The demise of RRBs in Canada
The government of Canada is no longer issuing real return bonds. This will likely impact a number of investment managers… but Sun Life Granite Series of Funds are well-positioned in the aftermath.
The government of Canada is no longer issuing real return bonds. This will likely impact a number of investment managers… but Sun Life Granite Series of Funds are well-positioned in the aftermath.
On November 3, the Government of Canada (GoC) announced in its 2022 Fall Economic Statement that it “has decided to cease issuance of real return bonds (RRBs) effective immediately.” The reason cited was low demand for RRBs.
The move was a surprise to bond dealers and is unprecedented among G7 countries with an inflation- linked bond market. Prior to the announcement, RRBs were expected to make up 0.5% ($1.4B) of GoC bonds issued in the current fiscal year, and 6% of 30-year GoC bonds issued1. For comparison, in Q2 2022, US Treasury Inflation-Protected Securities (TIPS) made up 4% of US Treasury bonds issued, and 38% of 30-Year US Treasury bonds issued2. The next Canadian RRB auction was scheduled for December 1, 2022.
Some Fund Managers prefer RRBs in their managed solutions (such as TDFs and TRFs), primarily for two reasons:
This recent announcement could potentially impact any TDF and TRF with an allocation to RRBs. Fund Managers now essentially have two options:
This announcement has minimal to no impact to Sun Life Granite Series of Funds. The Multi-Asset Solutions Team does not have a dedicated allocation to RRBs, as their preference is to use other asset classes to mitigate inflation risk, including real assets and equities. The team also gives our underlying managers discretion to opportunistically invest in off-benchmark exposures, including those that may provide inflation awareness such as inflation linked bonds of other countries (e.g., US TIPS).
1 Update on the 2022-23 Debt Management Strategy, Government of Canada
2 Fiscal Year 2022 Q2 Report, U.S. Office of Debt Management
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