Inflation-linked bond

An inflation-linked bond adjusts its payments for inflation. The principal is uprated in line with a consumer price index, with a short lag, and the coupon is paid as a fixed percentage of that adjusted principal, so interest payments rise with prices too. Governments are the main issuers: examples are index-linked gilts in the United Kingdom, Treasury Inflation-Protected Securities (TIPS) in the United States, and bonds from several euro-area governments linked to national or euro-area price indices. Some, such as TIPS, guarantee to repay at least the original face value at maturity even after deflation; others do not.

Their yields are quoted in real terms, after inflation. The gap between a conventional bond's yield and an inflation-linked bond's yield of the same maturity, known as the breakeven inflation rate, shows the inflation the market is pricing in. If actual inflation turns out higher than that, the linker does better; if lower, the conventional bond wins. The inflation protection is locked in only if you hold to maturity. Before then, prices still fall when real yields rise, and long-dated linkers can fall a great deal, as holders discovered when real yields jumped in 2022.