Canadian Investment Review

Time for Inflation-Linked Corporates?

Written by Caroline Cakebread on Tuesday, June 26th, 2012 at 4:02 pm

balloonsA little over a decade ago, pension funds could rely on allocations to government bonds to help fund their liabilities and manage risk. However, the fallout from the 2008 Financial Crisis combined with punishingly low yields on government bonds have fundamentally changed the role that sovereign debt plays in a pension portfolio. These same factors have also pushed more and more pension funds to explore new areas of fixed income, including greater allocations to corporate debt.

As corporate debt becomes more important for pension funds and other institutional investors with inflation-sensitive liabilities, the EDHEC-Risk Institute has raised an interesting question: what if corporate market debt programs were designed to look more like the sovereign debt market? It’s the subject of a new study released today entitled “Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks.” In it, respondents suggest that the issuance of inflation-linked bonds may benefit both issuers and investors.

For investors, inflation-linked corporate debt could be an ideal instrument for hedging their liabilities at a time when sovereign debt is no longer considered the default asset for pension funds’ asset-liability management.

For corporations, issuing inflation-linked debt would ultimately limit the firm’s risk and increase the value of its shares.

One main conclusion of the study: for many firms, current debt-management practices can be improved through the issuance of inflation-linked debt. Read the full study.

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