Peanuts;336271 wrote:I don't want to hijack Cm258's thread so...
Ben Ski and a few others regularly mention inflation-linked bonds. I've only just got my head around nominal bonds, and bond funds so IL is a new subject for me. A little background - in my SIPP I am 60% global equities and 40% UK gilts (VGVA) and Global Agg (VAGS). Would I be wise to switch some of my current bond funds for some U.K. Inflation-Linked Gilt Index Fund (VUKIFLA)? If so what benefit do IL bonds give, and do they share the same capital appreciation bonus if interest rates come down? I'm currently only on the Vanguard platform hence the only option to me is the above fund.
Thanks
What is the role of bonds in your portfolio?
What is the role of Inflation Linked bonds within that requirement?
Since 1st Jan 82 the average Annual CPI inflation (Published monthly) in the UK has been 2.8%
https://www.rateinflatio...torical-inflation-rate/
The estimated annual inflation CPI inflation is a slight rise in Q2 25 (~2.8%) from the current ~2.5% then declining to ~2.0% by the end of 2029.
https://obr.uk/forecasts...forecast/inflation/#CPI
I think it is fair that inflation rates are hard to predict accurately and the average of ~40y history contains some nasty spikes that were not predicted until they were almost upon us.
The experts are not very good at predictions and we would probably only do better by luck.
My take is individual inflation linked bonds are good at protecting your purchasing power for a given future date. So a reasonable security to build a ladder that have annuity like properties. They are a dubious asset for investing to make a profit. Over 10+Y periods diversified equity portfolios will almost certainly a better inflation hedge. A passive ETF/Fund that aims for a fixed duration can erode your purchasing power and I am not sure what value they have. Given most inflation products return very little above inflation an active fund will tend to return less than inflation after costs. Gilts, on average, current return 1-2% over inflation. So without any unexpected inflation spikes Gilts will be better performing. On my platform Linkers cost more to purchase than Gilts and probably have wider spreads. For both Linkers and Gilts the capital appreciation is tax free so low coupon varieties are good to hold outside a tax wrapper. (Clearly better inside, if you have the capacity.)
Of course the next 40Y may be very different to the last ……
Turkey has had some unorthodox economic policies instigated by Erdogan that has resulted in ~40% inflation. In this case Linkers would be A LOT more attractive. Let’s see how Trump/Reeves perform…..In theory the central banks have inflation targets and should raise interest rates if inflation starts to rise. There is an article in the FT about Trump wanting to replace Jerome Powell with his own man because he does not like the mandate. See the following excellent series of podcasts for more insight….
https://www.ft.com/unhedged-podcast
FWIW. I have 4 tranches of NS&I Inflation Bonds that run alongside my Gilt ladder and MM fund. I may build and annuity like Linker ladder at some point to cover basic expenditure to complement my drawdown strategy. Apart from that I have no plans to buy any more Linkers/TIPS.
Good Luck.