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.

 

Sponsors

Overseas earners will be key amidst 2017 inflation

Sponsored by Neptune

Overseas earners will be key amidst 2017 inflation...

A by-product of sterling weakness is inflation, and we expect this to continue to gather steam over the coming months, with energy and food prices the hardest hit....

Kames Income Hub

home_research_centre

Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

Square Mile Research

AXA Distribution Fund
AXA Distribution Fund

Talking Factsheets is a video service for users...

Visitor's Comments Add your comment

Add Your Comment

We won't publish your address

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.

Profiles

Viewpoint

Investment Strategy

Feature

Tweets

Events

PA Alternative Ucits 2017 Congress
PA Alternative Ucits 2017 Congress

Tuesday 25 April
The Langham, London

PA Europe 2017
PA Europe 2017

Thursday 11 May
Furniture Makers' Hall

PA Channel Islands 2017
PA Channel Islands 2017

Wednesday 24 May
Royal Yacht Hotel, Jersey

PA UK Equity 2017
PA UK Equity 2017

Thursday 15 June
Radisson Blu Edwardian Bloomsbury Street Hotel

Sponsored Content

Investment Strategy

OTHER STORIES FROM LAST WORD...