Issue link: http://clhia.uberflip.com/i/333350
10 4.0 Increasing the Supply of "Ultra-long" Government Bonds 4.1 Issuance of 50-Year Federal Bonds One of the challenges faced by Canadian life and health insurers is the relative lack of ultra-long dated (out past 30 year) Canadian government bonds. The life and health insurance industry was pleased to see the announcement by the Federal Department of Finance on September 27, 2012, regarding adjustments to its debt management strategy. In particular, the government noted that given long-term interest rates were at historic lows, it would be beneficial and prudent for the government to lock in additional long-term funding. This would be achieved through a reallocation from short-term issuance towards long-term bonds. On April 28, 2014, the Government of Canada issued its first 50-year bond. The Canadian life and health insurance industry participated in the issuance and commends the government for this action. However, more must be done to achieve a balance between the demand and supply of 50-year bonds in Canada. We note that the federal government offering was oversubscribed and ultimately yielded 1 basis point lower than the yield for its benchmark 30-year issue which clearly shows the excess demand for such assets in the Canadian market. Accordingly, we believe that there should be a sustained commitment by the Government of Canada to issue 50-year bonds and to increase the supply of these bonds to a benchmark level over the next five years. Building the stock of 50-year bonds to a benchmark level is important, otherwise, the volume of secondary trading in these bonds could be quite modest as the stock of 50-year bonds may simply be acquired by long-term investors and held as core parts of their investment portfolios. We also believe that the historically low long-term interest rates in Canada present a unique opportunity for issuers to secure long-term funding for their planned long-term infrastructure expenditures. Issuing longer-dated debt will also have important intergenerational benefits as future roll-overs of shorter-term debt would be avoided and the risk to the active working population of unexpectedly higher short-term funding rates would be reduced. While not common practice currently, some degree of matching of the term of government assets and liabilities would represent a best practice. Another benefit of the Government of Canada issuing a sufficient volume of 50-year bonds is that it would enable the development an ultra-long interest rate swap market in Canada. We note that 50- year swap markets currently exist for the British Pound, Euro and US dollar. Given that interest rate swaps are priced off of the Government of Canada yield curve, Canada's interest rate swap market generally currently caps out at 30 years. The impact of the lack of such ultra-long interest rate swaps in Canada is that insurers have fewer tools to manage their ultra-long-term asset and liability mismatch than they otherwise would. This impacts the industry's risk positions and pricing ability and, ultimately, the industry's ability to issue long-dated products to Canadians. While more longer 50-year bonds will reduce the need for long dated interest rate swaps, we would expect that, in practice, some mix of more supply and continued reliance on the interest rate swap market will be required going forward.