TransWikia.com

Inflation linked securities - Euro Government Inflation-Linked big price increase

Personal Finance & Money Asked on April 13, 2021

I find very interesting that Bloomberg Barclays Euro Inflation Linked 10+ (Euro) securities increased their price in the last 6 month with about +4.4%.
Looking on the equivalent USD TIPS my increase (should be also long term securities but cannot find their duration now, TIPS.L) for the same period was of "only" about 0.76%.

Can anyone explain the sharp increase in price of the inflation linked (FRC4, EURO) ones ? They should be influenced by an increase in inflation (significant considering the high rise?) or something as people really see as imminent one – but at the same time there is no rise in the rate for the new long term securities (of the same type, non inflation linked) – as I know, hence they not justify the increase from this perspective ?

Long term securities of the same type (government, VETY) did not had an increase higher than 0.6% during same time – that should suggest the difference is not linked to perspective even lower interest rates but to perspective inflation factors. If that is the case why newer bonds emitted now do not reflect that an actual inflation is "expected" ?

One Answer

Briefly:

  • Linkers hedge against their underlying currencies' exposure to inflation risk
  • Linker price increase may indicate buying pressure
  • Buying pressure may indicate buyers to expect an increase of the risk the product hedges against
  • As the product hedges EUR inflation risk, this may indicate eroding trust in EUR stability

Can anyone explain the sharp increase in the price of the inflation-linked (FRC4, EURO) ones?

People's trust in EUR stability erodes.

Correct answer by sudonym on April 13, 2021

Add your own answers!

Ask a Question

Get help from others!

© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP