Better safe than sorry?
David Karni, head of fund selection for BCC Risparmio & Previdenza in Milan, on the other hand, has just added some inflation-linked bonds for his fixed income fund-of-fund. Italian investors have often been plagued by rampant inflation before the country introduced the euro in 1999, which probably makes them more inclined to hedging against it. The Italian government has understood these sentiments well. Since 2012 it has been raising more than €80bn by issuing inflation-linked bonds, amounting to more than 5% of total outstanding government debt.
“It is true that a long period of low inflation looks likely, but I think it is difficult to predict the timing for this asset class,” says Karni. “So I think it makes sense for our clients to replace part of the nominal bonds by inflation-linked bonds, considering there is not much upside in [Italian] government bonds with a yield of around 1.8 and the spread near 115.
Some countries in emerging markets have also issued inflation-linked bonds, but these are mainly picked up by domestic investors as they are issued in local currency. Russia was the latest country to enter the inflation-linked bond market, issuing an undisclosed amount last month. Russia’s finance minister Anton Siluanov said, according to the Wall Street Journal, that the sale attracted “substantial numbers of foreign buyers from the US and Europe.”
However, considering the recent record of Russian state officials when it comes to speaking the truth, this should be taken with a pinch of salt. “For the moment we stay out of EM linkers,” says Karni. “We are worried about the pace of economic growth and the volatility of local currencies.
