Group that advises the Bank of Canada on debt markets is livid over Freeland's decision to scrap inflation-adjusted bonds

A group of investors overseen by the Bank of Canada are angry over the cancellation of inflation-protected bonds.

Members of the Canadian Fixed-Income Forum disagreed with the government's reasons for ending the issuance of real return bonds, which are a useful hedge against inflation for pension funds and other institutional investors.

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Inflation-linked bonds are an important asset class that serves a crucial role in allowing Canadian investors to manage their exposure to inflation and provides central banks and markets participants with an important measure of inflation expectations.

With the decision to eliminate new RRB issuance, market participants lost a way to express their inflation views and some members warned that the decision may cause the government to not have full confidence in containing inflation.

Canada is the only G7 country that doesn't issue bonds linked to inflation.

There are minutes.

Bank of Canada officials were not involved in the discussion of RRBs because of the federal government's debt strategy, according to the minutes. The members from Bay Street appeared to show up for the meeting in a mood to vent their frustration with the decision.

The cancellation removes a risk-free security for retail and institutional investors. With the aging of the Canadian population, demand for RRBs is expected to increase further, according to several members. Canada is the only G7 country that doesn't issue new bonds linked to the inflation rate.

The committee is chaired by the deputy governor of the Bank of Canada and the global head of rates trading at Royal Bank of Canada. The membership list has representatives from Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of America, and Canadian National Railway Co.

Financial institutions base their lending on the price and availability of risk-free assets, which is why inflation-protected debt is important. The real return bond program was abruptly canceled by Freeland in her November fiscal update.

The Finance Department said that the government has decided to stop issuing real return bonds. The decision reflects low demand for this product and will allow the government to consolidate funding.

After the Great Recession, there was a period of low inflation. The central banks kept benchmark interest rates low for the better part of a decade because they were afraid of disinflation. It wasn't necessary for investors to pay more to hedge against inflation.

The backdrop is no longer the same. In June, Canada's headline inflation rose to 8.1 per cent, the highest level since the early 1980s.

According to the minutes, members disagreed that the program should be canceled because of the issue of liquidity for regional banks. They are still able to transact in quantities they need despite the fact that it is somewhat worse than nominal bonds. The U.K., for example, has inflation index-linked bonds that are more similar to the RRB's than the U.S.

The minutes on the discussion about RRBs take up an entire page while most other concerns only need a paragraph.

Many members of the committee expressed concern over the lack of consultation and transparency surrounding the decision. Finance just finished a consultation on the debt strategy and there were no questions about the end of the program. In the fiscal update, members described the characterization of RRBs as "overly negative" and an "incorrect reflection of Bay Street's views".

The committee unanimously agreed that Freeland should reconsider as the sudden scrapping of RRBs in the wake of the government's "unexpected" decision to stop issuing ultra long bonds may undermine confidence in the market for Canadian debt.

Some members felt that Freeland's handling of the government's debt strategy could lead to less demand or participation in the bond market going forward, and ultimately leading to higher borrowing costs for the government.

The email address is kcarmichael@postmedia.