Canadian Real Return Bond Essay
My research interests are public finance, banking system and applied statistics. When I read ‘The Study of (Canadian) Real Return Bonds’ by Thornburg Investment Management (2015), I found major problems of this government debt instrument. As a unique debt instrument that pays interests and final principal amount adjusted to the change in the Consumer Price Index (CPI), the Government of Canada Real Return Bonds (RRBs) have become a low-cost borrowing method for the government, and a sound long-term investment category for investors since its first issuance in 1991. However, while RRBs have problems of its long maturity dates, long durations and a high sensitivity to short-term movement of interest rates, there is a modest number of academic …show more content…
Based on the results, the research will point out the current drawbacks of Canadian RRBs, with recommendations to solve its problems. First, the research exploits RRBs’ historical returns and prices, and compare those data with those of the regular nominal bonds, and of its counterparts: the U.S. Treasury Inflation Protected Securities, and the U.K. Inflation-Indexed Bonds. Secondly, the analysis measures its yield volatility, compared with nominal bonds’ and RRBs counterparts’. Thirdly, the correlation of RRBs with the Canadian equity market will be examined to testify if RRBs succeeded as a sound instrument to hedge equity risks. Furthermore, I apply the financial models of time-varying interest rates to compute RRBs theoretical yields. The difference between the bonds’ theoretical and actual yields will reflect its risk premium. To explain about this risk premium, the research will point out the current problems of RRBs, as well as possible solutions. One of the solutions that I expected to conclude from the research is that the government should issue Real Return Bonds with a number of shorter maturity dates. This will result in smaller volatility of RRBs price, therefore RRBs will be more favored and become more effective as a low-cost borrowing method for the
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