Senator calls for Ottawa to bring back real-return bonds

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Canadian Senator Clément Gignac is among those opposing Ottawa’s decision to stop issuing real-yield bonds, a key inflation hedge for pension funds and insurers to meet long-term commitments, and said he hopes Treasury Secretary Chrystia Freeland will meet her Decision in the New Year.

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“My intention will be to continue to put maximum pressure on Finance and BOC (the Bank of Canada) to reconsider their decisions,” he said in an email Monday, adding that he had already raised the issue in the Senate .

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In a LinkedIn post on Friday, Gignac, an economist and former Quebec cabinet minister, urged Freeland and the Treasury Department to conduct “a ‘real’ and comprehensive consultation” on the government’s debt management strategy and real-yield bond issuance.

The government said there were consultations with market participants before Freeland decided last month to halt issuance of real yield bonds due to low demand.

The decision was controversial, however, and buy-side investors are increasingly speaking out about it – including the director of Alberta Investment Management Corp. (AIMCo), Jim Keohane, and Chief Executive of the Investment Management Corporation of Ontario (IMCO) Bert Clark, who this week questioned the government’s rationale.

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Both fixed income experts said infrequent trading does not indicate low demand, noting that long-term investors such as pension funds tend to buy and hold real-yield bonds rather than trade them.

Additionally, Keohane said that after his experience, which spanned two decades at the Healthcare of Ontario Pension Plan before joining AIMCo, any government issuance of real-return bonds would be “oversubscribed.”

Clark said real return bonds are an important part of portfolio construction at IMCO, which manages more than $70 billion in assets for Ontario public sector clients and provides effective protection against inflation.

The change in the government’s debt management strategy in relation to real yield bonds has been on Gignac’s radar since November. In a LinkedIn post last month, the senator called for the Bank of Canada’s comment on the Treasury Department’s order to be released. He said this is “transparent” and “protects the credibility of the BOC”.

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Gignac questioned whether the central bank “really agrees with this bold decision,” noting that real-return bonds emerged in 1991 when the Bank of Canada adopted its current inflation target of 2 percent.

Some observers have suggested that the government’s stance on real-yield borrowing may suggest that higher inflation will persist, meaning real-yield borrowing would remain an expensive proposition for them.

Institutional investor resistance to the inflation-linked bond decision has increased since last month, and that was evident in the minutes of the recent meeting of the Canadian Fixed-Income Forum, a group set up by the Bank of Canada.

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Bank of Canada officials withdrew from a discussion of the group’s real-return bonds, which included representatives from Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of America, HOOPP and the Canadian National Railway Co. s investment department. Participants said they “disagree with the government’s reasons” for ending the program, according to minutes of the group’s last meeting on Nov. 29, released Dec. 16 on the Bank of Canada’s website.

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They said that inflation-linked bonds are “a very important asset class that plays a crucial role in enabling Canadian investors to manage their inflation risk and, in a well-functioning market, provides central banks and market participants with an important measure of inflation expectations.”

In addition, the decision to end the issuance of new real-yielding bonds deprived market participants of the opportunity to express their views on inflation, with some members noting that the decision “could give the impression that the government might not have full confidence in containing inflation.” inflation has,” the group said.

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