Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Register

25 July 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

The diversification illusion: why 'balanced' portfolios may be exposed

Firstlinks is sponsored by:
banner

Most viewed in recent weeks

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Why Australian shares are falling behind the world

Australia’s market boasts a long record of outperformance, but recent results tell a different story. Is the ASX’s lagging performance a temporary setback or evidence that structural forces will keep global markets ahead?

Latest Updates

Superannuation

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Retirement

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Taxation

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Investment strategies

The surprising beneficiaries of the AI boom

While markets obsess over AI winners, a larger, more predictable growth engine is forming. A surge in electricity demand and infrastructure build‑out reveals the quiet, durable assets evolving beneath the AI story.

Superannuation

When losses in super become irreplaceable

The notion of 'you can afford more risk' assumes that losses can be replaced. Above a $2.1 million super balance the law says otherwise, and a worked example shows the refill takes decades, or never happens.

Retirement

Why I object to ‘hitting a number’ for retirement

Many investors dream of “hitting their number” and walking into retirement. But what if reaching that milestone is the moment they should be asking the tough questions? After all, there's a lot more to life than a high portfolio value. 

Planning

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

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.