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 LET’S GO GLOBAL (AGAIN)
If you think TIPS are the last word in inflation-linked government bonds, think again
6/1/2008
By James Picerno
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Pricing pressures are bubbling in economies around the world. Consumer prices in OECD countries (a proxy for the developed world) rose by 3.5 percent in the year through this past January—the highest pace since 2001. Inflation is also on the rise in emerging markets, including China, which reported an 8.7 percent jump in consumer prices for the year through February—up sharply from 2.7 percent for the same period a year earlier.
No wonder that the global market for inflation-linked bonds is bubbling as well. Growing demand for hedging inflation is one reason. But there’s the portfolio-diversification angle, too. Investors increasingly see inflation-protected obligations as a distinct asset class, even when compared with conventional bonds.
As it happens, the supply of so-called linkers is rising, too. More governments than ever are issuing inflation-linked bonds. The global market capitalization for sovereign inflation-linked bonds jumped 50 percent to $1.5 trillion in the two years through early 2008, according to Barclays Capital.
The U.S. remains the biggest issuer, which translates into roughly one-third of global market cap. That means that most of the world’s linkers are floated offshore on a value-weighted basis. It may surprise the casual observer to learn that Brazil is ranked fourth in market cap for inflation-linked bonds. According to a new global linkers bond index from Barclays, 19 governments (including the U.S.) are now issuing securities in this corner of the debt world.
In another sign that this sector of the bond market is coming of age, the first ETF targeting the asset class has been launched. State Street Global Advisors rolled out the first international inflation-protected bond ETF in March: SPDR DB International Government Inflation-Protected Bond ETF (Amex: WIP), which tracks the DB Global Government ex-US Inflation-Linked Bond Capped Index, a benchmark of bonds from 18 developed and emerging countries save for the U.S.
More global inflation-linked products may be coming, including some based on the new Barclays Capital Universal Government Inflation-Linked Bond Index. So says Ralph Segreti, the London-based global inflation-linked product manager for Barclays, which has been a leader in trading and analyzing linkers. In a recent interview with Wealth Manager, Segreti discusses the firm’s new benchmark, how it works and why investors should consider inflation-linked bonds as something more than a domestic asset class.
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