Pros and Cons of Inflation-Linked Bonds

Inflation can have a dampening effect on fixed-income investments, reducing their purchasing power and cutting deeply into the real value of returns over time. This happens even if the inflation rate is relatively low. For example, if you have a portfolio that returns 9%, but the inflation rate is 3%, the true value of your returns has been cut by about a third. Inflation-linked bonds (ILBs), however, can help to offset (or hedge) that risk because they increase in value during inflationary periods.

The United States, Canada, Japan and a wide range of European and Asian countries all issue inflation-linked bonds. Because they help to hedge against an uncertain future, ILBs have become a popular long-range planning investment vehicle for individuals and institutions alike. 

How Inflation-Linked Bonds Work

The Risk in Inflation-Linked Bonds

The History of Inflation-Linked Bonds

The Bottom Line

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