Chrystia Freeland’s decision to scrap inflation-adjusted bonds slammed

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A group of fixed-income investors overseen by the Bank of Canada is livid over Finance Minister Chrystia Freeland’s decision to cancel a series of inflation-protected bonds.

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The minutes of the most recent meeting of the Canadian Fixed-Income Forum state explicitly that members “disagreed with the government’s reasons” for ending the issuance of real-return bonds, which are a useful hedge against inflation for pension funds and other institutional investors because the yield is linked to changes in the consumer price index.

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“All (members) strongly agreed that inflation indexed-linked bonds are a very important asset class that serves a crucial role in allowing Canadian investors to manage their exposure to inflation and, in a well-functioning market, provides central banks and markets participants with an important measure of inflation expectations,” the group said in the minutes of its Nov. 29 meeting, which the Bank of Canada published on its website on Dec. 16.

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“With the decision to eliminate new RRB issuance, market participants lost a way to express their inflation views and some members enunciated that the decision may create a perception that the government may not have full confidence in containing inflation.”

Canada is now the only G7 country not issuing new sovereign inflation index-linked bonds

Minutes

The minutes state clearly that Bank of Canada officials recused themselves from the discussion of RRBs because the central bank manages the federal government’s debt strategy. The members from Bay Street, on the other hand, appear to have shown up for the meeting in a mood to vent their frustrations with a decision that few saw coming.

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“For retail and institutional investors, the cancellation removes a risk-free security that helps them manage short and longer-term inflation risks,” the minutes said. “Several members noted that demand for RRBs has increased across the curve in the current higher inflationary environment and is expected to increase further with the aging of the Canadian population. They also point to the fact that Canada is now the only G7 country not issuing new sovereign inflation index-linked bonds.”

The committee is co-chaired by Bank of Canada deputy governor Toni Gravelle and Jim Byrd, global head of rates trading at RBC Capital Markets, the investment banking arm of Royal Bank of Canada. In total, the committee’s membership list includes 15 members, including representatives from Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of America and Canadian National Railway Co.’s investing division.

More to come …

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