Short-duration linkers – a new kid on the block
Baltora agrees investing in inflation-linked bonds involves a trade-off between inflation and duration, with long-duration inflation-linkers being mainly attractive for liability-driven investors. “Retail investors look primarily for inflation protection, so short-duration inflation-linked bond funds are the most attractive option for them as that is more of a pure inflation play,” he says.
Anticipating this, AXA IM launched a short-duration inflation-linked bond fund in February, which invests in inflation-linked bonds with a maturity less than five years. Contrary to what many investors believe, this market is actually quite liquid, says Baltora. “Of the total stock of $2.8trn, about $650bn is in short-duration.”
It has since reached a size of $800m (€751m). “Almost all the returns of this fund so far have come from inflation, while the bulk of the returns of our long-duration fund have come from moves in rates.”
A downside of investing in short-duration bonds is of course that yields remain incredibly low, especially in the eurozone so it’s hard to earn any returns in this space. Therefore, some of the investors that have flocked to Baltora’s short-duration fund have done so for a quick profit.
“Some people are buying break-even inflation as a tactical trade,” he admits. Even though break-even yields are even lower than nominal yields, as long as inflation expectations are positive, this seems a sensible attitude. With the ECB staying in moderate easing mode while GDP growth is holding up, reflation is set be one of the investment themes to characterise 2017.
