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

September 26, 2012

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


Source: PR Newswire