Why have returns from inflation-linked bonds been so abysmal?

Is there any point in investing in inflation-linked bonds?

Unquestionably, yes. There are usually two good times to invest in what is a highly technical market.

1. During QE. Quantitative easing tends to be good for all asset prices but it is incredibly supportive for inflation-linked bonds. This is particularly the case if you buy inflation-linked bonds close to the initial announcement of QE. Central banks usually announce QE when disinflationary fears are at large and inflation breakevens are below central banks’ targets. Printing money under QE increases the skew of inflation to the upside.
2. In a stagflationary environment. At some point, central banks might have to shift their focus away from controlling inflation and towards supporting growth. Once unemployment ticks higher, central banks may – either voluntarily or under political pressure – tighten policy less than expected or start loosening it. If inflation breakevens at that time are compelling then inflation-linked bonds could perform well.

So when you buy inflation-linked bonds – and what maturity of bond you buy – makes a huge difference to your total returns. Most have had a poor year in 2022, but the time to add some inflation protection to your portfolio again might not be all that distant.

Juan Valenzuela is manager of the Artemis Strategic Bond Fund.

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. This is a marketing communication. Refer to the fund prospectus and KIID/KID before making any final investment decisions. CAPITAL AT RISK. All financial investments involve taking risk which means investors may not get back the amount initially invested.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data.

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.

Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.