Few these days trust governments to protect the value of their currency and keep inflation limited.
You may have had a sense of this, but here’s the data point that backs up the claim:
The market for inflation-protected debt is expected to hit $2 trillion this year according to Risk.net, and about $200 billion of inflation-linked bonds will be issued this year alone by the U.S. and Europe.
Such growth shows how bond investors are increasingly telling governments to take a hike when it comes to lending money no-inflation-strings attached.
Issuing inflation-link bonds without any market prodding isn’t in a government’s best interest unless it plans on cutting deficits, reducing debt, and protecting the value of its currency. Which means this trend is most likely driven by market demand.
“Exchange-traded fund providers and institutional investors have increased their demand for transparency in the inflation markets,” says Waqas Samad, managing director, head of index portfolio and risk solutions at Barclays Capital in London.
Watch this space.
The more fixed income investors ask for inflation adjustment as a matter of standard practice, the more market confidence in government financial discipline will have collapsed.