Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Register

12 February 2026

Home / Caveat Emptor

Inflation linked bonds

Question from Douglas

Do long dated inflation linked bonds help the investor in a rising interest rate environment?

 

Answer from Elizabeth Moran, Director of Education and Fixed Income Research, FIIG Securities

The simple answer is yes, insofar as the Reserve Bank of Australia (RBA) uses its control of interest rates as its primary mechanism to control inflation, so interest rates should only rise if inflation is rising.

Principal and interest on inflation linked bonds are linked to inflation (as measured by the Consumer Price Index, or CPI), so the value of these assets will increase as inflation rises.

As an example, the Sydney Airport Finance capital index bond maturing in November 2020 is currently yielding a quarterly coupon of CPI plus 4.65%. If CPI averages 2.50% (which is the middle of the RBA target band) over the remaining life of the bond, this bond will yield 7.15%. However, if inflation rises at some stage over the life of the bond, and averages 3.50% over that period, that directly translates into an additional 1% annual return on the bond, increasing the yield to 8.15%.

  •   4 December 2013
  • 2
  •      
  •   
2 Comments
Esther
December 09, 2013

Hi

How do i buy into Sydney Airport Finance capital index bond? are these Bonds registered in ASX??

thanks heaps!

Warren Bird
December 09, 2013

The more complex answer is that it depends on your time frame. Inflation linked bonds, like nominal bonds, fall in price for a while when yields rise. Whatsmore, inflation-linked bonds are longer duration* than nominal bonds of the same final maturity date, so the capital price impact is going to be greater.

Of course, as I harp on about a lot, for an investor in a portfolio of bonds who correctly looks at their investment for a time horizon similar to the duration of the portfolio, this needn't put you off. The rising real yield means that maturing linkers can get reinvested into the market at those higher real yields. A fall in bond prices is never permanent - every inflation linked bond will mature at an inflation-adjusted value of 100.

But if you have a shorter term time horizon than that, then inflation linked bonds might not be suitable for capital preservation. Every investor is different and needs to talk to their planner about their needs.

It's possible for nominal yields to rise while the real yield on an indexed bond to remain unchanged. That happens when the market simply pushes up bond yields because of higher inflation expectations. That's a great outcome for holders of inflation linked bonds as they get a lift in the nominal value of their assets and their interest payments due to the higher inflation. But it's rare and usually you get some increase in the real yield as well when nominal yields rise.

In the current climate the big fear that many people have is that real yields will return to 'normal' (whatever that is these days!) In which case, most of any increase in market yields is likely to be almost fully reflected in real yields. This has already happened to some extent over the past year or so as bond yields have risen from their very, very low levels of mid-2012. Inflation linked bonds have pretty much fully reflected this increase, and the longer duration means that their total return has been well below that of nominal bonds.

I don't want any of that to put people off buying inflation-linked bonds, because they are a suitable investment for many long term portfolios. But please do understand that there's more to them than just 'inflation up, bond value and interest up', so that you aren't surprised or disappointed at the short term fluctuations.

There are a few brokers around, like Curve Securities or FIIG, who can source Sydney Airport inflation linked bonds, and other fixed interest assets for clients who have 'wholesale' amounts of money to invest.


* see my Cuffelinks article http://cuffelinks.com.au/term-deposit-investors-did-not-understand-the-risk/ for an explanation of duration risk. It's not as scary as many think!

 

Leave a Comment:

RELATED ARTICLES

Bonds have a role in managing inflation risks

Australia joins the PIIGS

5 charts every retiree must see…

Firstlinks is sponsored by:
banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

10 things I learned about dementia and care homes from close range

My mother developed dementia before eventually dying in June last year. She was in three aged care homes before finding the right one. Here is what I learned along the way.

Latest Updates

Taxation

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

Property

It's okay if house prices drop

The assumption that falling house prices are electorally fatal has shaped policy for decades. Evidence from upzoning suggests affordability can improve without reducing overall housing wealth.

Investment strategies

Investment bonds for intergenerational wealth transfer

Investment bonds can be a versatile and a tax-effective option for building wealth for longer-term investment goals. They can also be used as an estate planning tool, enabling the smooth transfer of wealth to younger generations.

Investment strategies

Why switching to income may make sense in 2026

Investors are jumpy as valuations continue to rise and income investing may provide a respite. In a challenging market for income investing AML offers their top picks.

Interviews

Retiring Schroders boss on lessons he’s learned, industry changes, and the market outlook

CEO Simon Doyle is retiring after 38 years in the finance industry. In an interview with James Gruber, he shares the three main lessons he’s learned, and where he sees opportunities and risks in markets today.

Investment strategies

How US midterm elections affect the markets

Investors may overlook the US midterms amid global events, but they could still impact markets. History shows markets react during midterm years, with increased volatility and lower returns. Will this year be any different?

Investing

Does increasing geopolitical risk lead to higher equity market returns?

Increasing geopolitical tensions has investors on edge but one study shows evidence of a war premium for equity markets.

Sponsors

Alliances

Site Map

About Firstlinks

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.