This chapter provides policy guidance for sovereign debt management offices on how best to develop and implement buyback and switch programmes as a debt management tool. It first describes policy objectives regarding refinancing and liquidity risk management, and then gives an overview of country practices of buyback and switch operations including selection of bonds, methods, timing of operations, size limitations, and other operational constraints. Finally, it provides recommendations for sovereign debt management offices when introducing or reviewing such debt management facilities. This chapter draws mainly on a recent survey conducted among OECD government debt managers on the use of bond buybacks and switch programmes.
OECD Sovereign Borrowing Outlook 2023
OECD Sovereign Borrowing Outlook
4. Buyback and switch programmes: Evidence‑based recommendations for sovereign debt managers
Abstract
4.1. Introduction
Buybacks and switches (or exchanges) have long been and still are important debt management tools for several sovereign debt management offices (DMOs). These tools are often used by sovereign issuers to manage debt redemption profiles, enhance market liquidity, efficiently manage cash, and reduce debt service costs. Against this background, this chapter aims to provide both policy and technical recommendations to sovereign debt management offices when creating or reviewing their buyback and switch programmes. It discusses objectives, and design features such as the selection of bonds, pricing, and auction designs as well as communication aspects of buyback and switch operations in light of country experiences.
It draws mainly on a survey carried out among OECD government debt managers on the use of bond buybacks and exchange operations in 2022. When it is possible and relevant, it compares the results of the initial survey conducted in 2011.
Key findings
Debt buyback and exchange operations can support sovereign DMOs in fulfilling their objectives under a variety of budget and market conditions. DMOs conduct buybacks and switches mainly to smooth out debt repayment profiles and to support a liquid and well-functioning government bond market.
Implementing a well-designed buyback/switch programme may also help to minimise borrowing costs over time for governments by reducing the liquidity premiums. This can be achieved by building up a larger benchmark issues by buying back older (off-the‑run) securities from investors at the expense of selling newer (on-the‑run) securities. Buyback operations can also be used in times of acute market stress to cushion volatility; however, they often have a limited capacity to address severe market liquidity disruptions.
Most sovereign debt management offices in the OECD area use bond buybacks (and to a lesser extent switches) regularly. To provide predictability and transparency to market participants, they often announce broad guidelines on buyback/switch programmes as part of their annual or quarterly funding programmes, and further specifications on operations closer to the date of operations.
Authorities should carefully consider various options and parameters including investor demand, cost-effectiveness, and impact on existing market dynamics when deciding on setting up a buyback and switch programme -or when revising the existing programmes.
To achieve successful results, authorities must exercise maximum care in both the design and execution phases of these programmes, including determining eligible participants, timing of buybacks, size limitations, and communication of the operational aspects.
Particular attention needs to be given to market conditions before, during and after the buyback/switch operations. Authorities should actively monitor market liquidity to identify the most suitable bonds to target, select offers to accept during operations and evaluate the success of the operations. These activities would help inform decisions about future adjustments to the size or focus of the buyback programme and guide decisions about individual buyback operations.
After establishing a programme, it is recommended to re‑assess the need and effectiveness of buyback and switch programmes and adopt suitable changes over time. In particular, DMOs should assess both direct and indirect benefits to the taxpayer, either through providing liquidity support to the market that results in lower financing costs and/or mitigating refinancing risk through reducing roll-over peaks and extending the average life of outstanding debt profile.
4.2. Overview of buyback operations
Sovereign debt management offices (DMOs) can purchase some of their outstanding securities from investors through two different mechanisms – buybacks or switches. Buybacks, by definition, involve the DMO (or central bank as its fiscal agent) offering to purchase outstanding sovereign debt from investors at a mutually agreed price, using cash. In contrast, switches (or exchanges) involve the DMO offering to exchange existing outstanding securities with investors for newly issued securities at a mutually agreed price. Unlike other auctions, these operations provide no additional funding to the government, but they have implications for the composition of the debt portfolio and market liquidity of selected bonds.1 These tools offer sovereign debt managers a means to support market liquidity, efficiently manage cash, provide greater precision to liability management, and reduce debt service costs.
Given the recent large increases in the level of global sovereign debt, current concerns about secondary-market liquidity for sovereign debt in a number of global markets, the removal of accommodation by several large central banks, the strained intermediation capacity of primary dealers, and changes in market structure, a number of DMOs are exploring revisions to, or creation of, such programmes. At the same time, a few countries, such as Ireland and Denmark, that have started producing budget surpluses again after the fiscal expansionary period in 2020 and 2021, are looking at ways of enhancing market liquidity due to limited borrowing needs.2 Against this background, it is timely to develop a better understanding of the prevalence of and motivation for, DMO’s current use of buybacks and exchanges, as well as the various processes and considerations associated with the use of these tools.
4.2.1. Use of buyback and switch operations in the OECD area
The use of both buyback and switch operations is a common practice amongst DMOs. The responses from 39 OECD member and accession countries to the 2022 survey on Debt Buybacks and Switches indicate that a majority of the respondents currently conduct buybacks (22 countries), while a slightly smaller group (18 countries) currently conduct switches (or exchanges) (Figure 4.1).3 Most countries that answer 'Yes’ to this question use both of these operations (14 countries).
Figure 4.1. Use of buybacks and switches in the OECD area
Notes: The figure summarises the responses from 39 OECD member and accession countries. The total number of responses in the figure does not add up to the total number of respondents, as a few countries have checked both ‘no’ and ‘under consideration’ options.
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
Some countries used these facilities in the past but then stopped them, mainly because of fiscal reasons. For example, the US Treasury executed a regular buyback programme in 2000‑02, during a period of fiscal surplus.4 In effect, this enhanced the Treasury’s ability to avoid a decision to discontinue a benchmark maturity without also being compelled to shrink new issue sizes. As borrowing needs increased, the US Treasury ceased its buyback programme. However, since 2014, Treasury has periodically executed small-value buyback operations to ensure operational readiness of all necessary buyback infrastructures. Similarly, a few countries including Australia, Canada and New Zealand, ceased their regular buyback programmes in 2020, when borrowing requirements significantly increased and central banks started performing quantitative easing in the wake of the pandemic. In several OECD countries, central bank quantitative easing resulted in reduced the free float of government securities and thus reduced the demand for a buyback programme.
The DMOs that already have such programmes in place review their frameworks and design features to improve efficiency, considering various factors, including changing market structures, financial conditions and investors’ needs. For example, Sweden shifted its switch operations to smaller volumes in favour of larger issuance at primary auctions in 2021 and 2022. The UK DMO extended the buyback window in which primary dealers can request a bid on near maturity bonds from 12 months out from redemption to 18 months in 2021.
Among the 39 respondents, only four countries reported never having carried out buyback operations and three reported that such facilities are under consideration including the US Treasury. With regard to switch operations, nine countries reported having never carrying out them and two reported having them under consideration. It is important to note that the most common reason cited for not conducting these operations was ‘limited investor interest’, followed by ‘operational complexity’ and ‘insufficient outstanding securities’.
4.2.2. Objectives of buyback and switch operations
Debt buyback and exchange operations can serve a variety of primary and secondary objectives of debt management, depending on how they are designed. First, buyback and exchange programmes can support the management of the redemption profiles and mitigate roll-over peaks by reducing the outstanding amount of targeted issues. For instance, a country that financed large borrowing needs in the past may have a large stock of outstanding debt concentrated on a specific date. These roll-over peak could also be a result of benchmark bond programmes.5 By addressing such large stocks (“bullets”) in a timely fashion, debt managers can limit roll-over risk, and possibly help DMOs navigate challenging market conditions (OECD, 2013[1]). Depending on the size and design of the operations this would help manage refinancing risk. For example, a country may choose to use cash surpluses or other available funds to buyback some of its existing debt from the market to reduce the refinancing needs in the future.6
Second, these tools could allow debt managers to provide direct liquidity to support both specific securities and a liquid benchmark curve under different budgets and financial conditions (OECD, 2013[1]). Promoting the efficient functioning of the government securities market stands as a secondary objective for sovereign debt management in many OECD countries. Buybacks and switches enable DMOs to adjust the structure and range of instruments to support liquidity in the government securities market. Buying back older and typically less liquid securities (off-the‑run) could address concerns about the difficulty in being able to trade certain government securities in the market and, at the same time, provide a reference price point for other market participants. From an investor’s perspective, the presence of an end-buyer that is willing to purchase off-the-run securities along the curve is perceived as providing comfort. In addition to improving liquidity in off-the-run securities, these operations can help support a liquid benchmark yield curve. DMOs aim to maintain a certain benchmark issuance size to ensure good liquidity and reduce any liquidity premium. This can be particularly challenging in an environment of fiscal surplus. For example, Denmark greatly benefited from buyback and switch operations to support a well-functioning domestic financial market in 2022, on the back of a fiscal surplus (Box 4.1). In addition, these operations can be conducted to address unforeseen distortions in the market liquidity during periods of stress. Providing additional liquidity to the system through buybacks would act as a cushion against market volatility. However, it should be noted that these programmes often have a limited capacity to address severe market liquidity disruptions, therefore they are not a substitute for actions taken by the monetary authority.
In addition, DMOs can benefit from these operations to offset large cash inflows; balance cash buffers and smooth out issuance volatility; reduce the number of outstanding securities; correct instances of perceived “mispricing” along the yield curve, and; help investors recycle capital further out the yield curve (by switching different maturities). According to the survey results, smoothing redemptions and managing refinancing risks were the most common reasons for conducting both operation types, followed by enhancing market liquidity (Figure 4.2).
Figure 4.2. Purposes of the use of buybacks and switches
Notes: The figure summarises the responses from 39 OECD member and accession countries. The total number of responses in the figure does not add up to the number of respondents, as countries are allowed to check more than one option.
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
Box 4.1. Use of buybacks to support liquidity in government securities market: Case of Denmark
The Debt Management Office of Denmark has been an active market participant in the secondary market, where, for example, it continuously buys government securities in off-the‑run issues (tap buybacks). The DMO also holds switch auctions with an aim at building up outstanding volumes in new bonds more quickly.
Buybacks were particularly important in 2022, as the Danish debt management office aimed to maintain a certain size to ensure good liquidity in the securities amid low funding needs and budget surpluses. In 2022, the central government sold bonds for just under Danish krona (DKK) 12 billion and bought back bonds for DKK 18 billion via switch auctions (Figure 4.3). The total buybacks by the central government in 2022 amounted to DKK 43 billion, while the central government issued bonds totalling DKK 73 billion when the central government’s issuances in connection with switch operations are included.
Figure 4.3. Buybacks and sales in 2022
Source: Danmarks Nationalbank, Central Government borrowing and debt 2022, https://www.nationalbanken.dk/en/governmentdebt/publications/Pages/Danish-Government-Borrowing-and-Debt-2022.aspx.
4.2.3. Operational aspects of buyback and switch operations
As discussed in the previous section, debt buyback and exchange operations can support sovereign DMOs in fulfilling their objectives under a variety of budget and market conditions. In order to achieve successful results, both the design and execution of these programmes requires careful attention. For example, the price‑setting criteria should be clear and transparent, and the results of any activities should be publicly reported. At the same time, designing an operational framework for a buyback/switch programme is a complex exercise, as it requires a number of operational, analytical, and market judgements. For example, these programmes should be consistent with the regular and predictable debt management framework, while the issuer should preserve a level of flexibility regarding executing any specific operation in view of the government’s cash forecasts and market liquidity conditions.
Regularity of the programmes and choice of the securities
Many sovereign issuers (including Belgium, Chile, France, Italy, Korea and Portugal), regularly conduct buyback and switch operations (Figure 4.4 Panel A). When operations are held regularly, they are typically announced as part of annual borrowing plan communications, and investors are given notice of one business day or less prior to an operation. There is less visibility for market participants on the target volume. Only a few countries adopt a discretionary approach and make the decision to conduct these operations on an ‘ad hoc’ basis taking into account the DMO’s needs, market conditions and investor demand. For example, Brazil has performed multiple liability management operations both in domestic and international markets in recent years without having a regular programme (Box 4.2). A few countries make use of these operations on a regular basis, but also use extraordinary operations when required.
Figure 4.4. Regularity and the use of buybacks and switches
Notes: Panel A summarises the responses to the question ‘do you conduct the following operations on a regular basis (e.g. at least annually)’.
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
In terms of the maturity selection, DMOs generally target securities for repurchase that are nearing redemption (i.e. maturing in t+1) (Figure 4.4 Panel B). It is important to highlight that compared to 2019 and 2021, the use of buybacks was significantly higher in 2020, in the wake of the pandemic, with an aim to help ease the selling pressure in the markets. A few countries conducted buybacks in order to take advantage of a historically low interest rates environment. For example, Mexico bought back two foreign currency-denominated bonds due in 2022 from the market in 2020. In Japan, the buyback programme is used for Inflation-Indexed Bonds to improve the supply-demand balance and liquidity.
Switch operations can be carried out to change the average maturity of the outstanding debt or on a duration-neutral basis. In recent years, a few countries, including Mexico and use switch operations to extend the average maturity of the outstanding debt by exchanging securities with short remaining with new long-dated securities.
Box 4.2. The use of buybacks in Brazil in the wake of the COVID‑19 pandemic
The Brazilian National Treasury (BNT) conducts buyback operations in different markets and different sizes for a variety of purposes, including to reduce the amount of short-term debt maturing, increasing average term-to-maturity, absorbing excessive flows, and providing market price references. While the BNT doesn’t have a formal (or regular) programme, it has performed multiple liability management operations (e.g. buybacks, switches, spread auctions, and early redemptions) both in domestic and international markets since the late 1990s. During the late 1990s and early 2000s, Brazil utilised switch operations in which the Treasury buys back bonds close to maturity and sells other bonds based on market preferences to handle low cash positions and reduce risks in the domestic market sovereign debt management. In the 2000s, Brazil conducted a number of liability management operations in foreign-currency-denominated securities, including early redemption of Brady Bonds from the market, to restructure its debt portfolio.
More recently, in order to mitigate the significant volatility and uncertainty in financial markets due to the COVID‑19 pandemic, the BNT actively used liability management operations in the government bond market. Between 12‑16 March 2020, buyback auctions were held for fixed-rate and inflation-linked bonds. During this period, liquidity reserves allowed for greater flexibility in adjusting issuances to market conditions. Later in the year, market conditions improved, and bond issuances reached historical highs, averaging BRL 126.7 billion in the second half of 2020 compared to BRL 58 billion in 2019. Amidst a scenario of uncertainties, risk aversion and a steepening yield curve, the debt issuance average maturity declined, resulting in a shorter public debt maturity structure.
In the months of February and March 2021, the National Treasury held switch auctions, which consisted of exchanging a number of securities that were soon to mature for longer-term securities. In February 2021, the buyback of floating rate notes (Letra Financeira do Tesouro – LFT) 1 March 2021 (target bond) was carried out with the placement of LFT securities maturing on 1 March 2022, 1 September 2023, and 1 September 2027 (destination bonds). In March 2021, the buyback of the zero-coupon instruments (Letra Financeira do Tesouro – LTN) 1 April 2021 (target bond) was carried out with the placement of LTN securities maturing on 1 April 2022, 1 January 2023, and 1 July 2024, and fixed rates with by-annual coupons (Notas do Tesouro Nacional série F – NTN-F) 1 January 2025 (destination bonds). The switch auctions in 2021 reached a large financial volume, reaching approximately 25% of the stock of the LFT 1 March 2021, and 7% of the stock of the LTN 1 April 2021.
Brazil’s long-standing experience with liability management operations suggests these tools have proven to be a useful tool to mitigate refinancing risks and to provide price references in moments of extreme volatility. However, the authorities highlight that they tools should be used with caution and with a precise goal, considering it has the potential to change the behaviour of market participants and, consequently, the price formation dynamics in the government bonds market, and long-term market stability.
Source: Authorities of the Brazilian National Treasury.
Criteria used for bond selection
The process of bond selection should involve formal consultations with market participants, in particular with primary dealers. This consultation is important for the programme to be successful in meeting its objectives. Since these operations imply investors reallocating their assets, understanding their preferences and constraints is critical. For example, the Japanese Ministry of Finance holds meeting with JGB Market Special Participants to discuss the details of the buyback programme for the next quarter. The frequency and the purchase amount of buyback are determined based on the discussions at the Meeting of JGB (Japanese Government Bond) Market Special Participants.
Although the criteria for selecting bonds differs across countries, “the remaining maturity of the security” is the most important selection criterion for identifying buyback target bonds. In addition, several DMOs also consider “off-the‑run” bonds more broadly, less-liquid bonds, and high coupon bonds (Figure 4.5).
It should be noted that conducting buybacks of medium- and long-maturity securities can be more complex than buybacks of shorter maturities, since longer maturity securities have greater duration risk, increasing the exposure of DMO to potentially large yield changes.
Figure 4.5. Criteria for selecting the target bond(s) for buybacks and switches
Notes: The figure summarises the responses from 39 OECD member and accession countries. The total number of responses in the figure does not add up to the number of respondents, as countries are allowed to check more than one option.
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
Figure 4.6. Restrictions on target bonds
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
In terms of the bonds that are offered in switch operations, the selection depends on the purpose of the operations. For example, if a DMO that aims to extend the maturity of its debt portfolio, it would consider long maturities as target bonds, whereas for liquidity enhancement purpose, on-the‑run bonds (newly issued bonds) may be more preferrable. The survey results reflect this perspective (Figure 4.6). The most common restriction reported for exchange operations is that exchanges are not permissible across all security types. Several DMOs noted that they consider size limits and match the maturities of target and destination bonds.
Choice of methods and platform to execute buybacks and switches
In terms of purchase methods, 18 OECD respondents use auctions for both buybacks and switches. DMOs typically price their switch operations through auctions. Among these, several countries reported holding traditional auctions for the destination bonds, while target bond prices are fixed. Following auctions, the second most common method for buybacks is secondary market purchases, while for switches it is bilateral operations.
In most cases, DMOs conduct buybacks and switches within debt management offices, while some via their respective central banks as their fiscal agents. Only a few conduct buybacks via brokers. DMOs choose the platform(s) suitable for the preferred method(s) for the operations. The majority of DMOs use proprietary/custom platforms to conduct buybacks and switches. For example, in Italy, the exchange operation can be carried out using the telematic trading system (with a dedicated segment of the same system for interdealer activity) or the auction system managed by the Bank of Italy. In Japan, the Ministry of Finance uses the Bank of Japan Financial Network System. Several DMOs also use Bloomberg for both types of operations, while several conduct buybacks by phone. Regardless of the platform choice, typically, transactions settle target and destination bonds on the same day.
Figure 4.7. Methods and platform used to execute buybacks and switches
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
Announcements of operation parameters including size, eligible investors, bonds and timing
Most commonly, DMOs announce their intentions to hold buyback/switch operations as a part of their annual or quarterly funding programme. Further details are often announced closer to the date of operations (e.g. a few days before the auction dates) in order to mitigate price deviations. Such public announcements may include information on the following operational parameters:
List of eligible securities
Operation date
Operation start time and close time
Settlement date
Offering formats
Offering amount limits
Par amount to be bought
Typically, DMOs publish summary results shortly after the operation. Post-transaction reporting may include detailed information including offered and accepted total amounts and number of accepted issues.
In terms of operation’s size, the survey results indicate that DMOs tend to either announce target or maximum sizes for their operations, with a maximum size announcement being the more prevalent paradigm for buyback operations (Figure 4.8 Panel A). No respondents announce minimum sizes. The respondents highlighted that the announced size of the operation should leave the DMO with flexibility in the event that offers received in buyback operations are either insufficient in size or too expensive in price. Hence, DMOs reserve the right to buyback less than the maximum amount. The size of each operation can be measured as a proportion of gross issuance, as a proportion of debt held by the public, or as a proportion of available float of the security.
Figure 4.8. Announcements of size and eligible investors
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
Several DMOs have specific minimum float amounts for any outstanding security, while several others evaluate size limits on a case‑by-case basis. The reason to introduce limits to the amount of bonds repurchased relative to the original issue amount is to ensure that the security being bought back has sufficient remaining supply to support secondary market liquidity. The size of each operation can be determined considering both investor- and issuer-side factors including the purpose of the operation, market capacity (e.g. investors’ balance sheet), investors’ interest in participating, and overall funding needs and cash balances. For example, during periods when sovereign financing needs are lower and on-the‑run issue sizes are relatively small, there is likely to be more capacity to increase auction sizes and support a larger buyback programme (US TBAC, 2023[2]). It should be noted that when primary dealers have limited risk-bearing capacity, a large buyback operation could temporarily push up the prices of bonds that are eligible for repurchase. Similarly, if the issuer aims to preserve the maturity structure of the debt, this will affect the size of buyback/switch operations.
Most DMOs limit participation in their operations to their primary dealers, which is often designed as part of primary dealership agreements (Figure 4.8 Panel B). Several countries allow non-primary dealers and/or domestic institutional investors to participate, largely depending on their holdings and/or market-making capacity. Only a few allow retail and foreign investors to participate as well.
In terms of the number of bonds offered, most DMOs that conduct exchanges allow multiple target bonds (bonds purchased) to be exchanged for a single destination (newly issued) bond. A summary of the survey results on a selection of eligible bonds is the following:
The number of target bonds eligible ranged from 2 to 5 for most respondents.
Most respondents evaluate which target bonds are selected based on relative‑value pricing.
A majority of DMOs limit buyback amounts on specific securities to ensure sufficient secondary market supply (float).
Several DMOs have specific minimum float amounts for outstanding securities, while several others evaluate size limits on a case‑by-case basis.
A slightly smaller group limits the types of securities that are eligible for buybacks.
While offering multiple bonds provides flexibility to a DMO, it might pose some pricing disadvantages.
Most DMOs do not conduct or settle buybacks on the same day as other financing operations (e.g. auctions, syndications).
Pricing method for conducting buyback and switch operations
DMOs typically price their buyback and switch operations through auctions, which is considered the most efficient and transparent method of pricing. However, many countries also offer a fixed price for buybacks at the prevailing market rate, although to a lesser extend for switches (Figure 4.9).
Figure 4.9. Pricing method for conducting buyback and switch operations
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
4.2.4. Associated costs and risks
Sovereign debt managers take a long-term perspective and carefully consider various factors including investor demand, impact on existing market dynamics and cost-effectiveness when making a decision on introducing a new instrument or setting up a new facility such as buyback and switch programmes. DMOs may face various financial costs and reputational risks associated with these operations.7 The survey results indicate that the largest potential costs and risks are ‘budgetary costs’ for buybacks, and ‘price movements between announcement and close of the operation’ for switches. This is followed by ‘price movements between announcement and close of the operation’, ‘reputational risk’ and the possibility of ‘high premium asked by investors’ (Figure 4.10).
Figure 4.10. Associated costs and risks
Source: 2022 Survey on Debt Buybacks and Switches by the OECD Working Party on Debt Management.
In terms of cost-effectiveness, the buyback of illiquid bonds may crystalise illiquidity costs on the public sector´s balance sheet (Chang, Yang and Parker, 2018[3]). In addition, when bonds maturing beyond the current fiscal year are repurchased, future interest costs are brought forward to the current year. Before 2022, the interest cost was typically realised as a capital loss on buybacks, as the interest rate level was falling (i.e. bonds are redeemed at a price above 100). This has changed recently with the rising interest rate environment. For example, the Danish DMO reports that the rising interest rates have led to falling bond prices, which actually resulted in a capital gain on buybacks in 2022 (Danmarks Nationalbank, 2023[4]).
Unlike a call option, a buyback operation is not based on contractual requirements, and it depends on investors’ willingness to sell their holdings back to the issuer. Therefore, it might be challenging when investors are unwilling to sell their holdings. In the survey responses, the most common reason cited by DMOs for not conducting buybacks and switches was a lack of investor interest.
Another important source of challenge is that these operations have several phases, ranging from the initial announcement to the final reporting announcement. Operationally, switches are more complex than buybacks. Reflecting this, the survey results indicate that operational complexity is cited among the most common reason for not conducting switches.
In practice, pricing can be challenging in switch operations, especially in volatile market conditions. In response, countries use different types of pricing mechanisms for different market conditions. A prerequisite for the central government’s involvement in the secondary market is that the trades can be conducted at fair market prices and avoid distortions in the market. This means that there is a reasonable correlation between the prices of the central government’s buyback securities and on-the‑run securities.
4.2.5. Measuring effectiveness
The effectiveness of exchange and buyback operations can be measured through various indicators, which may vary depending on the key objectives of the operations. The survey results reveal that most DMOs measure the impact of their transactions. Some of the various indicators and measures listed below:
Positive impact on the average term-to-maturity of the debt (comparison of average term-to-maturity and/or average term-to-refixing before and after transactions)
Positive impact on the average cost of the debt (net interest payments impact, opportunity cost related to investing the same cash amount in other ways or instruments, the spread between the market price and the buying price in the auction)
Contribution to reducing refinancing risk
Contribution to smoothing the redemption profile
Fostering the liquidity and efficiency of the secondary market of the government bonds.
4.3. Recommendations for sovereign debt managers
Sovereign debt managers should take a long‑term perspective and carefully consider various parameters including investor demand, cost-effectiveness, and the impact on existing market dynamics when making a decision on setting up a new facility such as buyback and switch programmes -or when revising the existing programmes. In addition to policy aspects, they would need to consider a number of operational aspects to facilitate a buyback/switch programme, including determining eligible participants, the timing of buybacks, size limitations, and other operational constraints.
Drawing on the key points from the implementation experiences of OECD countries, this section proposes recommendations for DMOs when creating or reviewing their buyback and switch programmes.
Regular and predictable framework: These debt management operations should be consistent with the regular and predictable framework of DMOs. In particular, DMOs should publish the objectives pursued and the mechanics of the procedure in advance. At the same time, they should reserve flexibility in terms of the specific timing and size of each operation.
Transparency and accountability: Authorities should consider price and operational transparency features of different methods and platforms to be used for buyback and switch operations. In addition to publishing of the guiding framework, clear and timely communication of the operation is important to avoid potential misinformation as well as mitigating the risk of price manipulation.
Market consultation at different stages: Sovereign debt managers should consult with market participants, in particular with respect to primary dealers’ balance sheet capacity, when creating the buyback and switch programmes, and the implementation of the operations. This includes both procedures in general and specific offerings. This will help sovereign debt managers keep abreast of investors’ needs and expectations, which is critical for attracting high demand for these operations and to avoid any potential adverse impacts on the functioning of markets.
Active monitoring of the secondary market: Sovereign debt management offices would need to actively monitor market liquidity, in particular when accepting offers during operations and evaluating the success of the operations. These activities would help inform decisions about future adjustments to the size or focus of the buyback programme and guide decisions about individual buyback operations.
Aim for broad participation: DMOs should aim for broad participation in buyback/switch operations. Similar to the debt issuance process, greater participation fosters competition, which drives better price outcomes and contributes to cost-effectiveness. In this regard, participation in these programmes should be encouraged with a clear purpose and timely announcement of operations. In addition, regularly scheduled programmes would contribute to greater participation.
Review and assessment of the programmes: Authorities should assess the need and effectiveness of buyback and switch programmes and adopt suitable changes over time if necessary. They should assess both direct and indirect benefits to the taxpayer, either through providing liquidity support to the market that results in lower financing costs and/or mitigating refinancing risk through reducing roll-over peaks and extending the average life of the outstanding debt profile.
References
[3] Chang, B., J. Yang and L. Parker (2018), “The Cost of the Government Bond Buyback and Switch Programs in Canada”, Staff Analytical note No.41, https://www.bankofcanada.ca/wp-content/uploads/2018/12/san2018-41.pdf.
[4] Danmarks Nationalbank (2023), Central government borrowing and debt 2022, Danmarks Nationalbank, https://www.nationalbanken.dk/en/governmentdebt/publications/Pages/Danish-Government-Borrowing-and-Debt-2022.aspx.
[5] Garbade, K. and M. Rutherford (2007), “Buybacks in Treasury Cash and Debt Management”, Staff Reports, No. 304, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr304.pdf.
[6] OECD (2018), OECD Sovereign Borrowing Outlook 2018, OECD Publishing, Paris, https://doi.org/10.1787/sov_b_outlk-2018-en.
[1] OECD (2013), OECD Sovereign Borrowing Outlook 2013, OECD Publishing, Paris, https://doi.org/10.1787/sov_b_outlk-2013-en.
[2] US TBAC (2023), “Presentation on ’Considerations for Designing a Regular and Predictable Treasury Buyback Program’”, https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ12023.pdf.
Notes
← 1. Liquidity of a security can be defined as the ability to quickly transact large trades at low cost and at any given time. One of the prerequisites for liquidity of government bonds is that there is a sufficiently large outstanding volume of bond. If liquidity is low, it becomes expensive for investors to trade through liquidity premium, which will ultimately result in a lower bond price (OECD, 2018[6]).
← 2. In the context of disappearing funding needs, maintaining liquidity of government securities hence promoting the efficient functioning of the markets, becomes challenging for sovereign issuers. In addition to buyback/switch operations, countries under a declining debt environment use the following tools: i) cutting issuance volumes and frequencies; ii) reducing the number of on-the‑run bonds; iii) closing some security lines; iv) consolidation of funding needs of public institutions, and; v) setting a minimum level of debt.
← 3. The following countries responded the 2022 OECD Survey on Debt Buybacks and Switches: Australia, Austria, Belgium, Brazil, Canada, Chile, Croatia, Colombia, Costa Rica, the Czech Republic, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
← 4. During 2000 and 2001, the Treasury purchased more than USD 65 billion of existing bonds from the market and enhanced the liquidity of benchmark issues (Garbade and Rutherford, 2007[5]). In effect, this enhanced the Treasury’s ability to avoid a decision to discontinue a series without also being compelled to shrink new issue sizes.
← 5. Typically, DMOs build up benchmarks by issuing large volumes at key tenors (i.e. 3‑, 5‑, 10‑, and 30‑year maturity segments) cross the yield curve. By providing an adequate supply of standardised securities, benchmark bond programmes help to enhance liquidity and thereby lower liquidity premia, or sometimes create negative liquidity premia (OECD, 2018[6]).
← 6. For example, in Italy, the Sinking Fund was set up in 1993 aimed at reducing the government debt stock by buying back bonds or repaying at maturity. The Sinking Fund’s financial resources include privatisation revenues and (other) extraordinary income.
← 7. Reputational risk may arise occur if the operation is not successful, for example due to the lack of market interest, or bad operational risk management.