The decision to eliminate inflation-linked securities as a funding source comes at the worst possible time for investors as the economy faces a period of high inflation, says the Canadian Bond Investors’ Association (CBIA). It says the department of finance’s surprise and specific concerns following the decision to abruptly cease issuance of real return bonds (RRBs) was implemented without holding a thorough, focused consultation with market participants. The decision has negatively impacted the functioning of capital markets and will have many negative implications for various types of market participants and their clients. Now more than ever, investors have greater interest in inflation-protection products as they reassess their inflation risk exposures. More particularly for pension plans, aging demographics should only amplify this demand in the future. Eliminating RRBs not only reduces the diversity of funding by excluding certain market participants, but also alters the perception of all market participants that the government of Canada is not confident that it can deal with the inflation problem. The CBIA believes, in the current inflationary environment, there is strong, and possibly growing demand, for RRBs that are held by buy-and-hold type investors who are reluctant to sell their positions in a product line where supply is limited.
- PWC