Money market instruments

Money market instruments are very short term debt securities, with maturies of a few days to one year. They are issued by governments, financial institutions and large corporations. These securities are typically very liquid, very safe, and typically trade in very high denominations on a dealer market, i.e. without a central exchange.

The best known and most liquid money market intruments are treasury bills issued by governments. The private sector issues commercial paper, bearer deposit notes, and formerly, bankers' acceptances. This article describes each of these instruments in turn. Most individual investors access money markets indirectly through money market mutual funds or money market exchange-traded funds (see cash ETFs), although T-bills can be available from discount brokers starting at $10 000 minimums.

Treasury bills

Treasury bills, usually called "T-Bills", are debt instruments issued by the Government of Canada (or provinces) with maturities of up to 360 days. They are sold at a discount to face value (i.e., at less than 100 cents to the dollar) and pay full face value on maturity. The difference between the face value and the purchase price represents the interest payment and is fully taxable in non-registered accounts.

An example of an annualized rate of return calculation from the Department of Finance (Canada) is as follows:

The return to the investor is the difference between the purchase price and the par value. The rate of return is calculated by dividing this difference by the purchase price and expressing the result as an annual percentage rate, using a 365-day year. For example, a price of $990.13 per $1,000 of face amount for a 91-day bill would produce an annualised rate of return equal to 4.00 per cent, computed as follows:

Since T-Bills are government-issued, no CDIC guarantee is necessary. They are suitable for parking large amounts of cash for a short time, with full government guarantees. The fact that they exist is also useful for economists to determine what is the risk-free rate of return, i.e. any investment with more risk than T-bills should get a higher expected return.

Current T-bills rates can be found at Selected treasury bill yields - Bank of Canada. Historical returns are avaible under Canadian asset class returns.

Commercial paper

Unsecured

Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Commercial paper is supported by a standby line of credit as a liquidity backstop. It is issued by a wide range of corporate borrowers with "good" to "highest" short term credit ratings. These borrowers "generally also have access to the primary bond market and mainly use CP to raise additional working capital or to smooth seasonal cash flows".

Maturities on commercial paper rarely range any longer than 270 days. The returns of commercial paper are higher than on T-bills because of the risk of default, and commercial paper is usually issued in denominations of $100k or more, so individual investors typically access it through money market mutual funds.

Unsecured commercial paper accounted for only 5% of Canadian money markets in 2017.

Asset-backed

Canadians were made aware of asset-backed commercial paper (ABCP) when the market for about $32-billion worth of this debt froze completely in August 2007. Issues with non-bank ABCP in particular are chronicled in the Money market fund article.

Despite decreased investor demand since the global financial crisis, ABCP sill accounted for 10% of Canadian money markets in 2017, making it the second-largest money market instrument issued by the private sector after bankers' acceptances.

Banker's acceptance

Bankers' acceptances were introduced in the early 1960s in Canada. In 2018, they accounted "for the largest share of money market instruments issued by non-government entities" and were "the second-largest money market instrument overall in Canada" after T-bills. They have nearly disappeared since mid-2024 (see below).

Bankers' acceptances were short-term debt instruments issued by a firm but guaranteed by a bank. Here is how the Bank of Canada described them :

A BA is a direct and unconditional order from a corporate borrower (client) to draw down against its established line of credit (called a “BA facility”) at a Canadian bank. Once the drawdown occurs, the accepting (or lending) bank guarantees the principal and interest by stamping the paper, thus becoming fully liable for the payment upon maturity in case of non-payment by the underlying corporate borrower. The accepting bank charges a fee, called the “stamping fee,” for this guarantee. The stamping fee has been bilaterally agreed to and is dependent on the credit quality of the borrower. Once stamped, the BA is transferred to the bank’s (or dealer’s) stock of money market inventory, where it can be sold to investors in the secondary market. These products receive the same short-term credit rating as that of the accepting bank.

Corporations with high credit ratings might have prefered to issue commercial paper instead of BAs, since that might have lowered their cost of funding.

Primary means of receiving short-term funding for corporations, by short-term credit rating (2018)

Credit quality	DBRS short-term debt rating	Ability to issue/access short-term funding products
Highest quality Superior Good	R-1 (high) R-1 (mid) R-1 (low)	Commercial paper and BA facility
Adequate protection	R-2	BA facility
Lower end of adequate Speculative	R-3 R-4	Line of credit

In March 2020, in response to the COVID pandemic, there was a "near-complete freeze in the BA market". The Bank of Canada introduced a "Bankers’ Acceptance Purchase Facility" to buy BA's in the secondary market; this had the effect of providing funding to companies that needed cash and restored investor confidence.

Up to 2024, rates for BA facilites were based on the Canadian Dollar Offered Rate (CDOR) benchmark. That benchmark was discontinued in 2024 with an expectation that "the BA based lending model, which is responsible for creating the BAs that are sold to money market investors, will disappear", leading to "no, or at most very limited, BA issuance taking place after June 2024". Since much of the BA market was in very short instruments, the federal budget 2024 introduced a one-month T-bill on a temporary basis, as a partial substitute for BAs. Statistics from CIRO show essentially no BA trading in the secondary market since September 2024.

Bearer deposit notes

Bearer deposit notes are unsecured instruments issued directly by Canadian banks to fund their activities, with typical maturies from 3 to 12 months. From an investor point of view, bearer deposit notes can be seen as a partial substitute to the end of the BA market.

Typical spreads

T-bills from the federal government are considered risk-free. All other money market instruments must have higher yields to attract investors. In 2017, the following spreads were typical, where 1 basis point is 0.01%:

Illustrative spread of money market securities over Government of Canada treasury bills

Money market product	Spread over Government of Canada 3-month treasury bills (basis points)
Government of Canada treasury bills	0
Provincial treasury bills	+10
Commercial paper	+30
Bankers’ acceptances	+30
Bearer deposit notes	+30
Asset-backed commercial paper	+40

See also

• Short term cash returns