August 22, 2024 – The federal government’s decision to stop issuing real return bonds in 2022 took the investment community by surprise — and major investors surveyed by the C.D. Howe Institute think Ottawa made a mistake by ending the program.
Real return bonds (RRBs) are indexed to inflation, providing the bond buyer with a guarantee the money they used to obtain the bond will have the same purchasing power when the bond matures.
RRBs were always a small fraction of the federal debt portfolio, with new issues never much exceeding $2.2 billion per year. In 2021/22, RRB issue had fallen to $1.4 billion, even as Ottawa sold more than $250 billion in debt that fiscal year.
When it stopped issuing RRBs, the federal government cited weak demand as a reason for its decision. But in “Cancel the RRB Cancellation,” a new paper for the C.D. Howe Institute, authors Bill Robson and Alex Laurin challenge that rationale.
Robson and Laurin surveyed 13 institutional investors, with a total of some $2.6 trillion in assets, about RRBs. None supported the decision to cancel the program. Nearly all said they are very likely or somewhat likely to purchase RRBs if the government resumes issuing them.
The investors also said that the reason demand for RRBs has been weak is in large part because Ottawa never issued very many of them, and only offered them with a 30-year maturity. More RRBs issued at different maturities would increase demand for them, the survey found.
“I bet if individual Canadians could go to their local banks and buy inflation-protected government bonds, a lot of them would,” report co-author Bill Robson says.
Ending RRBs will deprive Canadians and the institutions such as pension funds and insurers who invest on their behalf of a valuable investment tool that can help protect against inflation, the report states. The report points out that alternatives, such as US inflation-indexed bonds (TIPS), are less effective hedges against price increases than RRBs. It concludes that current inflation and the explosion of federal debt issues in recent years have changed the environment for RRBs, and that Ottawa should reverse its decision and begin issuing the bonds again.
“There has been a lot of pressure on pension funds to invest more in Canada,” Robson points out. “And here we have a situation where there is an investment instrument that they would like buy — but it’s not available in this country.”
For more information contact: Bill Robson, President and CEO, C.D. Howe Institute; Alex Laurin, Director of Research, C.D. Howe Institute; and Daniel Kitts, Communications Officer, C.D. Howe Institute, 416-865-1904, Ext. 9520, dkitts@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.