Ardea reports

The last couple of months have been all about the credibility of the US and European currencies being undermined by various unfortunate events. Investors have been struggling with a very odd challenge, namely finding alternative stores of value ...

It is no surprise that inflation-linked bonds have outperformed recently. Inflation has become a recurrent theme in current global economic discourse, particularly in the wake of 'QE2' in the US and rising food and energy prices.

Why are real yields negative in the US, and do they offer good value as an investment at current levels?

The Consumer Price Index for the second quarter of 2010 came in at 0.6% growth over the quarter.

Australian ILBs recorded solid gains during the quarter, outperforming nominal bonds, bank bills and the global ILB market.

The Australian Office of Financial Management recently provided further detail on intended Commonwealth issuance over the remainder of the Financial Year.

The AOFM issued a new $4bn 2025 inflation linked bond, the first since 2003.

The AOFM announcement confirms the issuance of a new capital indexed bond with a maturity date of 20 September 2025.

The announcement that the AOFM would reopen the ILB market with the re-issuance of a new benchmark line, represents a significant increase in the supply of sovereign ILBs.

Inflation linked bonds represent a unique combination of inflation protection and outperformance during downturns.

While the current state of the global economy provides the environment for lower inflation, recent fiscal and monetary policy activities will lead to higher inflation in the future.

A heightened focus on ILBs and an increased number of participants in the market are positive for ILB performance over the medium term.