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Inflation is spiking across the world and as prices are rising at rates we haven’t seen for decades, many investors are wondering how they can protect their portfolios against this inflation.
In this video, I look at one type of inflation hedge which works particularly well called inflation-linked bonds. I will show you how they work, what you need to know to use them effectively and which funds you can buy to give you exposure to them.
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Bought US TIPS last November and not hedged they have done OK but took the thinking US would raise rates strongly giving be the currency boost back to pounds so more complex thinking when buying these types of bonds
Why has my Vanguard VTIP ETF dropped over 3% while inflation is peaking?
Great explanation of this Asset Class. Fantastic how you got to this one, investment deciding, question.
I like the Mother-In-Law indicator. When My MIL tells me to buy something, I sell and when she tells me to sell, I buy. If she tells me there is going to be a recession my confirmation bias turns positive.
That was really good thanks
Thank you for all the videos and podcast with always great content. What do you think of the Inflation expectation ETFs, that are short in nominal and long in index linked bonds in an environment with raising interest rates? Should be a better choice than index linked bonds?
Brilliant explanation.
Ohh no!! I love your videos Ramin and consider your knowledge and viewpoints fascinating, but I’m really sad to see the introduction of video sponsors. I realise you have to make money, but I’m getting so tired of all my favourite YouTubers getting on this bandwagon. I really don’t want to let your videos go but if the ad spots become frequent it’ll start to get really annoying. Such a shame.
I invested in Royal London index linked fund late last year and the performance has been pretty underwhelming given rocketing inflation.
Really good explanation! But won't the price of these bonds also fluctuate based on demand?
Correct me if I'm wrong:
The prices can change based on supply and demand. So we start by thinking "only buy inflation linked bonds when you think inflation will be high in the next 10 years". But we also need to consider whether we think inflation will rise *higher than the average investor thinks it will*. If everyone knew for a fact that inflation in the next 10 years was going to be high, it would drive up the price of inflation linked bonds until they are no longer profitable on average. If everyone but you thought inflation was going to be low, these bonds would fall in price and be cheap, so if you snapped them up and inflation turned out high, you'd reap even more rewards
The elephant in the room is that the CPI significantly underestimates the actual rate of inflation which is probably at least 15% It is more smoke and mirrors from the government which makes investing in these bonds pointless.
Thank you Ramin for your great video! Amazing content! Just had one question. In the credit suisse 2021 Yearbook, chapter the low returns world. In the graph inflation linked bonds have negative returns the past few years. How is this even possible?
According to the video Tony is far superior to Norm, as the cumulative coupon almost catches up (you said by 2022 but the graph looks more like it's 2028) AND the principal goes up. And this is despite the fact that inflation hasn't been particularly high since 1998. In fact you show that Tony sells now for $127 while returning at least $175 (likely more) in 2028 + the coupons. Looks too good to be true. Are you sure there isn't an error somewhere?
Inflation can be reduced by subsidy.
Ministry of finance must have a virtual equity bank for adjustments.
The problem with TIPs is that they don't factor in the M2 money supply; and the chefs at the BLS over cook the headline inflation rates
While informative, the problem with these videos is that you need to protect your portfolio AHEAD of the event happening. Waiting for inflation to spike and then thinking about how to protect it has already taken away most of your best options. Commodities have already spiked, TIPS have priced in a high degree of inflation already. It's the same reason why you buy insurance when times are good, you don't wait for your house to catch fire before ringing around. Markets don't pay your to react to what is already happening, they pay you to look into the future and put your bets on ahead of time.
Where central banks pursue an inflation target policy of 2%, to buy inflation linked bonds with an expected breakeven of over 3% suggests central banks will fail in meeting their targets over the next 10 years.
It's not a bet I'm taking.
Good video. For inflation linked bonds how can the price be calculated when they are freely traded on exchanges, so subject to supply and demand? What would be the principal value at redemption of the inflation linked bond?
This was like going back to school to enjoy an excelent maestro. Thanks colega!! … and cheers from the inflation linked city of Buenos Aires 😉
Fighting 7.9% inflation (more like 15%) with a 1% Fed funds interest rate is like stopping a forest fire with a bucket of water. Folks prepare accordingly. Make investment in other not to depend on the government for funds.
Great video as always. Very nice explanations. What I think would be also good to have mentioned is that the CPI is calculated and issued by the government and what we saw in the past few weeks is, that the government calculates the CPI in their own favour, meaning that it will be most likely lower than the real CPI which hurts our savings.
Brilliant! thanks Ramin! I wonder what inflation breakeven is now in the European Union.. Gotta do my research and see whether the ECB does provide that. Have a nice weekend
Sticking with my plan to invest a lump sum (when it comes through) with IGLA as my bond fund. Keeps falling so probably a good time to buy this with a long-term outlook.
80/20 split.
Equities in a Global Index Fund.
Turn the news off, rebalance every year or so.
Sleep easy.
bondsZzzzZzzz
Many Thanks!!!
i have 50% bond funds and 50% in iBonds. No need to speculate about insurance and I make some returns no matter what.
Have to say I found this video a bit disappointing. Maybe I missed an important part of the explanation, but it seemed to focus around the performance of an IL bond from issue to maturity, whereas I'd be more interested in how to value such a bond mid-term relative to the normal flavour. But, as per other comments, I'd be buying a fund rather than an individual bond and then there's the question of which fund and what duration it might focus on. Actually, the only TIPS-specific option I can quickly see in my – admittedly limited – InvestEngine choice is UBTP, which seems to cover 1-10 years.
Why not just buy both as a hedge?
$SCHP
I got my I-bonds!
Not linked to the real rate of inflation but the inflation they report.
Thanks for your videos!
What do you consider the best hedge (or the combination of) for the times like this, with both inflation and interest rates going up? I mean, it can theoretically take years with both of them growing, if rates are not high enough to help bring down inflation, and deflationary technological thingy not working that well given global production/transportation issues, politics, conflicts etc.
Bonds can perform not that well given both rates and inflation growing.
Gold is already at somewhat high price level.
Cryptocurrencies ETFs? Something else?
Thanks.
As a keen Linux user great to see a terminal on this video.
Simple question: how UK based investor can purchase Inflation Linked Gilt Bond? Not a bond fund but actual bond. Why bond and not fund? Because inflation linked bond fund seem to have nothing to do with guaranteed fixed income despite it's description – it is volotile almost like equities or even worst if its duration is long enough.
CPI ? Now that's a joke on its own . Inflation is way higher than that.
Congratulations on the new sponsor!