Freeland abruptly decided last month to cease issuance of real return bonds, a useful inflation hedge for pension funds and other investors with long-term liabilities. Among the reasons stated for the decision was the bonds are illiquid and in low demand. Keohane said the securities rarely trade because institutional investors value them too much to give them up.
Also, the part about "low demand" is false.
Furthermore, because these long-term holders don’t trade the bonds, the only way to buy them is when the government issues them. And whenever that happens, they are snapped up.
[...] the decision to eliminate new real return bond issuance deprived market participants of a way to express their inflation views, with some members indicating the decision “may create a perception that the government may not have full confidence in containing inflation,” the group said.
[...] several members said demand for the real return bonds has increased in the current higher inflationary environment and is expected to increase further with the aging of the Canadian population, according to the minutes. They also pointed to the fact that Canada is now the only G7 country not issuing new sovereign inflation index-linked bonds.
The Canadian government is aware that higher-than-normal inflation will persistent for some time. So, of course, they are not interested in paying a rate of return that's adjusted for inflation.
In the end, this will backfire. Capital has a global reach. If Canada refuses to offer real return bonds, then people and institutions can simply go elsewhere. Eventually, the vanilla bonds will have to offer higher rates to entice buyers.