MNI: Canada Says Ending RRBs Justified, Decision Given Poorly

Canada's review of ending real-return bond sales found little reason to reconsider the move, while officials conceded the decision was “not well implemented” and pledged upset investors will be better informed ahead of other potential changes such as to mortgage bonds, a memo obtained by MNI shows.

“In the department’s view, despite many years of sustained RRB issuance, the RRB program had limited success in achieving the program’s objectives,” according to the document obtained by MNI under a freedom of information request. The briefing was sent to Finance Minister Chrystia Freeland and said she requested the review. A few small redactions to the six-page note dated July 9 were made under exemptions related to international affairs and ministerial advice.

"Primary dealers and buyside investors have provided negative feedback about the lack of a focused consultation, the abrupt nature in which the program was cancelled and the optics of its timing," the memo said. "We acknowledge that this change was not well implemented. More communications with and lead time for the market would have been greatly appreciated.”

Officials said they are working to "better engage market participants" around future large potential changes such as the ongoing review of whether to halt sales under the CAD260 billion Canada Mortgage Bond program.

"This summer, the federal government invited Canadians and stakeholders, including market participants, to provide feedback on its proposal to consolidate Canada Mortgage Bonds (CMBs) into the Government of Canada’s regular borrowing program in order to generate revenues for affordable housing initiatives. The Department of Finance is currently reviewing the many submissions it received,” Freeland spokeswoman Katherine Cuplinskas told MNI via email.

The government plans an update on CMBs in a fall fiscal presentation though any changes won't be implemented before April. (See: MNI: Canada Warned Ending Mortgage Bonds Could Be Costly and MNI: Canada Could Earn CAD800M/Yr Ending Mortgage Bonds-Memo)

BANK OF CANADA CONFIDENCE

Canada's 2022 budget ended sales of RRBs first made available in 1991, after an earlier move scaling them back had little market reaction, the memo said. In recent years the bonds were “less cost-effective” for the government amid low demand as pension funds and insurance companies sought other inflation hedges, according to the post-mortem.

Senator Clement Gignac, a special adviser to the department during the Global Financial Crisis, questioned Bank of Canada Governor Tiff Macklem and another witness in committee hearings about the wisdom of ending RRBs. Other media commentary at the time noted halting inflation-protected bonds was curious at a time when consumer prices were soaring.

It’s “not the case” as critics have suggested the move demonstrated a lack of confidence in the Bank of Canada’s inflation fight, officials wrote.

The bonds were often a poor indicator of inflation expectations because of low demand and illiquid trading, the memo said. “Smaller pension funds continue to express desire for RRBs, but without broader demand to sustain a market and regular auctions it is difficult to justify the program.”

One redaction in the memo provided to MNI was labeled "International Update." Some bond strategists warn ending CMB sales will reduce foreign demand for federal Canadian debt.

Excerpt of document: