Monday, July 7, 2008

So-called inflation-linked bonds are yet another rip-off

Index-linked bonds - Losing Interest

Two articles (see inside): ECONOMIST: "Higher inflation is not all bad news for the government. The race to buy index-linked bonds, which protect their owners against future price rises, is so intense that the 50-year gilt was offering a real (after-inflation) yield of just 0.3% in trading last week. That is a very cheap way [for governments] to borrow money. One interpretation of this trend is that the markets have lost faith in the Bank of England's ability to control inflation." BLOOMBERG: "Treasury Inflation Protected Securities aren't living up to their name for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods. 'The consumer price index underestimates inflation', said ..." HPC SUMMARY: Inflation is ripping off everyone.

Posted by drewster @ 11:12 PM (645 views)
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2 thoughts on “So-called inflation-linked bonds are yet another rip-off

  • Here’s the second article:

    Bloomberg: TIPS* flunk inflation test as fuel and food overtake CPI
    Treasury Inflation Protected Securities aren’t living up to their name for bond investors who say they can’t trust the way the U.S. government calculates the rising cost of consumer goods.

    Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee’s largest bank, are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department’s consumer price index. Morgan Stanley says derivatives tied to inflation expectations are a better bet, while FTN recommends corporate and agency bonds because the index doesn’t reflect the actual rate of U.S. inflation.

    The $500 billion TIPS market’s 5 percent returns this year have beat a 2.2 percent gain for Treasuries, according to Merrill Lynch & Co. indexes. TIPS should pay more, because the consumer price index downplays the 39 percent increase in gasoline and a 133 percent rise in corn in the past year, investors say. Yields on TIPS relative to Treasury debt, a gauge of traders’ inflation bets, barely changed over the past 18 months even as consumer expectations for prices climbed to 3.4 percent, the highest since 1995.

    “The consumer price index underestimates inflation,” said Jeremy Wolfson, who oversees $8.5 billion as chief investment officer at the City of Los Angeles Department of Water and Power Pension Fund. “Whether TIPS are adding a true inflation hedge, that’s arguable based on the CPI component of it.”

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  • little professor says:

    But for consumers, you can get National Savings inflation-linked bonds, which pay 1% over RPI.

    I’ve got £15k stashed in the last issue, which paid 1.35% over RPI – earning me the equivalent of around 9.3% before tax. If inflation was being honestly calculated, that figure should be closer to 15%.

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