Rising inflation has caught investors’ attention. Interest rates and breakeven inflation [1] have spiked substantially as vaccines and residual stimulus have created a re-opening boom in many developed countries since mid-2021. Add to this growing optimism, the belief that central banks will tolerate some period of above target inflation, and we now find many investors asking how to potentially protect their portfolios from a higher inflation regime. To help answer these questions, we start by examining the pros and cons of what many investors see as the go-to bond solution for inflation protection, sovereign inflation-linked bonds or “linkers.”

 

[2] Breakeven inflation is approximately the difference between the nominal yield of a traditional bond and real yield of a linker of comparable maturity. It represents the level of inflation needed to make returns to maturity equivalent between the two.

 

"Linkers (1) can be poor short-term inflation hedges, but have historically provided protection over the long term. (2) currently lock in low, or even negative, real returns.

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Past performance is no guarantee of future results. The value of investments can go down as well as up, and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments, such as securities issued by small capitalization, foreign and emerging market issuers, real property, and illiquid, leveraged or high-yield funds, carry additional risks that should be considered before choosing an investment manager or making an investment decision.

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

 

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