Index-Linked Bonds: A Shield Against Inflation
Investors seeking protection from inflation have long turned to index-linked bonds. Governments worldwide, including the UK since 1981 and the US since 1997, issue these bonds. They adjust returns based on inflation indices, like the Consumer Price Index (CPI).
Index-linked bonds, also known as inflation-linked bonds, are designed to shield investors from inflation's impact. They ensure that the principal amount and interest payments rise with inflation. This is achieved by linking the bond's returns to a specified index, usually the CPI.
Traditional fixed-rate bonds may suffer from inflation risk, as their returns may not keep pace with rising prices. In contrast, index-linked bonds can exhibit lower volatility due to their direct link to inflation. This makes them an attractive option for those worried about inflation eroding their returns.
Governments are prominent issuers of these bonds. The UK pioneered this area in 1981, while the US introduced Treasury Inflation-Protected Securities (TIPS) in 1997. More recently, Germany and the Netherlands have issued inflation-indexed covered bonds (Pfandbriefe) as part of their debt issuances.
Index-linked bonds offer investors a way to protect their investments from inflation while ensuring predictable returns. With governments worldwide issuing these bonds, they have become a staple in many investment portfolios. Their ability to adjust returns based on inflation indices makes them an attractive option for those concerned about the impact of inflation on their investments.
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