Ottawa ought to reverse cancellation of inflation-linked bond program

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Ottawa ought to reverse a controversial resolution to cease issuing actual return bonds and as an alternative broaden this system, diversify lending phrases to assist finance the nationwide debt and supply entry to the inflation-indexed asset class that may be very a lot in demand by the nation’s largest pensions, based on a brand new report from the C.D. Howe Institute.

“The authorities’s cancellation of the RRB program implies that Canadian savers can have much less entry to a uniquely useful instrument to guard themselves from inflation,” the report said. “The pension funds and different establishments that make investments on particular person Canadians’ behalf will lose a key instrument to assist them ship on their guarantees.”

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The report, written by William Robson and Alexandre Laurin, stated the federal government justified the cancellation due to weak demand and illiquid markets, however that it didn’t take note of that its administration of the actual return bond program — notably the small quantities issued and lack of range in maturities —  discouraged buyers from shopping for and holding RRBs.

The authorities may have elevated the float to enhance liquidity, demand and pricing when institutional buyers complained of an absence of liquidity within the secondary market throughout consultations in 2019, however it “paradoxically” opted to cut back annual RRB issuance to $1.4 billion from $1.8 billion, the report stated.

The subsequent cancellation of this system led to “suspicions that it anticipated persistently larger inflation sooner or later,” the authors stated, suggesting that reversing that call would additionally strengthen Canada’s dedication to sustaining inflation at two per cent.

A dedication to controlling inflation was a transparent goal of the RRB program from its early days within the Nineties since it could visibly diminish the fiscal benefits of upper inflation, they stated.

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In addition to increasing this system’s dimension, the authors urged {that a} extra liquid RRB market with 10-year or shorter maturities may promote the event of derivatives and extra inflation-linked merchandise, notably price-indexed annuities and autos offering protection for incapacity and long-term care.

Backing the analysis is a C.D. Howe survey that tapped the opinions of 13 institutional buyers with $2.6 trillion of property below administration — and substantial holdings of RRB — concerning the shock cancellation of this system in late 2022.

None of them supported the federal government’s resolution, with 12 opposing it and one with no opinion, and so they stated that if the federal government have been to renew issuing the inflation-indexed securities, they might possible purchase $7.9-billion value over the subsequent three years.

Canada has been issuing RRBs since 1991 and the report famous that the quantity of inflation-linked debt issued has all the time been small relative to different governments, such because the United Kingdom, Australia and the United States.

The asset class is very desired by pensions, which make long-term guarantees to retirees which can be typically listed to inflation. While some inflation hedging will be completed by investing in asset courses comparable to world infrastructure and actual property, the match isn’t actual — a key issue for pensions listed to inflation — because of international forex and inflation dangers, the report stated. 

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And with no new issuance, the prevailing inventory of inflation-linked bonds will shrink because the bonds mature, falling 35 per cent inside the subsequent 12 years and being absolutely eradicated in 30 years. 

Other home issuers, which haven’t any management over inflation targets, are unlikely to fill the hole left by the federal authorities, the report stated.

“Further thinning of the marketplace for RRBs will possible adversely have an effect on the supply and pricing of different listed merchandise: listed annuities, for instance, will possible develop into costlier,” the authors stated.

They added that even when there was some rationale for decreasing the issuance of the inflation-linked securities in an period of below-target inflation and restricted authorities financing necessities earlier than the COVID-19 pandemic, circumstances have modified.

“The federal authorities ought to resume issuing RRBs — in better quantities and with extra range of phrases than earlier than,” they stated.

The response to the cancellation of the RRB program in November 2022 was swift. Jim Keohane, a veteran pension government and director at Alberta Investment Management Corp. (AIMCo), stated he thought the justification provided by Finance Minister Chrystia Freeland was “not legit.”

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The restricted session the federal government undertook additionally got here below hearth from Bert Clark, chief government of Investment Management Corp. of Ontario and Canadian senator Clément Gignac, an economist and former Quebec cupboard minister.

The pension specialists stated rare buying and selling didn’t point out low demand, noting that long-term buyers comparable to pension funds have a tendency to purchase and maintain RRBs, not commerce them. Moreover, Keohane stated that in his expertise, which spanned twenty years on the Healthcare of Ontario Pension Plan earlier than he joined AIMCo, any authorities concern of actual return bonds could be “oversubscribed.”

A gaggle of fixed-income specialists convened by the Bank of Canada, which included representatives from Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of America Corp., Healthcare of Ontario Pension Plan and Canadian National Railway Co.’s investing division, additionally disagreed with the federal government’s resolution to cancel the RRB program, based on the minutes of their Nov. 29, 2022, assembly.

• Email: bshecter@postmedia.com

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