The federal government’s plan to consolidate Canada mortgage bonds into the Government of Canada bond program could limit pension funds’ ability to mitigate risk through diversification, according to the Pension Investment Association of Canada.

In an open letter to Finance Canada, the PIAC said the move may force institutional investors to choose between accepting lower yields or assuming potentially higher risks with alternative securities that trade at higher yields than current mortgage bonds.

Read: PIAC urging federal government to reconsider cessation of real return bonds, citing DB pension impacts

There’s also uncertainty around whether the significant share of foreign investors in mortgage bonds would transition to other Canadian fixed income investments, noted the letter. As well, if the consolidation doesn’t occur, or only happens partially, it could lead to a loss of liquidity in the Canadian fixed income market and undermine its existing credibility with global investors.

In the event of consolidation, the PIAC suggested the government optimize its issuance annually according to regular consultations with market participants and balance investor demand with maintaining low issuance costs. It also cautioned against establishing new benchmarks in existing sectors to accommodate new issuances. Instead, it suggested the federal government consider measures such as increasing the size of existing bonds or resuming the issuance of Canadian real return bonds.

Read: Withdrawal of real return bonds could financially impact DB pension plans: CIA