Investors Flock to Inflation-Linked Bonds Amid Market Volatility

Investors are flooding into inflation-linked bonds as tariffs and market volatility increase inflation risks. These bonds adjust principal with inflation, protecting purchasing power. Major markets include US TIPS, UK Gilts, and French OATi. Analysts see current levels as attractive despite recent corrections.

Why Inflation-Linked Bonds Are Surging

Investors worldwide are increasingly turning to inflation-linked bonds as protective securities during volatile market conditions. These bonds, whose principal value adjusts with inflation, offer a hedge against rising prices. The trend intensified in April 2025 after US tariff announcements sparked inflation fears, with Treasury Inflation-Protected Securities (TIPS) seeing record inflows.

How Inflation Bonds Work

Inflation-indexed bonds like US TIPS and UK Index-linked Gilts adjust their principal daily based on inflation metrics. For example:

• If a bond has a $100 principal and 5% coupon rate
• After 10% inflation, principal becomes $110
• Interest payment rises to $5.50 (5% of $110)

This mechanism preserves purchasing power. Real yields (returns above inflation) provide predictable income during uncertain times.

Market Impact of Recent Tariffs

The US tariff rollout in April 2025 triggered significant market shifts:

• Short-term inflation expectations jumped 2%
• Breakeven rates (inflation expectations) surged before OPEC+ oil announcements caused temporary corrections
• Real yields declined as investors sought safety

"The tariff escalation is a regime shift, not noise," says Elida Rhenals of AXA IM. "Recession risks are now baseline, making linkers essential."

Global Linker Markets

Key inflation bond markets include:

• US TIPS: $500 billion outstanding
• UK Index-linked Gilts: $300+ billion
• French OATi/OAT€i: $200 billion
• Germany, Australia, Italy, Japan and Brazil also have active markets

Government-issued inflation bonds now exceed $3.1 trillion globally.

Investment Outlook

Despite April's volatility, analysts see opportunity:

• AXA IM considers current breakeven levels "attractive"
• Inflation expected to outpace market predictions
• Real yields offer asymmetric upside potential

"The sharp repricing presents a rare entry point," notes Rhenals. With central banks like ECB and BoE cutting rates, inflation-linked bonds may outperform nominal bonds throughout 2025.