Posted inFixed Income

Inflation-linked bond flows: up and down with the oil price

Net flows into inflation-linked bond funds have suffered net monthly outflows most of the time since mid-2013 [when inflation fell below 1% in most eurozone countries for the first time] according to Morningstar data. But this trend (briefly interrupted in January when the oil price had also fallen steeply) reversed abruptly in April, when inflation-linked bond funds registered record net inflows of €764m. However, after another month of steady net inflows in May, the latest fund flow figures show the ‘linkers-mania’ has subsided just as quickly as it emerged: net flows fell back into negative territory.

The private banking arm of Credit Suisse was one of those institutions which stocked up on inflation-linked bonds earlier in the year. “We have a strong underweight to government bonds, but within that underweight we went overweight inflation-linked bonds a few months ago,” says Omar Gadsby, its head of fixed income fund selection. “But we are back to a neutral weighting now as inflation expectations have edged down again.”

As energy prices are regarded as the main driver of inflation (or deflation) these days, you can also simply get exposure to the oil price as an inflation hedge. That’s what the German private bank BHF opted for, says Philipp Dirkx, who manages a multi-asset portfolio there. “We don’t have any inflation-linked bonds, but bought exposure to the oil price directly in January,” he says. “As the recovery of the oil price was so quick, we sold again, when it was at $65.”

Part of the Mark Allen Group.