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I find very interesting that Bloomberg Barclays Euro Inflation Linked 10+ (Euro) securities increased their price in the last 6 month with about +4.4%. Looking on the equivalent USD TIPS my increase (should be also long term securities but cannot find their duration now, TIPS.L) for the same period was of "only" about 0.76%.

Can anyone explain the sharp increase in price of the inflation linked (FRC4, EURO) ones ? They should be influenced by an increase in inflation (significant considering the high rise?) or something as people really see as imminent one - but at the same time there is no rise in the rate for the new long term securities (of the same type, non inflation linked) - as I know, hence they not justify the increase from this perspective ?

Long term securities of the same type (government, VETY) did not had an increase higher than 0.6% during same time - that should suggest the difference is not linked to perspective even lower interest rates but to perspective inflation factors. If that is the case why newer bonds emitted now do not reflect that an actual inflation is "expected" ?

Ghita
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Briefly:

  • Linkers hedge against their underlying currencies' exposure to inflation risk
  • Linker price increase may indicate buying pressure
  • Buying pressure may indicate buyers to expect an increase of the risk the product hedges against
  • As the product hedges EUR inflation risk, this may indicate eroding trust in EUR stability

Can anyone explain the sharp increase in the price of the inflation-linked (FRC4, EURO) ones?

People's trust in EUR stability erodes.

sudonym
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  • But if the trust in Euro Erodes why new bonds issued do not show an increase in yield also ? At least I don't know rates increasing (for Gvt bonds of the same type) – Ghita Feb 13 '21 at 07:06
  • I am not sure if I understand your question. Note that tuff like TIPS & FRC4 are not "classic" bonds, but ETPs that have bonds as their underlying. Once the underlying bond reaches maturity, the fund manager "rolls over", i.e. uses the cash obtained from the emitter (+premium) in exchange for the mature bond to buy newly emitted bonds. – sudonym Feb 13 '21 at 07:50
  • Yes, I know how they work. But do the new underlying securities from these ETFs showing change in the direction mentioned by my comment ? – Ghita Feb 13 '21 at 13:31