Britain looks like one place where investors urgently need a hedge against inflation, yet many say trade in domestic bonds designed with that in mind is overstating the price pressure so much that they have become too expensive to consider.
Even in normal times, British linkers enjoy huge demand from local pension funds, especially the defined benefit schemes that promise to account for inflation when they pay out. That drives yields lower and raises breakevens — the implied inflation rate. One-year indexed linked gilts currently imply a 5.8% inflation rate while five-year linkers show it at 4%.Linker market
UK two-year forward inflation swaps predict a 4% inflation rate, double the BoE target and up from around 3.83% at the start of September. That’s exacerbated the demand-supply imbalance in a market where about £1.7-trillion of inflation-linked mostly pension fund liabilities chase products worth less than £500bn.
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