The federal government’s latest budget brought along several announcements relevant to the institutional investor community of Canada — including a fund-of-funds initiative, clean electricity tax credits, funding options for airport assets — but an update on the real return bond program was nowhere to be found.
“I read the debt management report and definitely noticed that there’s no mention at all of real return bonds and it’s personally disappointing,” says Alexandre Laurin, vice-president and director of research at the C.D. Howe Institute.
Read: PIAC, ACPM asking federal government to bring back real return bonds
This year, the Pension Investment Association of Canada and the Association of Canadian Pension Management made real return bonds a key goal of their pre-budget submissions. In its submission, the PIAC wrote the reinstatement of the real return bond program would “restore a vital inflation-hedging tool and strengthen Canada’s fixed income market.”
The feds halted the real return bond program in 2022, claiming weak demand and illiquid markets. However, Laurin says it’s “hard to explain why” the department of finance stopped issuance when there’s support for the asset from sophisticated investors.
“Sophisticated institutional investors will identify markets with liquidity problems [and] yes, it was restricting demand. But that’s a liquidity problem — underlying all of this, the demand was there.”
Read: Expert panel: Cessation of real return bonds increases risk profile for Canadian pension fund model
A survey of 13 institutional investors from the C.D. Howe Institute showed an improved real return bond program with larger issuances and increased diversity of terms would be welcomed by the investment community.
For its part, the ACPM recommended reinstating the asset as a timely and strategic economic decision for Canada that would support an invest-in-Canada theme while anchoring and protecting long-term institutional pension investments.
“Although alternatives to Canadian [real return bonds] for managing inflation risk may be available, they are less direct at hedging Canadian inflation risk, are not always appropriate or available in all situations and are less viable than real return bonds.”
Laurin says the lack of real return bonds is pushing institutional investors to look abroad for alternatives including treasury inflation-protected securities issued by the U.S. Treasury. Opening the doors to real return bonds could help the financing needs of the feds in a stable way, he adds.
“It’s really not a perfect edge but at least it’s [something], . . . basically what we’re doing is we’re losing. We have a ‘buy Canada’ policy, but our domestic capital is being used to promote the market liquidity of U.S. bonds instead of promoting the market liquidity of Canadian bonds.”
Read: Real return bonds a boon for institutional investors, pension plan members: report