Corporate bonds - Inflation-linked bonds enter testing times

Inflation-linked bonds (ILBs) have been favoured by governments and markets over the last decade or so. They now account for over a third of new issues in the US and around 10% in the eurozone. Unlike conventional nominal bonds, ILBs' coupons and final payout are linked to inflation and guaranteed against deflation. They are generally portrayed as offering two advantages: inflation protection and portfolio diversification. In a recent study, we examined the dynamics of conditional correlations and volatilities of ILBs in relation to nominal bonds and equities. These dynamics have radica...