Bond Investments that Beat Inflation

Rising inflation means bad news for bonds, but there are still income opportunities in fixed interest - if you know where to look

Cherry Reynard 29 December, 2016 | 1:03PM

The degree may vary, but most economists agree that inflationary pressures are re-emerging. A combination of factors, including a rising oil price, Trump’s reflationary fiscal policies and, in the UK, Brexit, are contributing to higher inflation expectations. Inflation has is an historic foe for bond markets and they have already begun to wobble.

The link between higher inflation and poor bond returns is well-established. As inflation rises, the fixed income paid by bonds has less value and therefore bonds sell off. However, bond markets are not entirely fallow ground for those looking to protect portfolios against inflation.

How to Beat Inflation

The most obvious choice is to select index-linked government bonds over their fixed income alternatives. Peter Lowman, chief investment officer at Investment Quorum says the shift from a low inflation, low interest rate environment to a rising inflation, rising interest rate could prompt a rotational switch from fixed interest securities into global equities and cash, but with some exposure to some index-linked paper.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Henderson Diversified Income Ord90.55 GBX4.08
NB Global Monthly Income Fund Ltd GBP79.80 GBX1.01

About Author

Cherry Reynard

Cherry Reynard  is a financial journalist writing for Morningstar.co.uk.

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