Tuesday, 25 January 2011

Could we please have Canada Real Return Savings Bonds

Now that inflation is just starting again to rear its ugly head (2.4% in December, up from 2.0% in November), perhaps our federal government in its solicitous regard for the ordinary citizen could consider adding to the annual Canada Savings Bond line-up by offering a Canada Real Return Savings Bond.

The idea is very simple. As the name implies, it would be very similar to the existing Savings Bonds, sold in the annual campaign from October to December. In fact, the similar name would have the object of reassuring everyone of the same solidity and safety, as indeed it would have, being an obligation of the Government of Canada.

Why do this? There is a big gap in the product marketplace. While there are plenty of GICs and CSBs around with strong security of principal, the only true inflation-protection product of similar security is the series of real return bonds issued by the federal government. Unfortunately, the RRBs have several important limitations for the average person: one cannot buy small amounts ($5k is the RRB minimum); one has to buy through dealers (with their markup and loss of yield); long maturities only are available (the earliest one now is 2021 - see Finiki).

For people who only really want to preserve their capital and not garner big returns, CRRSBs would be a boon - small purchases, range of near to intermediate term maturities, and above all, no worry about inflation. At the risk of provoking a not-invented-here negative reaction, we in Canada have a convenient model to follow - the UK's Inflation Linked Savings Certificates. There's one feature they have that I especially like - no tax on the interest! (see item 5 in Terms and Conditions) That's only fair. In the UK the Certificates' return is next to nothing but at least the "inflation return interest" is not taxed as it is with our present product the real return bond (which only makes them worthwhile to hold in a registered account). A minuscule real return is still better than the net negative return currently on offer - e.g. 1.7% Bank of Montreal 1yr GIC minus 2.4% CPI to December (if that continues and is it likely to go down or up?) = 0.7% loss of purchasing power.

I can even suggest a silly slogan that would make it a big marketing success "Get Real Canadas"

Update March 9, 2011: It seems I am not the only person who believes shorter term RRBs would be useful. In The Missing Links: Better Measures of Inflation and Inflation Expectations in Canada published in 2009 by the CD Howe Institute, Gregor W. Smith advocates the creation of RRBs with maturities of 1, 2 and 5 years, for the dual purposes of providing savers better options and to enable better measurement of inflation expectations to guide government policy.


Michael James said...

The current rates on CSBs have a negative real return. I think it might be hard to sell real return CSBs advertised at -1%.

CanadianInvestor said...

Good observation Michael, do you think it would be good for the government to be forced to confront the "real"-ity?

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