Inflation is the biggest problem facing the United States and is more important to citizens than crime, health care or immigration according to a Pew Research Center survey from May 2022. Given inflation close to 10% this year, this is not surprising.
Unfortunately, the financial advice retail investors receive to deal with inflation is often poor. For example, a recent Forbes Article highlighted five options, the first being to invest in a high-yield savings account that earns up to 1.5% interest per year. Inflation was 8.3% in August in the US, implying a negative real return of 6.8%.
The second option recommended by Forbes was to invest in inflation-linked bonds, which are also often referenced by professional investors. We previously noted in an article that these types of fixed income instruments are not strongly correlated with inflation, because their principal amounts are adjusted with a lag to changes in the consumer price index.
In this research article, we will explore the performance of inflation-linked bonds since the start of 2022.
Performance of inflation-linked bonds
Investors can purchase unique inflation-linked bonds such as Treasury Inflation-Protected Securities (TIPS) directly or through ETFs. We focus on three ETFs that provide exposure to inflation-linked bonds issued by UK, EU and US governments. These manage between $800 million and $30 billion in assets and charge management fees of 0.09% to 0.19% per year.
Given high inflation in most countries in 2022, investors might expect inflation-linked bonds to have outperformed and generated attractive diversification benefits for traditional 60-40 portfolios that are misbehaved. Performance trends were similar, particularly for European and US inflation-linked bonds, but neither ETF generated positive returns.