Daily inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation or deflation on a daily basis. They are thus designed to hedge the inflation risk of a bond.[1] The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780.[2] The market has grown dramatically since the British government began issuing inflation-linked Gilts in 1981. As of 2019, government-issued inflation-linked bonds comprise over $3.1 trillion of the international debt market.[3] The inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market.
Structure
editDaily inflation-indexed bonds pay a periodic coupon that is equal to the product of the principal and the nominal coupon rate.
For some bonds, such as in the case of TIPS, the underlying principal of the bond changes, which results in a higher interest payment when multiplied by the same rate. For example, if the annual coupon of the bond were 5% and the underlying principal of the bond were 100 units, the annual payment would be 5 units. If the inflation index increased by 10%, the principal of the bond would increase to 110 units. The coupon rate would remain at 5%, resulting in an interest payment of 110 x 5% = 5.5 units.
For other bonds, such as the Series I United States Savings Bonds, the interest rate is adjusted according to inflation.
The relationship between coupon payments, breakeven daily inflation and real interest rates is given by the Fisher equation. A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.
Real yield
editThe real yield of any bond is the annualized growth rate, less the rate of inflation over the same period. This calculation is often difficult in principle in the case of a nominal bond, because the yields of such a bond are specified for future periods in nominal terms, while the inflation over the period is an unknown rate at the time of the calculation. However, in the case of inflation-indexed bonds such as TIPS, the bond yield is specified as a rate in excess of inflation, so the real yield can be easily calculated using a standard bond calculation formula.[4]
Global issuance
editThe most liquid instruments are Treasury Inflation-Protected Securities (TIPS), a type of US Treasury security, with about $500 billion in issuance. The other important inflation-linked markets are the UK Index-linked Gilts with over $300 billion outstanding and the French OATi/OAT€i market with about $200 billion outstanding. Germany, Canada, Greece, Australia, Italy, Japan, Sweden, Israel and Iceland also issue inflation-indexed bonds, as well as a number of Emerging Markets, most prominently Brazil. [5] [6] [7]
| Country | Issue | Issuer | Inflation Index |
|---|---|---|---|
| United States | Treasury Inflation-Protected Securities (TIPS)[8] | US Treasury | US Consumer Price Index |
| United States | Series I Inflation-Indexed Savings Bonds (I-Bonds - domestic retail bonds)[9] | US Treasury | US Consumer Price Index |
| United Kingdom | Index-linked Gilt | UK Debt Management Office | Retail Price Index (RPI) |
| United Kingdom | Index-linked Savings Certificates (domestic retail bonds) | National Savings and Investments | Retail Price Index (RPI) |
| France | OATi and OAT€i[10] | Agence France Trésor | France CPI ex-tobacco (OATi), EU HICP ex-tobacco (OAT€i) |
| Canada | Real Return Bond (RRB)[11] | Bank of Canada | Canada All-Items CPI |
| Australia | Capital Indexed Bonds (CAIN series) | Department of the Treasury (Australia) | Weighted Average of Eight Capital Cities: All-Groups Index |
| Germany | iBund and iBobl[12] | Bundesrepublik Deutschland Finanzagentur | EU HICP ex Tobacco |
| Russian Federation | Federal loan bonds (GKO-OFZ) with a nominal value indexed by the inflation rate | Ministry of Finance (Russia) | Russian Federation's CPI |
| Greece | EU HICP ex Tobacco | ||
| Hong Kong | iBond (domestic retail bonds) | Hong Kong Government | Composite Consumer Price Index |
| Italy | BTP€i | Department of the Treasury | EU HICP ex Tobacco |
| Italy | BTP Italia (domestic retail bonds)[13] | Department of the Treasury | Italy CPI ex tobacco |
| India | Inflation Indexed Bonds[14][15] | Reserve Bank of India | Wholesale Price IndexConsumer Price Index |
| Japan | JGBi | Ministry of Finance (Japan) | Japan CPI (nationwide, ex-fresh-food) |
| Sweden | Index-linked treasury bonds | Swedish National Debt Office | Swedish CPI |
| Brazil | Notas do Tesouro Nacional - Série B / C | Tesouro Nacional | B: IPCA / C: IGP-M |
| Mexico | Udibonos | Banco de Mexico | UDIs |
| Colombia | COLTES UVR | Ministerio de Hacienda y Crédito Público | CPI via the UVR indexing unit (Real Value Unit) |
| Israel | Index-linked treasury bonds | Ministry of Finance (Israel) | Israel CPI |
| Spain[16] | Bonos indexados del Estado and Obligaciones indexadas del Estado[17] | Tesoro Público | EU HICP ex Tobacco |
| Argentina | Bonos CER (Coeficiente de Estabilización de Referencia) | Ministry of Economy (Argentina) | INDEC IPC |
Inflation-indexed bond indices
editInflation-indexed bond indices include the family of Barclays Inflation Linked Bond Indices,[18] such as the Barclays Inflation Linked Euro Government Bond Indices, and the Lehman Brothers U.S. Treasury: U.S. TIPS index.[19]
See also
editReferences
edit- ^ income taxes bring some inflation risk back to such bonds. See tax on the inflation tax.
- ^ Shiller, Robert J. (2005). "The Invention of Inflation-Indexed Bonds in Early America". In Goetzmann, William N.; Rouwenhorst, Geert K. (eds.). The Origins of Value: The Financial Innovations that Created Modern Capital Markets. Oxford: Oxford University Press. doi:10.3386/w10183. ISBN 0-19-517571-9.
- ^ Barclays Capital Research A (2019-04-10). "Global Inflation-Linked Products: A User's Guide".
- ^ Frank J. Fabozzi, CFA (17 February 2003). The Handbook of Financial Instruments. John Wiley & Sons. pp. 207–208. ISBN 978-0-471-44560-9. Retrieved 1 January 2013.
- ^ "Real Return Bonds". Retrieved 2006-06-30.
- ^ Swinkels, Laurens (2012). "Emerging Markets Inflation Linked Bonds". Financial Analysts Journal. 68 (5): 38–56. doi:10.2469/faj.v68.n5.2. S2CID 199138325.
- ^ De Jong, Mariele; Swinkels, Laurens (2022). "The Capital-Protection Capacity of Emerging Markets Inflation-Linked Bonds". Journal of Portfolio Management. 48 (8): 127–138. doi:10.3905/jpm.2022.1.374. S2CID 251201299.
- ^ "TIPS In Depth". Retrieved 2006-06-30.
- ^ "Series I Savings Bonds". Retrieved 2008-04-09.
- ^ "OAT€is AND BTAN€is". Retrieved 2006-06-30.
- ^ "Government of Canada Market Debt Instruments". Archived from the original on 2009-08-12. Retrieved 2009-10-26.
- ^ "Finance Agency: Inflation-linked securities". Retrieved 2016-11-14.[permanent dead link]
- ^ "BTP Italia". Retrieved 2018-05-22.
- ^ "Reserve Bank of India - Press Releases". Reserve Bank of India. Reserve Bank of India. Archived from the original on 29 November 2014. Retrieved 15 November 2014.
- ^ "RBI to Launch Revamped Inflation-Indexed Bonds Soon". NDTV Profit. 12 June 2014. Retrieved 15 November 2014.
- ^ Moore, Elaine (2014-05-22). "Spain dives into inflation-linked bonds". Financial Times. ISSN 0307-1766. Retrieved 2016-08-12.
- ^ "Subastas | Tesoro Público - Yo invierto aquí". elijo.tesoro.es. Retrieved 2016-08-12.
- ^ "Barclays Capital: Inflation Linked Bond Index".
- ^ ""Lehman Brothers: Global Family of Indices - Daily Returns"". Archived from the original on 2008-10-30. Retrieved 2008-12-17.
External links
edit- Deacon, Mark, Andrew Derry, and Dariush Mirfendereski; Inflation-Indexed Securities: Bonds, Swaps, and Other Derivatives (2nd edition, 2004) Wiley Finance. ISBN 0-470-86812-0.
- Benaben, Brice, and Sebastien Goldenberg (ed.); Inflation Risks and Products (Dec. 2008) Riskbooks. ISBN 978-1-906348-07-6.
- Canty, Paul and Markus Heider; "Inflation Markets: A Comprehensive and Cohesive Guide" (2012) Risk Books. ISBN 9781906348755.