How are bonds protected against inflation?

Protection against inflation

In Austria it was 1.3 percent in December. The reason for this was the recent sharp falls in fuel and heating oil prices. This can have both positive and negative effects for fund investors, not only directly (e.g. through investments in the commodities sector), but also indirectly (on the coupon payment).

Inflation Linked Bonds

For some years now there have been so-called “inflation linked bonds” on the bond markets. With this type of bond, the coupon payments and the repayment for the issue are not fixed, but vary with the rate of inflation. This means that every year investors receive a coupon increased by the inflation rate - this provides protection against inflation for the coupon payment - and at the end of the term also the redemption increased by the inflation rate. Thus, the value of the repayment is also protected against inflation.

The Raiffeisen Inflation Protection Fund

Raiffeisen Capital Management launched the Raiffeisen Inflation Protection Fund in 2004. The focus of the fund investment is on achieving a return on a level customary for government bonds while protecting against loss of value due to a rise in inflation. Compared to government fixed-interest bonds, the Raiffeisen inflation protection fund offers advantages in a scenario of rising inflation rates. In this way, this fund can protect against losses in value when inflation rises - and thus interest rates.

The Raiffeisen Inflation Protection Fund has medium-term earnings potential similar to government-issued fixed-interest bonds. The fund has a comparatively low level of volatility, as the prices of the inflation-indexed bonds contained in the fund are insensitive to changes in inflation. The fund therefore offers protection against inflation-driven changes in interest rates, whereby currency risk can largely be ruled out.

The investment focus is on French bonds that are either linked to French inflation or to euro area inflation. Inflation-indexed government bonds from other countries as well as non-government issuers with an “investment grade” rating (at least BBB) are also part of the investment universe. It is possible to add classic fixed-rate bonds.

Advantages of the Raiffeisen Inflation Protection Fund at a glance:

  • Particularly suitable for very safety-oriented bond investors, as changes in inflation do not affect the price of inflation-indexed bonds.
  • Due to their low or negative correlation with other asset classes, inflation-indexed bonds are very suitable for diversification.
  • The earnings expectations are in the order of magnitude of traditional government bonds.
  • Inflation-indexed bonds can protect against loss of value in the rising inflation scenario.
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