5 March 2026

Recently trending

Making sense of record high markets as the world catches fire 3 ways to fix Australia’s affordability crisis Is there a better way to reform the CGT discount?How cutting the CGT discount could help rebalance housing market Welcome to Firstlinks Edition 648 with weekend update

Reader: "The BEST in the game because of diversity and not aligned to financial products. Stands above all the noise."

Scott Pape, author of The Barefoot Investor: "I'm an avid reader of Cuffelinks. Thanks for the wonderful resource you have here, it really is first class."

Reader: "It's excellent so please don't pollute the content with boring mainstream financial 'waffle' and adverts for stuff we don't want!"

Andrew Buchan, Partner, HLB Mann Judd: "I have told you a thousand times it's the best newsletter."

Jonathan Hoyle, CEO, Stanford Brown: "A fabulous publication. The only must-read weekly publication for the Australian wealth management industry."

Professor Robert Deutsch: "This has got to be the best set of articles on economic and financial matters. Always something worthwhile reading in Firstlinks. Thankyou"

Ian Silk, CEO, AustralianSuper: "It has become part of my required reading: quality thinking, and (mercifully) to the point."

Don Stammer, leading Australian economist: "Congratulations to all associated. It deserves the good following it has."

Steve: "The best that comes into our world each week. This is the only one that is never, ever canned before fully being reviewed by yours truly."

Ian Kelly, CFP, BTACS Financial Services: "Probably the best source of commentary and information I have seen over the past 20 years."

Reader: "Carry on as you are - well done. The average investor/SMSF trustee needs all the help they can get."

Eleanor Dartnall, AFA Adviser of the Year, 2014: "Our clients love your newsletter. Your articles are avidly read by advisers and they learn a great deal."

Noel Whittaker, author and financial adviser: "A fabulous weekly newsletter that is packed full of independent financial advice."

David Goldschmidt, Chartered Accountant: "I find this a really excellent newsletter. The best I get. Keep up the good work!"

Reader: "An island of professionalism in an ocean of shallow self-interest. Well done!"

Reader: "I can quickly sort the items that I am interested in, then research them more fully. It is also a regular reminder that I need to do this."

Reader: "Is one of very few places an investor can go and not have product rammed down their throat. Love your work!"

Reader: "Congratulations on a great focussed news source. Australia has a dearth of good quality unbiased financial and wealth management news."

Reader: "Love it, just keep doing what you are doing. It is the right length too, any longer and it might become a bit overwhelming."

Reader: "Great resource. Cuffelinks is STILL the one and only weekly newsletter I regularly read."

Reader: " Finding a truly independent and interesting read has been magical for me. Please keep it up and don't change!"

Reader: "Best innovation I have seen whilst an investor for 25 years. The writers are brilliant. A great publication which I look forward to."

John Pearce, Chief Investment Officer, Unisuper: "Out of the (many many) investmentrelated emails I get, Cuffelinks is one that I always open."

Reader: "I subscribe to two newsletters. This is my first read of the week. Thank you. Excellent and please keep up the good work!"

Reader: "Keep it up - the independence is refreshing and is demonstrated by the variety of well credentialed commentators."

Rob Henshaw: "When I open my computer each day it's the first link I click - a really great read."

John Egan, Egan Associates: "My heartiest congratulations. Your panel of contributors is very impressive and keep your readers fully informed."

Home / Caveat Emptor

Inflation linked bonds

Caveat Emptor
4 December 2013
2

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%.

bonds, inflation, inflation linked bonds, investment returns

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!

Most viewed in recent weeks

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

James Gruber
28 January 2026

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

James Gruber
4 February 2026

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.

Matthew Maltman, Matt Nolan
11 February 2026

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

Jago Dodson, Liam Davies
18 February 2026

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

5 February 2026

It’s economic reality, not fear-based momentum, driving gold higher

Most commentary on gold's recent record highs focus on it being the product of fear or speculative momentum. That's ignoring the deeper structural drivers at play.

John Reade
28 January 2026

Latest Updates

Superannuation

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Aaron Minney
4 March 2026
6

Investment strategies

Corporate earnings show resilience against volatility but risks remain

Evidence for a strong reporting season had been piling up for months and validated an upgrade cycle already underway. However, risks remain from policy uncertainty.

Jun Bei Liu
4 March 2026

Superannuation

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings.

Tobias Barkley
4 March 2026
7

SMSF strategies

Sixteen steps in a typical SMSF borrowing

Getting a mortgage is never an easy process but when an investment property is purchased in a SMSF the complexity increases significantly. Read this before taking the plunge.

Peter Townsend
4 March 2026

Planning

Do HNWI get better advice?

Good advisers lead to more diversification, lower turnover and less home bias. However, studies show the average adviser may not be adding much value to clients.

Joachim Klement
4 March 2026
2

Strategy

AFL Final Ten with wildcard edit 'unlevels' the field

When the new AFL season kicks off a wild-card will be added to the finals. Is this new formula fair and how does it impact the odds of winning the premiership.

Tony Dillon
4 March 2026
6

Planning

Love them or hate them, it's worth understanding annuities

Investors have historically balked at exchanging a lump sum for a future steam of income. Breaking down the financial and emotional considerations of purchasing an annuity.

Don Ezra
4 March 2026
5

Alliances

Site Map

About Firstlinks

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.

Inflation linked bonds

Leave a Comment: