an investor’s guide to inflation-linked bonds
TRANSCRIPT
An investor’s guide to inflation-linked bonds 1
An Investor’s Guide to Inflation-Linked Bonds
This document is intended for investment professionals in the Asia-Pacific region.
2 An investor’s guide to inflation-linked bonds
Standard Life Investments is a premier asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive Focus on Change investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence.
Contents
1 About Standard Life Investments
2 Diverging Inflation Paths Create Opportunities
4 Some Key Concepts
5 Who Issues Inflation-Linked Bonds?
6 Who Invests in Inflation-Linked Bonds?
7 The Benefits of Inflation-Linked Investing
8 A Wide Opportunity Set
10 Managing Currency Risk in a Global Portfolio
11 A Brief History of Inflation-Linked Markets
13 The Role of Inflation Swaps
14 Key Global Inflation Indices
15 Looking Ahead
16 Contact Details
1 An investor’s guide to inflation-linked bonds
Standard Life Investments is a premier asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive Focus on Change investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence.
About Standard Life Investments
As active managers, we place significant
emphasis on rigorous research and a strong
collaborative ethos. We constantly think
ahead and strive to anticipate change before it
happens, ensuring that our clients can look to
the future with confidence.
As at 31 December 2010, Standard Life
Investments managed $245.6 billion on
behalf of clients worldwide. Our investment
capabilities span equities, fixed income, real
estate, private equity, multi-asset solutions,
fund-of-funds and absolute return strategies.
Headquartered in Edinburgh, Standard Life
Investments employs more than 850 talented
professionals. We maintain offices in a number
of locations around the world including Boston,
Hong Kong, London, Beijing, Montreal, Sydney,
Dublin, Paris and Seoul. In addition, we have close
relationships with leading domestic players in
Asia, including HDFC Asset Management in India
and Chuo Mitsui Asset Trust and Banking in Japan.
Our parent, Standard Life plc, was established
in 1825. A leading provider of long-term savings
and investments, Standard Life floated on
the London Stock Exchange in 2006 and is
now a FTSE 100-listed company. Standard
Life Investments was launched as a separate
company in 1998 and has quickly established
a reputation for innovation in pursuit of our
clients’ investment objectives.
Our investors rank among some of the
world’s most sophisticated and high-profile
institutions. They include corporate pension
plans, banks, mutual funds, insurance
companies, fund-of-fund managers,
endowments, foundations, charities, official
institutions, sovereign wealth funds and
government authorities.
An investor’s guide to inflation-linked bonds 2
Diverging Inflation Paths Create Opportunities
Inflation is diverging
In the 1990s-2000s, now known as the Great
Moderation, a noticeable feature of the
economic landscape was that inflation was
low across most countries despite consistently
strong economic growth. In recent years,
the inflation path has looked rather different
from one economy to another. Compare, for
example, the US and the UK. The UK’s inflation
data has stubbornly exceeded expectations
ever since the crisis, whereas in the US core
inflation has tracked obdurately lower. Policy
makers in both countries allege the existence of
large output gaps, yet only the US displays the
classic symptoms. In the UK, unemployment
may be high, but it is not at levels implied by
output gap estimates. Inflation is stubbornly
higher than it should be, even when all of the
temporary factors such as tax increases and
the impact of a lower currency are removed,
and even when capacity utilisation indicators
are largely around cyclical averages rather than
at peak levels.
Similarly for Europe, there is a marked
heterogeneity of economic performance. Core
Europe has recovered well from the crisis, led
by Germany where some wage pressures are
starting to appear. Conversely, the plight of the
peripheral EMU countries needs little further
description. The dilemma for the ECB in terms
of policy making is plain to see. Indeed, with
the Fed still easing quantitatively, the Bank
of England split on the timing of a tightening
and the ECB chairman making it abundantly
clear that action is coming soon, this creates a
further degree of difference.
While such divergence may complicate
matters for policy makers, it does throw up
opportunities for investors to add value in
bond portfolios.
Having emerged from a period where the world
generally thought inflation was tamed, through
one where deflation was seen as much more
of a threat, the upswing in inflation pressures,
partly in the US and Europe but especially
across many emerging market economies, has
brought inflation-linked bonds to the forefront
of many investment discussions.
In recent months, inflation expectations have
risen markedly across major markets. This
move has been highly correlated with the
changes in the price of oil and other major
commodities. However inflation expectations
over the coming five years are only at
comparable levels to those experienced prior
to the crisis. In that period, the consensus was
that the authorities had inflation under control,
permanently. Questions have to be asked
therefore about why inflation insurance is no
more expensive now than then, given the much
higher existing levels of uncertainty.
At this stage of the economic cycle, we would
expect in normal circumstances that investors
should favour real assets, i.e. those with an
implicit or explicit link to inflation. However,
this is far from a normal recovery, after a far
from normal recession. Hence, it is expected
that investors will wish to own a more cautious
mix of real assets than in more normal
circumstances. This may mean a greater weight
in inflation-linked bonds, and lower weightings
in riskier real assets than would be normal at
this stage of the cycle, to provide a significantly
better diversified portfolio. Global inflation-
linked debt has proved a powerful diversifier in
the last decade, both within bond portfolios
and within balanced funds. Holdings in this
asset class allow investors to move closer to
their efficient frontier.
With the shockwaves of the financial crisis still rumbling around the markets, a growing theme is the divergence of inflation prospects across different economies. Before the crisis, the degree of homogeneity of outlook was remarkable; now, the opposite is the case.
Jonathan Gibbs, Head of Real Returns
3 An investor’s guide to inflation-linked bonds
As the inflation performance of different
economies has diverged in recent times, so
has the policy response. The US still has its
foot firmly on the stimulus gas, while the UK
has started stringent fiscal restraint. In the
Euro-zone, the ECB remains unreconstructedly
monetarist, and the fiscal picture is as varied
across the Euro-zone as is the economic
performance. We believe this divergence of
both performance and policy response will
generate opportunities.
A key example of this is the performance of
Australia, where the economy has benefited
from heavy exposure to emerging economies
such as China and India. Australian real yields
are much higher than the major markets, and
we have benefited from this several times
in our global inflation portfolios. Australian
bonds have underperformed US ones in recent
months and we believe there is an opportunity
to see this reverse over time as the Australian
economy cools.
In conclusion, the divergence of economic
performance and policy response can be exploited
by managers of global funds to add value. We
seek opportunities in both cash and derivative
markets. Global inflation portfolios can form a
key part of a wider multi-asset portfolio, providing
substantial diversification of risk.
Basis points spread between Australian and US real yields
Source: Bloomberg as at 31 May 2011.
80
90
100
110
120
130
140
150
160
170
180
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
2010 2011
An investor’s guide to inflation-linked bonds 4
Some Key Concepts
The features of an inflation-linked bond
An inflation-linked bond is similar to a nominal
bond such as a Treasury bond. The only difference
is that both its principal (the final payment at
maturity) and its coupon (the interest rate paid
during the life of the bond) are linked to an
inflation index. This means that the investor
receives the real face value of the bond at
maturity, and the real value of the interest rate
in the meantime.
Real yields
Instead of focusing on nominal yields, investors
in inflation-linked bonds are interested in real yields, which measure a bond’s yield adjusted
for inflation. This measure is important because
inflation erodes the real value of investment
returns on nominal bonds, and consequently
reduces an investor’s spending power in the
future. It is also important to investors whose
liabilities are impacted by inflation, as investors
will seek to retain real spending power for
the future.
In fundamental economic terms, real yields can
be interpreted as the price of economic capital
– for example, the price that businesses have
to pay to invest in new plant and machinery. In
boom times, this price rises with the demand
for that capital, and therefore so do real yields.
Conversely, in times of weakness, real yields
fall as demand for capital falls.
Nominal yieldsThe yield on a nominal bond yield can be
deconstructed using what is known as the
Fisher equation. This breaks down nominal
For example, if the annual coupon of a
nominal bond was 5% and the underlying
principal of this bond was $100, the annual
coupon payment would be $5. In the case
of an inflation-linked bond, if the inflation
index increased by 75% over the life of
the bond, the principal of the bond would
increase to $100 x 175% = $175. The
nominal coupon rate would rise in line with
the price index over the life of the bond, and
in this instance would be 8.75% (but still 5%
in real terms) at maturity
n = r + i
Where:
n = yield on a nominal bond
r = real yield on an IL bond
of the same term maturity
i = inflation expectations
yields into three components: inflation
expectations, a required real yield that
investors demand over and above those
inflation expectations, and a ‘risk premium’.
This last factor, which represents the price
investors are prepared to pay for a guaranteed
real return, is notoriously difficult to calculate,
and many an academic has failed to quantify
it. For this reason, the market convention
is to include risk premium within inflation
expectations, resulting in the following
simplified formula:
This equation results in one of the most
important concepts for investors. The inflation
expectations element of the formula represents
the expected average level of growth in the
price level over the life of a nominal bond and
an inflation-linked bond of similar maturities. By
extension, if the market is correct about these
expectations, then in order for the equation to
remain in equilibrium, the overall returns on the
two bonds must be identical. This is known as
the breakeven rate. If inflation is higher than
what is priced in over the life of the bonds, the
inflation-linked bond will give a higher return; if
lower, the nominal bond will perform better.
So investors who wish to take a view on the
path of inflation have a choice. If they believe
that inflation will be higher than the level priced
in by the market, they will sell nominal bonds
and buy inflation-linked. If lower, they will do
the opposite. If of course the market is right,
the investors will breakeven.
However, this is not just a hold-to-maturity
strategy, as a breakeven rate priced by
the market represents the expected average
rate of inflation over the life of the bonds.
Inflation expectations vary with economic
conditions, and so by varying the weightings
of nominal and inflation-linked bonds in
the portfolio, investors can take views on
movements in those expectations.
5 An investor’s guide to inflation-linked bonds
Who Issues Inflation-Linked Bonds?
The primary issuers of inflation-linked bonds
are governments. All of the G7 governments,
and many others, now use the asset class as
part of their borrowing program. The reasons
behind this are manifold, but it is done at
least in part to cheapen the cost of funding.
Governments expect to ‘save’ the risk premium,
by guaranteeing investors a real return.
Investors are willing to pay more for this surety.
Issuing inflation-linked bonds can be shown
to smooth the cashflows of a government.
A good deal of governments’ incomes are at
least partly inflation-linked. Sales and value
added taxes along with excise duties are prime
examples. By matching the mix of income
and payments, a government can reduce
the volatility of its cashflows, and in theory
at least, needs to adjust its tax rates less
frequently.
Inflation-linked bonds provide informational
advantages to governments and central banks
by demonstrating a market-driven, observable,
measure of inflation expectations. On occasion,
this can be distorted by institutional factors,
but implied inflation expectations are a useful
tool for policy makers.
In some instances, issuing in inflation-linked
space has been used as a demonstration of
a government’s inflation fighting credentials.
For example, the UK launched its inflation-
linked market in the early 1980s at a time of
high inflation, and by taking on the inflation
risk of its debt, it was demonstrating its
determination to bring inflation under control.
Many governments, for example some in South
America, have found that when their inflation
rates were persistently high, inflation-linked
bonds were the only bonds that investors
would buy.
Issuance of inflation-linked bonds can also
be seen as a means of reaching out to the
widest range of investors possible, while also
diversifying the risk of a government. In many
ways, a government can be seen as a fund
manager with the assets and liabilities column
headings swapped over. Diversifying assets is
every bit as important as diversifying liabilities.
Non-government issuers are fairly rare outside
the UK, and are dominated by semi-government
and agency issuers such as KfW, EIB and New
South Wales Treasury Corporation. In the UK,
a number of utility companies, whose pricing
structures are statutorily linked to the Retail
Price Index, have issued inflation-linked bonds.
There are also a number of Private Finance
Initiative bonds (PFI is a scheme to encourage
government sponsored infrastructure spend
without affecting the government’s balance
sheet), which were used to finance the building
of schools and hospitals, and similarly had
inflation-linked cashflows. Outside the UK,
inflation markets are almost exclusively
government and semi-government issued.
An investor’s guide to inflation-linked bonds 6
Who Invests in Inflation-Linked Bonds?
Typical investor profile
Inflation-linked bonds appeal to a wide and
growing range of investors. Clearly, the ability
to match inflation-linked liabilities is the prime
reason to invest. If investors’ real liabilities are
concrete, the only way to guarantee a cashflow
in real terms at that point is to buy an inflation-
linked bond that matures at the same time as
the liability. Plenty of other real assets exist,
such as equities, property and commodities,
but they do not constitute an inflation hedge.
They are far more volatile than the price level,
and may actually deliver a loss in real terms at
the appointed time. A mixture of real assets
will usually be a more efficient portfolio than a
single asset, and inflation-linked bonds tend to
be poorly correlated with riskier real assets, so
there is considerable diversification advantage
to be had from adding inflation-linked bonds to
the portfolio.
Investors with a portfolio of fixed real terms
liabilities may buy a matching portfolio of
inflation-linked bonds. The portfolio can be
designed to closely match the liability profile.
Many more investors however opt for a less
rigid match, but look at the appropriateness
of the mix of their assets relative to liabilities.
This tends to result in investments in actively
managed, benchmark-driven portfolios of
inflation-linked bonds.
The most prominent among these investors
are pension funds. They, by definition, have
an extensive book of real liabilities, which
they must meet at the appropriate time. An
immature pension fund, where most of the
liabilities are a long way in the future, can
afford to take a riskier view, holding a more
volatile range of real assets. As the fund
matures, the risk appetite of the
fund falls, and the need for closer liability
matching grows. This applies both to an
individual’s pension investment fund, and to
company or institutional wholesale funds. So
as a fund matures, weightings in equities and
property tend to fall at the expense of inflation-
linked exposure.
Charities, endowments and foundations are
also major investors in inflation-linked assets,
looking to preserve capital without undue
volatility. These investors also frequently have
inflation-linked payment schedules to their
beneficiaries, which makes inflation-linked
investments all the more suitable.
7 An investor’s guide to inflation-linked bonds
The Benefits of Inflation-Linked Investing
In addition to the liability matching benefits
we have just discussed, inflation-linked
bonds play a much wider role in both the bond
portfolio, and the total portfolio of assets.
Bondholders who expect inflation expectations
to rise should increase their holdings of
inflation-linked bonds, as these will outperform
nominal bonds if this occurs. Inflation-linked
bonds are also less volatile than nominal
bonds, as they respond to movements in real
yields, not nominal yields. This results in a
smoothing of returns to investors. Further, if
investors perceive that nominal yields are too
low, holdings of inflation-linked bonds will give
some measure of downside protection.
More importantly though, inflation-linked
portfolios, and particularly global ones, offer
significant levels of diversification within the bond
portfolio, as they have a relatively low correlation
with other bond asset classes. Within the wider
portfolio, those correlations are even lower,
meaning that a global inflation-linked portfolio is
an excellent diversifier, improving risk and return
characteristics of the overall portfolio and pushing
the investor closer to his or her efficient frontier.
An investor’s guide to inflation-linked bonds 8
A Wide Opportunity Set
While the US remains the largest issuer of
inflation-linked bonds, investing in global
inflation-linked bonds offers a broader
opportunity set than domestic portfolios, in
addition to giving access to the global liquidity
pool. The global market extends maturities
available for US investors from 30 to 45 years.
The chart below is a distribution by size and
maturity of bonds in the Barclays Global
Inflation-Linked Index, showing the depth of the
opportunity set available. Liquidity is generally
good across the major inflation-linked issuers.
Access to derivatives, while not required, widens
the opportunity set yet further.
In addition to the reduction in risk brought about
by reducing exposure to unexpected changes
in price levels by investing in an inflation-linked
portfolio, moving from a domestic portfolio to
a global portfolio reduces the risk yet further
as no one country will determine the success
or failure of your investment portfolio. The
expanded opportunity set also offers a broader
opportunity set than a purely domestic portfolio.
Barclays Global Inflation-Linked Index
Mar
ket
Valu
e ($
bill
ion)
Source: Bloomberg as at 31 March 2011.
0
10
20
30
40
50
60
70
80
20
11
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20
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54
20
55
UK US Euro-zone Canada Australia Sweden Japan
9 An investor’s guide to inflation-linked bonds
Reducing risks
The chart below suggests very strongly that a portfolio of hedged global inflation-linked bonds
is much more efficient than a simple domestic one, displaying significantly better risk-return
characteristics. Similar results are generated against other bond asset classes, and even greater
diversification benefits are shown against asset classes in the wider portfolio.
Active Versus Passive Investment
We believe that the inflation-linked bond
markets are inefficient, and this creates an
opportunity for active investment managers to
outperform those that adopt a passive strategy.
Because inflation-linked bonds represent a
relatively small proportion of the global bond
market, there is relatively limited research
undertaken. Markets are localised, and different
markets are affected by different drivers.
Adopting a passive strategy commits investors
to abide by whatever the rules of the passive
benchmark are, however bad. For example,
an issuing country may underperform very
substantially before being ejected from a
benchmark index, damaging returns to passive
investors. Active investors can anticipate such
changes and create outperformance. This was
the case when Greek inflation-linked bonds
were ejected from the benchmark indices at
the end of 2009. Passive investors will have
been forced to sell at the end of the year
when Greece dropped out of the benchmark.
Active investors had the ability to reduce their
exposure well in advance of this. Passive
investing ensures that investors will fall into
every pitfall along the way, whereas active
investing allows the manager to help investors
to avoid them.
Efficient Frontier: World Govt Inflation-Linked All Maturities vs iBoxx Dollar Corporates BBB
Source: Datastream and Barclays Capital: 29/12/2000 - 31/12/2010
Best Risk Adjusted Return
100% World Govt
Inflation-Linked
All Maturities
Minimum Risk Portfolio
100% US Govt Inflation-Linked All Maturities
6.0
6.5
7.0
7.5
8.0
8.5
6.5 7.0 7.5 8.0 8.5 9.0
Re
turn
%
Risk%
An investor’s guide to inflation-linked bonds 10
Holding a global portfolio of course introduces
exposure to the inflation rates of other
countries, and therefore a mismatch in returns.
However, in a diversified global portfolio, so
long as the currency exposure is hedged back
to the domestic currency, the mismatch should
be small over time.
This relies on the concept that countries with
higher inflation tend to have higher interest
rates. This will mean that over the cycle the
carry on the foreign exchange hedge will offset
the inflation mismatch.
For example, an investor in a higher inflation,
higher interest rate economy buys inflation-linked
bonds in a lower inflation, lower interest rate
economy. The bonds will provide insufficient uplift
to match his domestic inflation, but the interest
rate differential will mean there is a positive carry
on the foreign exchange hedge, and these two
should, over the medium term, net out.
These relationships are not perfect and do not
work instantaneously, but a well diversified,
hedged global portfolio of inflation-linked
bonds should, over the medium term, be an
effective domestic inflation-linked asset.
Managing Currency Risk in a Global Inflation Portfolio
11 An investor’s guide to inflation-linked bonds
A global market in government inflation-linked
bonds has only really existed since around
the turn of the millennium. The UK was the
first major issuer in 1981, and for some time
it was a small corner of the world markets,
present in just the UK, Canada and Australia.
When the US launched its Treasury Inflation
Protected Securities (TIPS) program in 1997,
the global market began to emerge. Euro-zone
issuers followed, with France issuing bonds
indexed both to French inflation (OATi) and
Euro-zone inflation (OATei), and Italy, Greece
and eventually Germany following in Euro-
zone-linked bonds. Japan completed the list
of G7 issuers in 2004, and Sweden is also a
large enough issuer to gain entry to market
benchmark indices.
The chart below shows the growth in the
market value over time, showing that recent
years have seen a massive increase in both
supply and demand.
The TIPS market has, unsurprisingly, surpassed
all others in terms of size, representing 39%
of the Barclays Global Inflation-Linked Index.
The Euro-zone has grown to 19% of bonds
outstanding. Australia returned to issuance in
the autumn of 2009, with a A$4bn issue (the
largest bond issue in Australia ever).
Barclays Global Index – Inflation-Linked Bonds Market Value ($bn)
Source: Barclays Capital. Data as at 31 March 2011.
0
200
400
600
800
1000
1200
1400
1600
1800
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US UK Sweden Japan Italy Germany France Canada Australia
A brief History of Inflation-Linked Markets
An investor’s guide to inflation-linked bonds 12
Other issuers
Many other countries issue inflation-linked
bonds, but are too small a size or too poor
a credit rating to enter mainstream indices.
Many countries at one stage could only issue
in inflation-linked bonds, as investors would
not buy nominal assets of countries with weak
currencies and persistent high inflation. Brazil
is the prime example of this, and represents
a large proportion of the emerging market
inflation-linked index.
Brazil has a long history in government
inflation-linked bonds, its first issue dating
back to 1964. It is the largest emerging market
issuer with over $130bn market value.
EM Inflation-Linked Bonds Market Value ($bn)
0
50
100
150
200
250
300
350
400
450
500
1996 1998 2000 2002 2004 2006 2008 2010
Israel
Source: Barclays Capital. Data as at 31 March 2011.
Turkey Poland Mexico South Korea Colombia Brazil Argentina Chile South Africa
Inflation-Linked Bonds Outstanding by Market Value ($bn)
0
100
200
300
400
500
600
700
800
Isra
el
Au
str
ali
a
Ca
na
da
Ita
ly
Jap
an
US
Gre
ec
e
Arg
en
tin
a
Me
xic
o
Co
lom
bia
Ch
ile
Fra
nc
e
Ge
rma
ny
Sw
ed
en
UK
So
uth
Afr
ica
So
uth
Ko
rea
Bra
zil
Po
lan
d
Turk
ey
Source: Barclays Capital. Data as at 31 March 2011.
13 An investor’s guide to inflation-linked bonds
Party A Party B
Inflation
Fixed Rate
As the size and sophistication of the global
inflation market has expanded, a range of
inflation derivative products has arrived to
broaden the opportunity set further. The
market for inflation swaps offers investors an
alternative means of expressing their views
on inflation.
In each region, the inflation swap market uses
the index to which domestic bond markets are
linked. The most common structure of inflation
There are active inflation swap markets in the
UK, US, Euro-zone, France, Australia and Japan.
There are also less developed markets in
Sweden and Canada but activity is very light.
The inflation swap market and inflation-linked
bond markets often interact via asset swap
activity (whereby an investor can pay inflation-
linked bond cashflows to a counterparty in
exchange for LIBOR flows). The more active
swap markets also have their own liquidity.
Supply tends to come from corporate bond
issuance, structured medium-term notes or
retail savings products linked to inflation.
Demand comes from pension funds (especially
in the UK and a growing theme in Europe), real
money and leveraged investors.
swap traded is a zero coupon swap, where
there is just one cashflow in each direction
at maturity. In the example below, Party B
pays a fixed amount, agreed at inception, and
receives an amount linked to the growth in the
relevant inflation index over the life of the swap.
Therefore, if the price level rises by more than
the fixed amount, party B makes a profit on the
swap. The value of the swap at any given point in
its life is determined by movements in inflation
expectations since the inception of the trade.
The zero coupon nature of inflation swaps
makes it an efficient way of implementing a
view or hedging an exposure on a particular
part of the curve without worrying about any
cashflows prior to maturity that can be an issue
when using bonds.
Inflation swaps are now used by a wide variety of
investors, for matching and hedging purposes,
as well as in conjunction with bond markets to
create more efficient portfolios. It should be noted
though that a long term inflation swap does not
guarantee a cashflow; if one’s swap counterparty
ceases to exist, so does the swap. Swaps are
collateralized (typically daily) such that the current
market value of a swap is protected, but the actual
pay-out should not be seen as equivalent in risk to
a government bond.
The Role of Inflation Swaps
An investor’s guide to inflation-linked bonds 14
Major issuers and their corresponding indices are shown in the table below:
Key global inflation indicesCountry Issue Issuer Inflation index
United States
Treasury Inflation- Protected Securities (TIPS)
US Treasury
US Consumer Price Index (NSA)
United Kingdom Inflation-linked Gilt UK Debt Management Office
Retail Price Index
Japan JGBi Ministry of Finance Japan CPI
Germany
Bund index and BO index
Bundesrepublik Deutschland Finanzagentur
EU HICP ex Tobacco
France OATi and OATei
Agence France Tresor France CPI ex-tobacco (OATi), EU HICP (OATei)
Canada Real Return Bond Bank of Canada Canada All-items CPI
Australia Capital Indexed Bonds Department of the Treasury (Australia)
ACPI
Sweden Index-linked treasury bonds
Swedish National Debt Office
Swedish CPI
Italy BTP€i Department of the Treasury
EU HICP ex Tobacco
Key Global Inflation Indices
15 An investor’s guide to inflation-linked bonds
Looking Ahead
The growth of the market is set to continue
across many countries:
¬ The investment grade market has grown from
$1454 billion at the end of 2009 to $1703
billion at the end of Q1 2011. There has
been new issuance from all countries in the
benchmark index except Japan, where the
Ministry of Finance continues to buy back
existing bonds.
¬ The US TIPS market has increased
significantly in size (from $563 billion at the
end of 2009 to $677 billion at the end of Q1
2011) and maturity.
¬ The UK RPI-linked market increased from
$341 billion at the end of 2009 to $406
billion at the end of Q1 2011, primarily
driven by very long-dated bonds sought
after by pension funds. In addition, there
are expectations for a CPI market to develop
over the next few years after the Secretary
of State for pensions announced in July 2010
that UK pension indexation will switch to
CPI from RPI.
¬ Since 2009, the Australian market has almost
doubled in size, from $10.5 billion to $19.1
billion at end of Q1 2011. The longest maturity
has increased from 2025 to 2030. New Zealand
is expected to re-enter the market in 2011
although timing remains uncertain.
¬ European issuance has also grown, across
Germany, France and Italy, from $394 billion
at the end of 2009 to $457 billion at the end
of Q1 2011. Germany is expected to expand
the maturity range of its bonds in the near
future by issuing a 30-year bond, and there
are ongoing rumours of issuance in the
pipeline from Ireland and Spain, although
this may be subject to prevailing sentiment
in peripheral European bond markets.
¬ Inflation continues to be a highly important
topic in emerging markets and the stock of
inflation-linked bonds has grown rapidly. The
Brazilian, Mexican and Polish markets have
all increased in nominal size by over 70%
since the end of 2009 (equating to nominal
growth of $97 billion, $21 billion and $3
billion respectively).
An investor’s guide to inflation-linked bonds 16
Contact Details
For more information, please contact a member
of our team.
Visit us online
standardlifeinvestments.com
Michael De VereInvestment Director - Asia
Tel +82 (0) 2 3782 4765
David PengInvestment Director
Head of Business Development - China, Taiwan, Hong Kong
Tel +852 9388 5285
Hong JiChief Representative
Beijing
Tel +86 10 84193401
20 An investor’s guide to inflation-linked bonds
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