The Canadian Life and Health Insurance Association (CLHIA) is calling on federal policymakers to consider issuing ultra-long government bonds.
In comments to the Bank of Canada and the Department of Finance in response to the latest round of debt management strategy consultations, CLHIA notes that the industry is supportive of the government’s efforts to increase longer-term bond issuance. Moreover, it says that it strongly supports the government assessing the prospect of issuing ultra-long bonds (bonds with maturities of 40 years or longer).
The trade group argues that such a move would be good from both the government’s point-of-view, and for long-term investors. “From the government’s perspective, issuing ultra-long bonds would be good asset-liability management given the long-term nature of the government’s assets,” it says; noting that it would also allow the government to ensure low-cost funding for its financial needs.
And, at the same time, it suggests that such a move would, “support a broad investor base by attracting domestic institutional investors that are actively seeking longer-term investments.”
Indeed, CLHIA suggests that there would likely be strong demand for ultra-long government bonds, as Canadian government securities are generally viewed as a prudent investment. And, it notes that long-term institutional investors would likely be a strong source of that demand; particularly insurers, which typically have substantial long-term liabilities.
“One challenge for the industry is finding investments with safe and stable yields that match the duration of its very long-dated obligations,” it says. “In the absence of an appropriate duration-matching asset, such as ultra-long bonds, insurers face additional asset-liability management challenges and reinvestment risks.”
“Both from a risk management and diversification standpoint, therefore, we believe there would be demand for ultra-long bonds by Canada’s life and health insurance industry,” it says.
CLHIA also notes that the current period of exceptionally low interest rates “has posed a significant challenge” for Canadian insurers; and, it suggests that “efforts by the government towards greater long-term bond issuance can help alleviate some of the strain and support the supply of long-term financial products to Canadians.”