Why Ottawa Should Issue More Inflation-Indexed Bonds: C.D. Howe Institute

Sep 26, 2012, 10:00 ET from C.D. Howe Institute

TORONTO, Sept. 26, 2012 /CNW/ - Ottawa should issue more real-return bonds (RRBs) to satisfy investor demand and lower its borrowing costs, among other benefits, according to a report released today by the C.D. Howe Institute. In "More RRBs Please! Why Ottawa Should Issue More Inflation-Indexed Bonds," Philippe Bergevin and William B.P. Robson argue that Canada's federal government, which began issuing RRBs in 1991, should issue more RRBs, of more types, than currently planned. "For individual savers and financial intermediaries such as pension funds, these bonds offer uniquely valuable protection against inflation. And for Ottawa, issuing more RRBs could lower debt-service costs - not just because of their typically lower yield, but also because more RRBs would underline the government's commitment to low inflation," said Mr. Robson, President and CEO of the Institute.

Inflation-indexed bonds such as Canada's RRBs are debt securities with principal and/or coupon payments linked to the general price level. The popularity of Canada's RRBs with long-term investors is evident in the tendency for their yield to be lower than the equivalent yield on nominal bonds combined with anticipated inflation would suggest, in the relatively large bids they receive at auction, and in their relatively low turnover. The C.D. Howe Institute report argues that meeting more of this demand would be good for Canadian taxpayers, as well as helping individual savers and financial intermediaries who save on their behalf.

The authors explore the potential impact of a larger RRB issue over the next five years than Ottawa currently plans. Rather than the $2.4 billion annually now planned, they suggest $7.2 billion annually. They further recommend that two-thirds of the larger RRB issue have 10-year maturities rather than the 30-year maturities exclusively issued to date. A plausible estimate of the net interest savings on federal debt comes to $200 million in 2016/17 and $500 million over the period until then. They also canvass a number of ways the federal government can ensure that this higher RRB issue does not hurt the depth and liquidity of the market for its nominal debt.

"Issuing more RRBs would not only better satisfy existing demand from investors, it has the potential to spur the development of other inflation-indexed instruments," said Mr. Bergevin. Experience elsewhere suggests that more federal RRBs could encourage other entities to issue inflation-indexed debt, and would let intermediaries provide such products as inflation-linked annuities, thus providing more Canadian savers with protection against intentional or accidental inflation.

For the report go to: http://www.cdhowe.org/more-rrbs-please-why-ottawa-should-issue-more-inflation-indexed-bonds/19066

SOURCE C.D. Howe Institute