- With global inflation still at high levels, many central banks expected to keep raising borrowing costs to limit price pressures.
- The Global Inflation-Linked Bond Index has plunged 17% in 2022 – the worst-performing of the 20 key fixed-income benchmarks.
While it’s not that soaring global inflation hasn’t created any winners, just that the most obvious ones aren’t shoe-ins for investments gains.
With global inflation still at high levels, many central banks expected to keep raising borrowing costs to limit price pressures.
One strategy that’s believed to work at a time of roaring inflation has been to bet on bonds that hedge price pressures, but unfortunately that trade has been a disaster.
The Global Inflation-Linked Bond Index has plunged 17% in 2022 – the worst-performing of the 20 key fixed-income benchmarks and linker indices concentrated in longer-maturity debt have absorbed the worst losses as central banks around the world lift interest rates.
In the United Kingdom, inflation is at its highest since the early 1980s, when inflation-linked gilts were first issued.
Similar instruments called Treasury Inflation-Protected Securities (TIPS) were only introduced in the U.S. over a decade later.
Due to institutional demand from pension funds, borrowers often issue these inflation-linked bonds in multi-decade maturities, but longer bonds are especially sensitive to rate increases, making them tricky to hold in a portfolio without suffering bouts of volatility.
For some funds, the pummeling of longer-maturity inflation linked bonds is now creating a buying opportunity.
