What can the inflation-linked gilts offer

The inflation linked gilts are not new since the UK government began issuing the inflation linked gilts in 1981. There is a big change in the inflation linked gilts this year after the Brexit referendum as the inflation-linked gilts have delivered a 28.5 per cent return according to Bank of America Merrill Lynch indices. Since the Brexit referendum, the securities that hedge against the risk of the UK economy falling into a recession become very popular, as we can see that not only the inflation linked gilts become very popular, but the prices of the regular gilts and gold increase.

What is the benefit of owning the inflation-linked gilts rather than the regular gilts? If you expect there will be an inflation in the future in general and the inflation may be slightly higher than the market expectation, then it is a great opportunity to own the inflation-linked gilts. It may have more risks than the regular risks. As it is linked to the inflation rate, when there is a deflation, the return of such gilts can be much lower than the return of the regular gilts. Moreover, in most cases, if there is an increase in the inflation rate, the economy is more likely to be in a boom. When experiencing an economic boom, there are more great investment opportunities other than the inflation-linked gilts, which offer higher returns than the inflation-linked gilts.

Usually people who like buying inflation-linked gilts are very risk averse and worried even when the economy is in a good shape and they want a certain return in the future in real terms. However, currently more people are attracted to this field, because of the today's special environment. People are uncertain about the UK economic future when Britain leaves the European Union and the central banks around the world are taking very aggressive monetary policies, which creates the best environment for buying inflation-linked gilts, as the inflation rate may increase in the future due to the aggressive monetary policies and the future economy is increasingly uncertain.

To conclude, the inflation linked gilts are a very good option currently due to the very special and rare economic situation, but in general it is not necessarily as good as the regular gilts.