemnified by the GoC: the government agreed to cover losses and, in return, it received any gains (BoC 2021b, 21).

The BoC allowed Canadian government securities distributors^FThe set of government securities distributors, which are firms authorized to participate in government securities auctions, was slightly larger than the set of primary dealers due to internal divisions between bank affiliates that distribute Treasury bills and marketable bonds, and a few independent distributors not included in the list of primary dealers. The following institutions were distributors: Bank of Montreal (BMO); Beacon Securities; Canaccord Genuity; Canadian Imperial Bank of Commerce (CIBC); Casgrain & Company; CTI Capital Securities; Desjardins; HSBC; Laurentian Bank; Merrill Lynch; National Bank of Canada (NBC); Odlum Brown; Royal Bank of Canada (RBC); Scotiabank/Bank of Nova Scotia (BNS); Sherbrooke Street Capital (SSC); Toronto-Dominion (TD) Bank. and their customers to participate in the GBPP (BoC 2020d). Distributors submitted bids on their own behalf and on behalf of their customers (BoC 2020d). Documents do not suggest which distributors and customers participated in the auctions.

A day before each operation, the BoC announced its size, timing, and the eligible GoC securities. On the day of the operation, participants submitted bids specifying up to five bids for the securities distributor and five bids on behalf of each of their customers. Each bid identified the security to be sold, the yield a bidder was willing to accept, and the amount a bidder would sell in CAD 1,000 increments above CAD 1 million. The BoC then accepted bids starting with the highest yield rates until the accepted bids exhausted the total allotment. Successful bidders received the rate they offered (BoC 2020d). Figure 4 shows sample results of GBPP auctions on April 1 and 2, 2020.

Figure 4: Sample Results of GBPP auctions

Successful bidders delivered GoC bonds through the CDSX platform, owned and operated by Clearing and Depository Services (CDS). Settlement occurred two days later.

Before each operation, the BoC announced a basket of eligible securities, usually eight to 10 bonds per tenor, that it would purchase (BoC 2020d; BoC 2020–2021). Only GoC securities were eligible; provincial debt was not. Sometimes participants sold the full allotment of these securities, and sometimes they didn’t sell any—rarely did they sell anywhere in between. As shown in Figure 5, the GBPP primarily purchased securities in tenors of two years, followed by five-year and 10-year bonds (BoC 2020–2021). As Figure 1 shows, the GBPP stopped purchasing bonds with tenors less than two years in fall 2020.

Source: (BoC 2020–2021)

Bidders were not subject to a minimum price or maximum yield.

As a bond purchase program, the GBPP took no collateral and therefore imposed no haircuts.

Auction data indicate that the GBPP purchased bonds at the price resulting from its auctions.

No documents suggest that the BoC charged fees to issuers of securities that it purchased.

The GBPP did not amend the scheduled maturities of assets it purchased.

The BoC prohibited bidders from colluding, though it did not announce any mechanisms to enforce this rule (BoC 2020d).

No documents suggest that distributors received relief from capital or liquidity regulations as a result of participating in the GBPP.

Though several countries launched government bond-buying programs, none were connected to the Canadian market.

On June 22, 2020, the BoC governor labeled the GBPP as quantitative easing (QE), signaling the end of the GBPP as a tool to provide market liquidity during the March panic (Macklem 2020). The governor cited the economic effects of the COVID-19 crisis as he spoke about the GBPP, rather than its efforts to replenish market liquidity. The GBPP continued as both a QE and cash-management tool until October 2021, when the BoC ended QE.