The end of the federal government’s real return bond program will deprive institutional investors and pension plan members of a valuable investment tool that can help protect against inflation, according to a new report by the C.D. Howe Institute.
It found a majority of Canada’s largest institutional investors are interested in investing in real return bonds and if the program were to resume, they’d likely buy around $7.9 billion in real return bonds over the next three years.
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In the absence of Canadian real return bonds, institutional investors have looked to other sovereign indexed bonds, particularly U.S.-based treasury inflation-protected securities, as an inflation hedge. However, the report noted these alternatives are less effective hedges than real return bonds.
The federal government cited a lack of investor support in its 2022 decision to stop issuing real return bonds, the report noted, adding demand among institutional investors was weak because few bonds were issued and they only carried a 30-year maturity. The asset class, which is typically indexed to inflation, would be more attractive to investors today given the recent surge of inflation and rise in federal debt.
“There has been a lot of pressure on pension funds to invest more in Canada,” said Bill Robson, president and chief executive officer of the C.D. Howe Institute, in a press release. “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.”
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