PA ANALYSIS: Are inflation-linkers the right answer to reflation?

Added 10th March 2017

Inflation-linked bonds have been a popular trade in recent months, and investors plan to continue buying more as inflation expectations are being revised upwards. But can you really tame the spirits of reflation with inflation-linkers?

PA ANALYSIS: Are inflation-linkers the right answer to reflation?

Government bonds have been deeply unpopular with European investors for a number of years.

Six in 10 of the fund selectors attending Last Word's Pan-European Congress in Rome last week - run by PA's sister publication Expert Investor - said they plan to decrease their allocation to the asset class over the next 12 months, while another 17% have sold off their entire government bond holdings.

Inflation-linked government bonds, however, are not quite as unpopular.

At the end of 2015, investors were fretting about deflation and inflation-linked bonds were being sold off as most were trading on negative yields.

Now, eurozone inflation has reached 2%, and inflation protection is back on the agenda.

"If interest rates rise in tandem with inflation, that may spoil the party for inflation-linked bond investors"

 

Over the past year, inflation-linked bond funds already saw net inflows of more than €13bn (£11.4bn) from European investors.

Inflation-linkers are also by far the most popular fixed income asset class with Congress delegates: of the 61% who use them, a large majority plan to increase their allocation further over the next 12 months.

“I’m positive on inflation-linked bonds,” said Anh Nguyen, a fund analyst at the private bank Nagelmackers in Belgium, taking part in a panel discussion on constructing fixed income portfolios. 

“The inflation break-even is still at 1.3% in Germany. If you expect inflation to hit the 2%-target, there is still room for more performance of inflation-linked bonds.”

But at the same time, Nguyen reminded the audience that the bulk of the return on inflation-linked bonds still comes from duration.

 

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About Author

Tjibbe Hoekstra

Senior Reporter

Tjibbe joined Expert Investor as a senior reporter in March 2014. Before moving to London he worked as a financial news reporter for various news outlets in Amsterdam, including Reuters and ANP, the main news agency in the Netherlands. He also worked for Fondsnieuws, a website and magazine for finance professionals in the Netherlands. Tjibbe holds a MSc in Public Administration and a post-graduate diploma in Journalism.

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