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Inflation Linked Bonds

April 24th 2020 – Written by Jonathan Chorley

Last week, Andrew highlighted the benefits of holding Gold particularly given the expansion of Government Debt, negative real interest rates and negative sentiment. Gold has formed a key component of our Asset Allocation strategies since Q1 2019 and we consider it vital in providing a balance of assets for different outcomes.

This week, we will consider another key component of our strategies – Inflation Linked Bonds, recently referred to as “21st century version of Gold” by  Alexander Chartres (Investment Director of Ruffer) in his recent MoneyWeek podcast.

Our recent thoughts are led by the ever increasing necessity that government and central banks will realise that inflation offers the only realistic route towards reducing the inevitable debt burden over the longer term. This coupled with the possible reversion of Globalisation which has been an important source of deflation over the past thirty years.

Whilst the yields on UK Index Linked Gilts (Linkers) have been negative for some time, we have seen in recent months that US Treasury Inflation Protected Securities (TIPS) yields also gone negative (see chart). 

This has been in part due to the perceived 'safety' offered by index linked and nominal bonds following the growing emergence of COVID-19 - remember falling yields mean rising prices. 

We hope that both TIPS and Linkers will protect the purchasing power of Portfolios over the longer term - this is of particular importance for investors who are conscious of how inflation can erode the value of their investments. 

EST. 1999