Buying Back Government Bonds: Mechanics and Other Considerations

With the elimination of the federal deficit, the Bank of Canada, the Department of Finance, and financial market participants are examining ways to manage the reduction in the stock of marketable debt. This paper summarizes three different methods ¯ reverse auction, over-the-counter purchases, and conversions ¯ that could be used to buy back Government of Canada bonds before they mature. The relation between the size of bond benchmark issues and the liquidity of the government securities market is examined. It is argued that the consolidation of bond issues, as well as the maintenance of large benchmarks, tends to enhance market liquidity. Thus, in an environment where the government's marketable debt is shrinking, purchasing off-the-run bonds ahead of maturity and the maintenance of large bond benchmarks helps maintain, and possibly enhances, the liquidity of a government securities market. In discussing the buy-back mechanics, reverse auctions are shown to be similar to conventional bond auctions except that tenders are made for the sale rather than the purchase of securities. Following this, the paper examines two over-the-counter repurchase methods. The first is similar to the coupon-pass approach used by the Federal Reserve. The second is simply direct over-the-counter purchases in the secondary market. Finally, the mechanics that underlie conversions (switches) are shown to be similar to reverse auctions or coupon passes except that the investors receive a liquid bond issue in return for tendering the less-liquid issue.