The Canadian Bond Investors’ Association, which represents managers of over $1.2 trillion (US$900 billion) of assets, is asking Canada’s finance department to reverse its decision to cease the issuance of inflation-linked bonds.
The government decided to stop the issuance of new real-return bonds after consulting market participants, citing weak demand, Finance Minister Chrystia Freeland said in a budget update released early this month. The decision is coming at the “worst possible timing for investors” due to historic levels of inflation and after the consultation “failed to identify the fundamental sources of demand” for such securities, the industry group said in a Nov. 14 memorandum.
Insurance companies and pension plans are natural investors of real-return bonds due to the nature of their liabilities as some of their contractual promises have frequently been tied to the consumer price index, the CBIA said. While some of the larger institutions may find alternatives, smaller investors offering products such as indexed annuities may face “higher volatility and risk for participant members,” it said.
The market for Canadian real-return bonds is small -- just $48.6 billion outstanding, according to data compiled by Bloomberg. The longest-dated issue matures in 2054.
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