Safest long-term investment

An inflation-linked bond will therefore be the safest investment option for a long-term investor looking to limit the uncertainty associated with the future real value of his capital. 

The market for inflation-linked bonds 

The market capitalisation of inflation-linked bonds is less than 10 percent of the market for government bonds and is dominated by the UK and the US. Linkers issued by authorities in these two countries make up almost 60 percent of the world market.

The authorities in a number of countries with a considerable economic output, including China, India and Russia, have not issued inflation-linked bonds. The same is the case in many smaller countries, and large developed markets in the benchmark index such as Japan and Germany have only small and relatively illiquid markets for inflation-linked bonds (see appendix).

In some markets, tax and regulatory conditions may affect the structural demand for, and therefore the supply of, inflation-linked bonds.

In a situation where there is a growing probability of deflation, inflation-linked bonds could have markedly different characteristics in different countries, as the underlying rules vary. Linkers are not identical across markets and are therefore difficult to view as a global asset class.

The combination of a long investment horizon, no short-term liquidity needs and a patient owner generally make the fund well-suited to bearing different types of systematic risk.

 Experience from the financial crisis in 2008 showed, however, that in periods of financial instability we cannot count on the same level of liquidity in the market for inflation-linked bonds. Tradability in these situations is lower, and we therefore bear a higher liquidity risk than for investments in nominal government bonds. 

 Linkers may, however, have a role in the operational management of the fund when it is possible to secure an attractive real return and inflation expectations are considered moderate.