NBIM DISCUSSION NOTE 9 - 17 AUGUST 2012
The Structure of Inflation-Linked Bond Markets
We describe the market structure of global inflation-linked bonds to evaluate to what degree they constitute an investable and homogeneous asset class. In particular, we discuss the market's growth, size and composition relative to nominal bonds. We also pay attention to the design of inflation-linked securities across countries and market-specific demand and supply factors.
- Despite strong growth in issuance, inflation-linked bonds still constitute a relatively small share of the fixed-income universe. The market value of sovereign linkers outstanding is about 6 percent of the capitalisation of the Barclays Global Aggregate, a commonly used approximation for the investment-grade nominal bond univers.
- Use of inflation-linked bonds among the largest bond issuers is somewhat uneven. Whereas the market value of linkers exceeds that of nominal Treasury bonds in the relevant global government bond indices for Brazil , there are many countries among the world’s largest economies that do not issue inflation-linked debt at all or use it very little (for example China, India, Russia and South Korea).
- The market weights of countries in inflation-indexed bond indices deviate substantially from their GDP weights. The UK, the US, Brazil and France are issuers whose share of the global linkers market significantly exceeds their share of world GDP. Conversely, China, Japan and Germany are three major countries whose weights in the index-linked bond indices are substantially below their share of world GDP. The timing of adoption and country-specific factors such as regulation seem to be behind these observed patterns.
- The linkers market appears to be less deep and offer less breadth for issuer diversification than the nominal bond market.
There is substantial cross-country variation in important features of inflation-linked bonds, such as the reference price index, deflation protection and indexation lag. This may cause cross-sectional divergence in returns even under comparable economic scenarios.
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