Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers are Bond (finance) where the principal is indexed to inflation They are thus designed to cut out the inflation risk of an investment. Unfortunately, income taxes bring some inflation risk back to such bonds. See inflation tax The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780. The market has grown dramatically since the United Kingdom government began issuing inflation-linked Gilts in 1981. As of 2008, government-issued inflation-linked bonds comprise over $1.5 trillion of the international debt market.lt;/ref> The inflation-linked market primarily consists of sovereign bond , with privately issued inflation-linked bonds constituting a small portion of the market.

Structure

Inflation-indexed bonds pay a periodic coupon (bond) that is equal to the product of the inflation index and the nominal coupon rate. The relationship between coupon payments, breakeven 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. For some bonds, such as the Treasury security#Series I Savings Bonds (U.S.), the interest rate is adjusted according to inflation. For other bonds, such as in the case of Treasury_security#TIPS the underlying :wikt: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 was 5% and the underlying principal of the bond was 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.

Global issuance

The most liquid instruments are Treasury Inflation-Protected Securities (TIPS), a type of 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 and Iceland - as well as a number of smaller emerging markets - also issue inflation-indexed bonds.lt;/ref> | class"wikitable" |- ! Country ! Issue ! Issuer ! Inflation Index |- | United States | Treasury Inflation-Protected Securities (TIPS)lt;/ref> | US Treasury | United States Consumer Price Index |- | United States | Treasury security (I-Bonds)lt;/ref> | US Treasury | United States Consumer Price Index |- | United Kingdom | Inflation-linked Gilts (ILG) | UK Debt Management Office | Retail Price Index (United Kingdom) (RPI) |- | France | Obligation assimilable du Trésor and OAT€ilt;/ref> | Agence France Trésor | France CPI ex-tobacco (OATi), EU HICP ex-tobacco (OAT€i) |- | Canada | Real Return Bond (RRB)lt;/ref> | Bank of Canada | Canada All-Items Consumer Price Index |- | Australia | Capital Indexed Bonds (CAIN series) | Department of the Treasury (Australia) | Weighted Average of Eight Capital Cities: All-Groups Index |- | Germany | Bund index. and BO index. | Bundesrepublik Deutschland Finanzagentur | EU HICP ex Tobacco |- | Greece | | | |- | Italy | BTP€i | Department of the Treasury | EU HICP ex Tobacco |- | Japan | JGBi | Ministry of Finance (Japan) | Japan CPI (nationwide, ex-fresh-food) |- | Sweden | Index-linked treasury bonds | Swedish National Debt Office | Swedish CPI |- | Iceland | | | |- |}

Inflation-indexed bond indices

Inflation-indexed bond index include the family of Barclays Inflation Linked Bond Indiceshttps://ecommerce.barcap.com/gilbpub/ "Barclays Capital: Inflation Linked Bond Index".], such as the Barclays Inflation Linked Euro Government Bond Indices, and the Lehman Brothers U.S. Treasury: U.S. TIPS indexhttp://www.lehman.com/indices/dailyreturn.html "Lehman Brothers: Global Family of Indices - Daily Returns".].

References

See also

* Fisher equation

External links

*http://www.treasurydirect.gov/instit/marketables/tips/tips.htm TIPS] *http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm U.S. Series I Savings Bonds] *http://dmo.gov.uk/index.aspx?pageGilts/Indexlinked Inflation-linked Gilts] *http://www.aft.gouv.fr/aft_en_21/debt_management_51/products_248/oateurois_257/ French inflation-indexed bonds]

Print

* 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. Category:Bonds Category:Inflation de:Inflation-Linked Bond ja:インフレ連動債 sv:Realobligation