What are inflation linked bonds?
Inflation linked bonds (ILBs) are simply bonds that have returns or cashflows linked to inflation. They are securities whose return includes a component that is determined by the future level of a pre-determined index, for example the Consumer Price Index (CPI) or inflation.
For example, if inflation is rising, then the capital value of the ILB will rise directly in line with the headline CPI. So, as the CPI rises and falls, so too will the capital value of the bonds.
There are two main types of ILBs issued in Australia, capital indexed bonds (CIB) and indexed annuity bonds (IAB).
Who are ILBs suitable for?
As the names suggests, ILBs are particularly well suited to investors concerned with the effect inflation will have on their investment portfolio. ILBs are the only investment that offers a true, direct protection against rises in inflation because the returns are linked to the CPI.