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The Fund Manager

UK long dated index-linked bond price

Image Source: Ruffer LLP and Bloomberg (UK 2055 index-linked bond)

We live in extraordinary times, and looking at recent political developments, both here and abroad, there is a risk that they could soon become even stranger.

UK long dated index-linked bond price

We live in extraordinary times, and looking at recent political developments, both here and abroad, there is a risk that they could soon become even stranger.

Back in 2007 who would have thought that interest rates would not only be cut to almost zero, but then stay more or less on the floor for the next ten years.

Of course financial assets of all types have flourished in an environment where money (debt) is almost free. Investors in search of some income from their hard earned savings have pushed equity and bond prices up to all time record levels, including UK government index-linked bonds. These are government bonds where the interest rate paid to investors (and the capital returned at the end) is linked to the rate of inflation. This has seen the price of the longest dated such bonds almost triple since the financial crisis in 2008.

Index-linked bond prices are driven by two factors: expectations of future interest rates and future inflation. If interest rates fall or inflation rises, the price goes up. Hence, immediately after the Brexit vote, as sterling weakness pushed up inflation and UK interest rates were cut, the price of these bonds rose rapidly from £200 to £270.






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