- Index-linked bonds have lower prices and higher yields than in past years
- They can provide income, mitigate rising inflation and diversify equity portfolios
- But they can volatile
Elevated levels of inflation have rarely been out of the headlines for the past two years, yet UK index-linked gilt (government) bonds have had a torrid time of it. The average fund in the Investment Association UK Index Linked Gilts sector, for example, fell 41.8 per cent over the two years to the end of October, according to Morningstar. This seemingly counterintuitive outcome is partly because inflation-linked bond prices depend on inflation expectations rather than actual inflation, and more significantly because linkers tend to be highly sensitive to interest rate increases due to their long maturities.
So while a disinflationary period may not sound like the most sensible time to buy inflation-linked debt, the prospect of peak interest rates, among other factors, means some professional investors argue that there is now a good case for this asset.