IM-Robson and Laurin_2024_0916.pub

Robson and Alexandre Laurin To: The Honourable Chrystia Freeland, Minister of Finance Date: September 16, 2024 Re: Let’s Bring Back Ottawa’s Inflation-Protected Bonds Two years ago, the federal government made a surprising decision to cease issuing Real Return Bonds (RRBs) – the government of Canada bonds that are indexed to the Consumer Price Index. [...] Yet RRBs are a valuable tool for investors to protect themselves from inflation and for the government to contain the cost of its debt. [...] Their principal increases with the price level, meaning that whether inflation is 2 percent – in line with the current commitment of the government and the Bank of Canada – or some higher or lower percentage, the real value of the bond and its coupon payments to bondholders and the government does not change. [...] So why did the government argue that demand for RRBs was too low to justify issuing more of them? Perversely, the government’s own approach to RRBs – issuing relatively small amounts and in only one maturity – meant that the market for RRBs was very thin, which reduced their attractiveness. [...] Instead of issuing enough RRBs to promote a liquid market, in which potential buyers and sellers could be confident of being able to trade, or providing a mix of maturities to suit the needs of different investors, or even creating a retail RRB that individual Canadians could hold in their RRSPs, the government issued only 30-year RRBs, and in such small amounts that only a handful of pension fund.