In defence of a financial instrument that fails to do its job
Inflation-linked bonds are a poor inflation hedge, but that’s not the point
Although buying inflation-protected bonds to protect against inflation does not seem unreasonable, it would have been a spectacularly unprofitable move during the latest bout of inflation. One hundred dollars put into inflation-protected Treasuries in December 2021, when investors first saw American core inflation reach 5%, would have been worth just $88 a year later. Even cash under the mattress would have done better.
Safe to say, inflation-linked bonds are in trouble. Investors pulled $17bn from exchange-traded funds tied to them last year. Canada announced plans to cease issuing them in 2022; Germany did the same in November. Sweden is considering its options. Yet these countries are making a mistake. So long as their purpose is not misconstrued, inflation-linked bonds serve a vital function for markets and the governments that issue them.
This article appeared in the Finance & economics section of the print edition under the headline "Inflated worth"
Finance & economics February 17th 2024
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