Ottawa should reverse a controversial decision to stop issuing real return bonds and instead expand the program, diversify lending terms to help finance the national debt and provide access to the inflation-indexed asset class that is very much in demand by the country’s largest pensions, according to a new report from the C.D. Howe Institute.
“The government’s cancellation of the RRB program means that Canadian savers will have less access to a uniquely valuable tool to protect themselves from inflation,”the report said. “The pension funds and other institutions that invest on individual Canadians’ behalf will lose a key tool to help them deliver on their promises.”
The report, written by William Robson and Alexandre Laurin, said the government justified the cancellation because of weak demand and illiquid markets, but that it did not take into account that its management of the real return bond program — notably the small amounts issued and lack of diversity in maturities — discouraged investors from buying and holding RRBs.
The government could have increased the float to improve liquidity, demand and pricing when institutional investors complained of a lack of liquidity in the secondary market during consultations in 2019, but it “paradoxically” opted to reduce annual RRB issuance to $1.4 billion from $1.8 billion, the report said.
The subsequent cancellation of the program led to “suspicions that it anticipated consistently higher inflation in the future,” the authors said, suggesting that reversing that decision would also strengthen Canada’s commitment to maintaining inflation at two per cent.
A commitment to controlling inflation was a clear objective of the RRB program from its early days in the 1990s since it
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