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Has the tide finally turned for inflation-linked bonds?

With the eurozone currently experiencing deflation, inflation-linked bonds are probably not the first thing on the mind of investors. However, as Brent crude is now back at $48, the only way for inflation is probably up. So should investors start thinking about protecting their portfolios against price rises?

April inflation figures for the eurozone that were released on Friday show that, even though overall inflation is -0.2%, annual inflation excluding energy is actually running at +0.7%. This shows that the oil price, as we noted last summer, plays a big part in the inflation equation. And so it does in determining investors’ interest in inflation-linked bonds, it seems.

Though inflows into inflation-linked bond funds have remained rather low, the thought of putting some money in the asset class has crossed the mind of all fund selectors Expert Investor spoke to last week. In February and March combined, a net €400m was invested in inflation-linked bond funds, though year-to-date net inflows are still on the negative side.

Tim Peeters, head of securities portfolios at Portolani in Antwerp, Belgium has already introduced inflation protection to his portfolio. “We have started investing in inflation-linked bond funds again during the past six months,” he says.

In fact, all government bond funds in Peeters’ portfolio are inflation-linked. This might sound bolder than it is though, as the Belgian has been avoiding government bond funds for some time, preferring absolute return instead. “So we are talking about just a few percent of the portfolio here,” Peeters explains.

A commodity play

By investing in inflation-linked bonds, you could be hitting two birds with one stone, says Peeters (pictured right). “Investing in inflation-linked bonds also gives you exposure to a commodities rebound in a conservative way,” he says. In an article published on this website on 18 February, Peeters made a strong case for increasing exposure to commodities.

Since the publication of the article, the Bloomberg Commodity Index is up some 10%, though volatility has been rather high. Peeters: “Considering this, inflation-linked bonds come in handy for more conservative clients who are wary of investing in commodities.”  

Looking outside the eurozone

David Karni, head of fund selection at BCC Risparmio & Previdenza in Milan, hasn’t yet taken any positions in inflation-linked bonds but is looking at the option of doing so. “The theme is on the table,” he says. “The idea of adding US and EM inflation-linked bonds looks most attractive to us, because inflationary pressures are higher there [than in the eurozone].”

   

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