Inflation-Linked Bonds for Strategic Asset Allocation

13 Pages Posted: 7 Feb 2017

See all articles by Kurtay Ogunc

Kurtay Ogunc

Louisiana State University

Asli Ogunc

Texas A&M University (TAMU), Commerce

Date Written: December 1, 2016

Abstract

If one believes in a more sustained economic recovery in the near term than the more volatile one we have been witnessing over the past few years, and hence the inherent risk of accelerating inflation, Treasury inflation-protected securities (TIPS) could provide inflation protection to institutional investors as a diversifier and a hedging instrument. In this paper, we show that TIPS offer excellent diversification benefits to different types of investors. Given the expectations for the economy in coming years, and the diversification benefits that TIPS offer, we recommend that institutional as well as individual investors allocate approximately 20 percent of portfolios to inflation-linked bonds. There are four apparent reasons for this recommendation: (1) low and sometimes negative correlations with major asset classes, (2) expectation for higher probabilities of inflation surprises, (3) robust risk/return profiles of TIPS, and (4) an inherent need to match liabilities that increase in value as inflation rises.

Keywords: Inflation-Linked Bonds, TIPS, Diversification, Inflation Protection

JEL Classification: G10, G11

Suggested Citation

Ogunc, Kurtay and Ogunc, Asli, Inflation-Linked Bonds for Strategic Asset Allocation (December 1, 2016). Journal of Investment Consulting, Vol. 17, No. 2, p. 59-68, 2016. Available at SSRN: https://ssrn.com/abstract=2913103

Kurtay Ogunc (Contact Author)

Louisiana State University ( email )

2900 BEC
4005 Nicholson Drive Extension
Baton Rouge, LA 70803
United States
225-578-6291 (Phone)

HOME PAGE: http://https://business.lsu.edu/finance/Pages/About.aspx

Asli Ogunc

Texas A&M University (TAMU), Commerce ( email )

2600 South Neal Street
Commerce, TX 75428
United States

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