Real Return Bond

Inflation protection by construction

A regular bond promises fixed dollars, and inflation quietly decides what those dollars will buy. A real return bond removes the gamble: its principal is adjusted in step with the consumer price index (CPI), and its coupon is a fixed real rate paid on that adjusted principal. Whatever inflation turns out to be, the bond's payments keep their purchasing power rather than their dollar count.

How the indexing works

Take an RRB with a 1.5% real coupon and $100 of principal. If CPI rises 3% over the year, the principal becomes $103, and the coupon is paid on $103: about $1.55 instead of $1.50. The next year the indexing compounds again on the new, higher principal. At maturity you are repaid the fully indexed principal, not the original $100.

Both the income and the final repayment therefore ratchet up with prices automatically. Through the 2021 and 2022 inflation surge, RRB holders watched their principal climb with each month's CPI while ordinary bondholders watched inflation eat their fixed coupons.

Discontinued in 2022

In November 2022 the federal government announced it would stop issuing new RRBs, citing low demand. The decision was widely criticized, notably by pension funds that relied on RRBs to match inflation-linked liabilities, and it landed, with unfortunate timing, in the middle of the strongest inflation in four decades.

Discontinued does not mean gone. All previously issued RRBs remain outstanding, with maturities running out to 2050 and beyond, and they still trade actively on the secondary market (as of July 2026). You can no longer buy a new RRB at auction, but you can buy an existing one through a dealer or hold them through the handful of funds that still specialize in them.

Break-even inflation: the market's forecast

Compare an RRB's real yield to the nominal yield to maturity of a regular Government of Canada bond with the same term. The gap is the break-even inflation rate: the average inflation at which both bonds would return exactly the same. If the nominal bond yields 3.5% and the RRB yields 1.5% real, break-even is about 2%. Expect inflation above 2% and the RRB is the better buy; expect less and the nominal bond wins. Economists watch this spread as a live reading of the market's inflation expectations.

Taxes, TIPS and what to use instead

RRBs share the phantom income problem of a strip bond: the annual inflation uplift to the principal is taxable in the year it accrues even though it is not paid out until maturity. In a taxable account you pay tax on money you have not received, so RRBs also belong in registered accounts such as RRSPs and TFSAs.

The American cousin is TIPS, Treasury Inflation-Protected Securities, which work on the same principle and are still being issued. With new RRBs gone, Canadians who want inflation-linked bonds typically use TIPS ETFs hedged to Canadian dollars, keep bond durations short so yields reset quickly as inflation moves rates, or lean on the broader defences covered in our inflation entry, starting with equities for long horizons.