Inflation Protection
TIPS better than Linkers?
In the UK we have Index Linked Gilts (also called) Linkers, this is debt issued by the Government with their value and income linked to changes in inflation (RPI); the US have their own equivalent Treasury Inflation Protected Securities (TIPS). As most of you will be aware we remain big fans of “Linkers” that have provided consistent and comparable returns to UK equities over the last 30 years with less of the peaks and troughs.
However, after a bumper 2016 returns have gone a little sideways over the last 14 months or so and part of the reason maybe that a lot of the value has been squeezed out of them. In fact, if you were to buy Linkers directly you would currently find that the majority of issues have negative yields – this means that if you buy them now and hold them to maturity you will lose money!
So whilst we like holding Linkers and will continue to do so (2010 was a great time to buy) we are looking for an alternative and in TIPS we think that they may be better value at present as yields remain positive.
Looking at image one to the right we see the yield in blue; generally as inflation rises (Consumer Price Index green) so does the expectation of inflation (10 Year Breakeven Rate in red). In turn this results in the value of TIPS going up and the yield falling.
Take a look at 2008/2009 that was a real “sweet spot”; inflation and expectation of inflation fell of a cliff, TIP yields spiked to over 3% (meaning a decline in their price). After reaching a low in 2009 inflation expectations started to pick up, followed by the Consumer Price Index; a the same times TIP yield started to tighten and fall from the 3% highs all the way down to near -1% in 2013 (almost 4 unbroken years of growth).
Whilst we may not be in that 2009 sweet spot TIPS do have a positive yield and therefore may currently offer more value than Linkers.
Sneak Peek!
Over the coming weeks you will see some changes to our presentation and website; we have been busy having a bit of a refresh of our brand and hope that you will like the new look – the top of the page shows our new logo and well be giving you a summary of all thats new in the not too distant future!
On this Day
9th March 1881The birth, in Winsford, Somerset of Ernest Bevin, one of the founding leaders of the Transport and General Workers Union (TGWU), which soon became Britain’s largest trade union. He was Minister of Labour during the Second World War and created ‘Bevin Boys’; young men chosen by ballot to work down the mines as part of their war service.
