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The Cost of the Government Bond Buyback and Switch Programs in Canada

Author

Listed:
  • Bo Young Chang
  • Jun Yang
  • Parker Liu

Abstract

This note examines the costs of the Government of Canada bond buyback and switch programs between 1998 and 2016. Our analysis indicates that the auction design of the buyback program was effective in retiring government debt with minimal costs resulting from bid shading in auctions and price impact. We find that the estimated cost is much less than the average bid-ask spread and the cost of similar buyback programs conducted by other countries. We also find that the variation in cost of the switch operations is largely explained by the price movement of the replacement bond in the 30-minute window between the announcement of the replacement bond price and the submission deadline of the bids. This result suggests that an auction design that decreases uncertainty around the replacement bond price can potentially reduce the variation in cost of the switch operations.

Suggested Citation

  • Bo Young Chang & Jun Yang & Parker Liu, 2018. "The Cost of the Government Bond Buyback and Switch Programs in Canada," Staff Analytical Notes 2018-41, Bank of Canada.
    • Handle: RePEc:bca:bocsan:18-41
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    References listed on IDEAS

    as
    1. Olivier Armantier & Nourredine Lafhel, 2009. "Comparison of Auction Formats in Canadian Government Auctions," Staff Working Papers 09-5, Bank of Canada.
    2. Song, Zhaogang & Zhu, Haoxiang, 2018. "Quantitative easing auctions of Treasury bonds," Journal of Financial Economics, Elsevier, vol. 128(1), pages 103-124.
    3. Rydqvist, Kristian & Wu, Mark, 2016. "Pre-auction inventory and bidding behavior: Evidence from Canadian Treasury auctions," Journal of Financial Markets, Elsevier, vol. 30(C), pages 78-102.
    4. Toni Gravelle, 1998. "Buying Back Government Bonds: Mechanics and Other Considerations," Staff Working Papers 98-9, Bank of Canada.
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    More about this item

    Keywords

    Debt Management;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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