Inflation-linked bonds provide diversification and inflation protection benefits for investors in multi-asset portfolios. When nominal bond yields rise as a result of the market pricing in higher rates of inflation, fixed income investors lose money. Investors in inflation-linked bonds however, can make money as the coupon they receive is linked to an inflation benchmark. Inflation-linked bonds are under-owned by the investment community and as such, offer good upside potential in the event of an unexpected breakout of inflation across the globe. While returns have been a modest 2-3% per annum for Euro inflation-linked bonds in recent years, UK and US ILB's have delivered 5-7% per annum over the last decade.
Positive returns in a rising inflationary environment are hard to come by, which is why ILB's should form a core part of your multi-asset portfolio as we transition from a period of declining interest rates and inflation to a more uncertain future.
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