October 13, 2026
BEATING INFLATION WITH REAL RETURN BONDS
Interest rates have risen. Inflation continues to romp. The US debt has passed $40 trillion, and the country continues to run massive deficits. The reliability of fiat dollars is under question. Gold and Bitcoin are seen as potential inflation hedges.
With this background, protection from inflation and the associated devaluation of money are naturally top of mind for investors. Some are looking at real return bonds for protection from inflation.
The reason that long-term real return bonds exist is to protect against inflation. Yet they’ve failed to do that in the past five years just as inflation roared higher.
For example, the iShares real return bond exchange traded fund XRB was trading at just over $30 five years ago, in November 2021. Today it trades at about $23 for a capital loss of about 23%. The interest earned on that $30 purchase price in late 2021 has been only about 1.7% annually. That’s a significant loss even in nominal dollars and more so in real purchasing power.
Let’s look at what went wrong and consider whether real return bonds are likely to protect against inflation going forward.
Canadian real return bonds are issued with maturities of about 30 years. The maturity value is adjusted upwards for the cumulative inflation. The bi-annual coupons are also adjusted upwards for cumulative inflation.
So, a newly issued real return bond can be counted on to protect the principal value against official cumulative inflation over its life. And the coupons will also increase with inflation. Meanwhile the market value of the bond can temporarily drop and cause a poor return or a loss.
In 2020 and 2021 the market required return on real return bonds dropped to a record low. (The market required return is the minimum profit or percentage gain that investors demand to justify the risk of investing in a particular asset or the broader market.)
In fact, Canada issued a real return bond in June 2021 with an initial coupon of 0.25%. That’s just $2.50 for every $1,000 of face value! As a result, the market value of older real return bonds with coupons as high as 4.25% soared to record highs. But since then, as inflation raged and market interest rates increased, the value of long-term real return bonds have plummeted compared to those high values.
Each real return bond will ultimately mature at its par value adjusted upwards for about 30 years of cumulative inflation. But holders of the 2021 0.25% bond will be saddled with a very low coupon rate over the long life of that bond. Even a high inflation rate adjustment can’t turn $2.50 on $1,000 into an attractive coupon. And anyone who bought an older real return bond in 2021 at a real price well above par has baked in a loss in real dollars on the maturity value.
As of now, the market real yield on Canadian real return bonds is about 1.8%.
Real return bonds are quoted with two prices, the actual market value and the real dollar value. The real dollar value is calculated as the actual market trading value of the bond divided by a cumulative inflation factor since its issue date. Individual real return bonds trade at prices that can be above or below par value in real dollars.
For example, the 4% real return bond that was issued in 1999 and which will mature on Dec. 1, 2031 was recently available for purchase at $212.77 and had a real value of $113.35. It will mature at a real value of $100 and the actual cash received will reflect the cumulative inflation factor since 1999. The current premium of $13.35 reflects the fact that the 4% real return is above the current market required rate of 1.8%.
If you are purchasing an individual bond, I recommend choosing one trading close to par value in real dollars because buying a bond at a premium or discount adds complexity.
While individual real return bonds can offer capital gains or losses over their lives, the most prudent reason for purchase at this time is as an inflation hedge, with a view to holding until maturity. If you are satisfied with a real inflation-protected return of about 1.8% annually then these bonds are appropriate for a portion of a portfolio. Bonds with remaining maturities ranging from 5-26 years are currently available. Typically, they can’t be bought online and so check with your broker.
But retail investors should probably choose a real return bond ETF rather an individual bond. A bond has the advantage of maturing at par value in real dollars on a known date, providing a known real return. But it has the disadvantage of a trading commission plus an opaque buy/sell spread that can cost you a hidden fee of up to about 2%. Individual real return bonds are far less “liquid” than ETFs.
Below I have selected one individual bond recommendation plus a US dollar real return ETF. I have also provided an update on a Canadian dollar ETF.
Government of Canada 2% Real Return Bond issued June 4, 2007 and maturing Dec. 1, 2041
Type: Real Return Bond
Current nominal price: $161.40
Time to maturity: 15 years
Current real price: $105.80 (a modest premium to real par value)
Annual payout: $3.05 (This will increase with inflation)
Yield: Original real yield of 2%, current yield of 1.9%
Income risk: Extremely low
Capital value risk: High, due to the fifteen year maturity and the potential increase in the market required return. It will mature at a real value of $100 and a nominal actual cash value that reflects the cumulative inflation since June 2007.
Comments: This real return bond has a current yield of 1.9%, which is moderately above the current market required return which is why the real dollar price is somewhat above par. If inflation over the next fifteen years averaged 3% then this bond should mature at a price that is about 56% higher than today’s purchase price minus the 5.8% real price premium for a capital gain of about 50% in nominal dollars and a 5.8% loss in real dollars. The overall real return, due to the interest payments, should be in the range of 1.8% compounded annually. This may sound low but would protect against inflation as well as provide a modest real return.
Action now: Buy, for those looking for inflation protection and planning to hold for fifteen years.
iShares Real Return Bond ETF (NYSE: TIP)
Closed October 13th at $104.56. All figures in US dollars.
Background: The fund was launched on Nov. 30, 2003 and has assets under management of $14.7 billion. The management expense ratio is 0.18%.
Performance: The total nominal dollar return since inception 23 years ago is modest at 3.53% annually and the nominal dollar return in the past five years is 0.83% annually, for a loss in real dollars. As of the time of writing, the fund was up down 4.9% year-to-date and has paid total distributions of $3.68 for a total return of about minus 1.6% year to date.
Yield: The shares pay an irregular and variable distribution which totaled $4.90 in the past year. The cash yield is therefore about 4.6%.
Taxation: The distributions consist largely of interest but may also include some return of capital or capital gains.
Risk: Canadian investors face a currency risk if the Canadian dollar rises. This ETF can be expected to decline in value if the market required return on real return bonds increases. The current market real return is about 2.65%. The unit price is currently at about its lowest point since 2010. That may provide comfort that the fund is unlikely to suffer a capital loss but that is by no means guaranteed. The discount to par value in real dollars on the holdings in this ETF currently has a weighted average of about 8%. If the premium was high, like it was in 2021, the risk of a capital loss would be higher.
Conclusion: This ETF will likely provide inflation protection and a real return of approximately 2.65% in the longer term. But the return for short-term holdings is impossible to know. An allocation to this ETF is appropriate for those with US dollar investments and who fear that inflation will increase or not return to the target level of about 2%. But be aware of the potential for a loss in value, particularly a temporary loss.
Action now: Buy as an inflation hedge. This ETF provides long-term inflation protection and is currently attractive in price.
iShares Canadian Real Return Bond ETF (TSX: XRB)
Closed October 13, 2026 at C$23.02.
Background: The fund was launched in December 2005 and has assets under management of $264 million. The management expense ratio is 0.39%.
Performance: The total nominal dollars return since inception 21 years ago is just 2.77% compounded annually. The return in the past five years is a compounded loss of 0.59% annually. Given the recent high inflation, that’s a significant loss in real dollars. The fund is up 0.6% and paid a distribution of $0.262 for a total nominal dollar return of about 1.7% year-to-date.
Yield: The shares pay distributions in June and December each year. The amount varies and the latest was $0.262, indicating about $0.528 per year. The cash yield is therefore about 2.3%.
Taxation: The distributions consist largely of interest but may also include some return of capital or capital gains.
Risk: This ETF can be expected to decline in value if the market required return on real return bonds increases. The current market return is about 1.8%. In the early years of this century the required return was 3% to 4.25%. It has been 2% or lower since 2005.
The unit price is currently at about its lowest point since 2010. That may provide comfort that it is unlikely to suffer a capital loss but that is by no means guaranteed. The premium to par value in real dollars on the holdings in this ETF currently has a weighted average of about zero. If the premium was high, like it was in 2021, the risk of a capital loss would be higher.
Conclusion: This ETF will likely provide inflation protection and a real return of approximately 1.8% in the longer term. But the return for short-term holdings is impossible to know. An allocation to this ETF is appropriate for those who fear that inflation will increase or not return to the target level of about 2%. But be aware of the potential for a loss in value, particularly a temporary loss.
Action now: Buy as an inflation hedge. This ETF provides long-term inflation protection and is currently reasonably attractive in price.