Bank goes 50bps, first sign of possible pause | Page 3 | General financial discussion | Discussion forum

Now that inflation is heating up there might again be more use for real return bonds so Freeland just cancelled them, I heard. Used the excuse of low demand for some time (well, yeah, during low inflation they're not needed). A helpful tool to weather inflation has been removed, Canada alone now in not offering a gov't-backed RRB. I never had any but some folks on here have used them in the past, from what I remember reading.

We had a look a while back. Don't believe the hype from those real return bond fund promoters. Real return bonds were a gimmick.

People had fantasies of locking in long term returns of something like inflation + 200 bps. Instead, those who looked into the actual pricing of the bonds realized they were going to be locking in returns of something like inflation - 50 bps instead.

That's why there was little interest from investors.

There's also the question of how stupid the government would be to issue even a real return bond that pays inflation + 0% when it could issue regular bonds that currently pay a fixed interest rate that is below the current inflation rate!

Government is being realistic not mean-spirited.

You haven't seen mean-spirited. If the government wanted to be mean-spirited, it would reverse its decision and then issue the real return bonds at inflation minus 200 bps.

"What?!? Well, you fund managers said you really wanted them, didn't you? You were expecting taxpayers to take on the inflation risk of your products and not charge an insurance premium for insuring that risk?"

On the other hand, maybe Canada is taking the lead on this among G7.

I am someone who raised the possibility of buying them a while ago when I thought the low inflation period would be
coming to an end. I didn't buy them, but I never expected them to be a good purchase DURING an inflationary period. I always understood it was something you bought to protect against possibility of an inflationary period.

Always wondering why not Canada

The U.S. Department of the Treasury Series I savings bonds also known simply as I bonds pay a 6.89% annual interest rate through April 2023, down from the 9.62% the paid to those who purchased from May through the end of October.

savemoresaveoften said
In my mind, Canada is ahead of the curve to stop offering RRB. That is better for the government to manage its debt, which we all know is a big number and getting bigger as interest rate goes up.
As Norman already said, why pay interest at inflation rate when they can pay less ?
Treasury’s job is to best manage its finances, not to bring out products to please investors. That’s why one has to be flexible when it comes to asset class and mix, and not fixated on 1 class only.  

The cost to the government should be exactly the same from RRBs and non-inflation linked bonds. That is assuming inflation is at the predicted level. If government institutions f-k up and inflation balloons, only then the cost of RRBs will be higher. Of course it could be less too. Therefore its a good tool to keep the government honest and force spending cuts if the economy is mismanaged and inflation is out of control.

Yes, its also a great diversifier for investors/retirees and helps protect pension institutions against out of control inflation.

Its a win-win.

I understand that you are far brighter than the likes of Bill Bernstein and worlds central bankers combined but would you mind your language when talking down to mere mortals?

Back to basic maths… You need to check your sums and learn about something called “duration”.

Ontario teachers pension fund is bright enough not to need real return bonds. But, they know a deal when they see one.

Just like years ago when one province decided to issue Japanese yen bonds instead of Canadian dollar ones. The rate on the yen-denominated bonds were rock bottom. I think the yen-denominated bonds could be issued for under 2% per annum while the Canadian dollar bonds had to be north of 6%.

The institutional investors snapped the yen bonds up. Province patted itself on the back for paying under 2% instead of 6%+.

Next year, the Japanese yen appreciated by something like 40% against the Canadian dollar and the province looked like a fool. Not only did the interest payments go up by 40% in Canadian dollars but the principal as well.

mordko said
…
Back to basic maths… You need to check your sums and learn about something called “duration”.

You need to learn not to throw around techno-babble, like a Star Trek actor, here. Some of us know not only how to calculate bond duration but also when it is irrelevant.

Some of us also know that central bankers don't decide what bonds to issue and that government bonds are not a public service to investors.

Bank of Canada helps with the paperwork for Government of Canada bonds. The bonds are issued by the government, not the Bank of Canada, to borrow.

Some of us also know there was a time when Government of Canada bond rates and GIC rates were higher than the current inflation rate.

Maybe, just maybe, the government issued real return bonds then because the real return bond rate was lower than the government could issue fixed rate bonds for? Kind of like why some people take the chance on a variable rate mortgage versus a higher fixed rate one?

savemoresaveoften said

Look at any well established (aka modern) pension funds (OTPP, CPP, HOOPPs etc) that are managed by real professionals. You will realize the % of fixed income let alone RRB are NOT the majority of their holdings by any means. They know bonds are NOT really the perfect match for their liabilities.  

CPP is a weird beast. Not a real thing. Its tax funded (aka mandatory contributions), backed up by the taxpayer, does a lot of redistribution and has infinite duration. It can take a lot of risk because the risk is not theirs. The other 2 in your list are also taxpayer backed.

Works differently if a DB fund is backed up by a business rather than taxpayer. Aren’t they required to have a certain amount in bonds? Same goes for insurers selling annuities.