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Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780. The market has grown dramatically since the Britishmarker government began issuing inflation-linked Gilts in 1981. As of 2008, government-issued inflation-linked bonds comprise over $1.5 trillion of the international debt market. The inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market.


Inflation-indexed bonds pay a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate. The relationship between coupon payments, breakeven inflation and real interest rates is given by the Fisher equation. A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.

For some bonds, such as the Series I Savings Bonds (U.S.), the interest rate is adjusted according to inflation.

For other bonds, such as in the case of TIPS, the underlying principal of the bond changes, which results in a higher interest payment when multiplied by the same rate. For example, if the annual coupon of the bond was 5% and the underlying principal of the bond was 100 units, the annual payment would be 5 units. If the inflation index increased by 10%, the principal of the bond would increase to 110 units. The coupon rate would remain at 5%, resulting in an interest payment of 110 x 5% = 5.5 units.

Global issuance

The most liquid instruments are Treasury Inflation-Protected Securities (TIPS), a type of US Treasury security, with about $500 billion in issuance. The other important inflation-linked markets are the UK Index-linked Gilts with over $300 billion outstanding and the French OATi/OAT€i market with about $200 billion outstanding. Germanymarker, Canadamarker, Greecemarker, Australia, Italymarker, Japanmarker, Swedenmarker and Icelandmarker - as well as a number of smaller emerging markets - also issue inflation-indexed bonds.

Country Issue Issuer Inflation Index
United Statesmarker Treasury Inflation-Protected Securities (TIPS) US Treasurymarker US Consumer Price Index
United Statesmarker Series I Inflation-Indexed Savings Bonds (I-Bonds) US Treasurymarker US Consumer Price Index
United Kingdommarker Inflation-linked Gilt (ILG) UK Debt Management Office Retail Price Index (RPI)
Francemarker OAT and OAT€i Agence France Trésor France CPI ex-tobacco (OATi), EU HICP (OAT€i)
Canadamarker Real Return Bond (RRB) Bank of Canadamarker Canada All-Items CPI
Australia Capital Indexed Bonds (CAIN series) Department of the Treasury Weighted Average of Eight Capital Cities: All-Groups Index
Germanymarker Bund index. and BO index. Bundesrepublik Deutschland Finanzagentur EU HICP ex Tobacco
Italymarker BTP€i Department of the Treasury EU HICP ex Tobacco
Japanmarker JGBi Ministry of Finance marker Japan CPI (nationwide, ex-fresh-food)
Swedenmarker Index-linked treasury bonds Swedish National Debt Office Swedish CPI

Inflation-indexed bond indices

Inflation-indexed bond indices include the family of Barclays Inflation Linked Bond Indices, such as the Barclays Inflation Linked Euro Government Bond Indices, and the Lehman Brothers U.S. Treasury: U.S. TIPS index.


See also

External links


  • Deacon, Mark, Andrew Derry, and Dariush Mirfendereski; Inflation-Indexed Securities: Bonds, Swaps, and Other Derivatives (2nd edition, 2004) Wiley Finance. ISBN 0-470-86812-0.

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