Inflation-linked bonds

forex trader

The advantage for investors is the guaranteed collection of real interest, which eliminates the inflation risk otherwise latent in investments in nominal securities.

Inflation-indexed bonds have not only aroused the interest of investors since the financial crisis of 2008/2009. Securities of this type are said to have been issued in North America as early as the 18th century. The Federal Finance Agency also issues Federal notes and Federal bonds with integrated inflation protection.

Inflation-indexed bonds are available in different variants. One variant provides that the nominal value of the bond remains constant during the term and is not adjusted for inflation. In return, the interest coupon is adjusted to a price index (e.g. the consumer price index of the Federal Statistical Office). In other variants, a fixed interest rate is granted regardless of the inflation rate, but it is based on an inflation-indexed nominal value - in absolute terms, the interest coupon thus also increases as inflation rises.


How does the price of an inflation-indexed bond behave?

Inflation-linked bonds have some special features with regard to their price development. Rising inflation expectations lead to falling prices for conventional (government) bonds because investors demand a higher yield. This is not the case with inflation-linked bonds because the real yield of the bonds does not change. The price fluctuations are therefore just as low as the correlation with inflation (eliminated from the bond risk). 

The German Finance Agency provides detailed information on its homepage about its range of inflation-linked German government bonds (see link below). It should be mentioned that inflation-linkers are also issued by numerous other industrialised countries, including the USA, UK, Japan and France. However, if a bond is denominated in a foreign currency, the exchange rate risk must be borne, which can be much greater than the inflation risk, especially in the short term. 

The thaiexness20 explains how it works as follows: "พันธบัตรรัฐบาลกลางและธนบัตรที่มีดัชนีเงินเฟ้อเป็นตราสารหนี้ที่มีระยะเวลาคงที่ห้าหรือ 10 ปี. พวกเขามีคูปองดอกเบี้ยคงที่ (จริง) เช่นเดียวกับองค์ประกอบผลตอบแทนผันแปรเพิ่มเติมที่จํานวนกระแสการชําระเงิน (รายได้ดอกเบี้ยประจําปีและจํานวนไถ่ถอนนอกเหนือจากรูปแบบ CFD ใน ฟอเร็กซ์ Exness ประเทศไทย) ขึ้นอยู่กับการพัฒนาของดัชนีเงินเฟ้อในทางตรงกันข้ามกับเล็กน้อย ความปลอดภัยที่มีดอกเบี้ย."

"Inflation-indexed federal bonds and notes are debt securities with a fixed maturity of five or 10 years. They have a fixed (real) interest coupon as well as an additional variable yield component where the amount of the payment flows (annual interest income & redemption amount) depends on the development of an inflation index, in contrast to a nominal interest-bearing security."

The yield component serves to compensate for price increases in everyday goods and services that occur during the bond's holding period. Since this adjustment for the inflation rate is made not only for the interest payments but also for the entire investment amount, the purchasing power of the invested capital is preserved. 

Official statistics almost always serve as a reference for the price development. The fact that the (sovereign) debtor thereby indirectly determines the amount of interest payments himself has so far not been considered a problematic conflict of interest, since the total volume of inflation-indexed bonds in sovereign debt is (perhaps deliberately) small. If states were to link all their debt to inflation and measure it objectively, the historically most common means of debt relief would no longer apply: Inflating government debt. 

The bottom line point

For Europe, the official consumer price index is relevant. This is calculated and published monthly by the Federal Statistical Office. The index is based on the manual recording of several hundred thousand prices for products and services from a wide range of areas.