Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780. The market has grown dramatically since the British government began issuing inflation-linked Gilts in 1981. As of 2008, government-issued inflation-linked bonds comprise over $1.5 trillion of the international debt market. The inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market.
Inflation-indexed bonds pay a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate. The relationship between coupon payments, breakeven inflation and real interest rates is given by the Fisher equation. A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.
For some bonds, such as the Series I Savings Bonds (U.S.), the interest rate is adjusted according to inflation.
For other bonds, such as in the case of TIPS, the underlying principal of the bond changes, which results in a higher interest payment when multiplied by the same rate. For example, if the annual coupon of the bond were 5% and the underlying principal of the bond were 100 units, the annual payment would be 5 units. If the inflation index increased by 10%, the principal of the bond would increase to 110 units. The coupon rate would remain at 5%, resulting in an interest payment of 110 x 5% = 5.5 units.
The real yield of any bond is the annualized growth rate, less the rate of inflation over the same period. This calculation is often difficult in principle in the case of a nominal bond, because the yields of such a bond are specified for future periods in nominal terms, while the inflation over the period is an unknown rate at the time of the calculation. However, in the case of inflation-indexed bonds such as TIPS, the bond yield is specified as a rate in excess of inflation, so the real yield can be easily calculated using a standard bond calculation formula.
The most liquid instruments are Treasury Inflation-Protected Securities (TIPS), a type of US Treasury security, with about $500 billion in issuance. The other important inflation-linked markets are the UK Index-linked Gilts with over $300 billion outstanding and the French OATi/OAT€i market with about $200 billion outstanding. Germany, Canada, Greece, Australia, Italy, Japan, Sweden and Iceland also issue inflation-indexed bonds, as well as a number of Emerging Markets, most prominently Brazil. 
|United States||Treasury Inflation-Protected Securities (TIPS)||US Treasury||US Consumer Price Index|
|United States||Series I Inflation-Indexed Savings Bonds (I-Bonds - domestic retail bonds)||US Treasury||US Consumer Price Index|
|United Kingdom||Index-linked Gilt||UK Debt Management Office||Retail Price Index (RPI)|
|United Kingdom||Index-linked Savings Certificates (domestic retail bonds)||National Savings and Investments||Retail Price Index (RPI)|
|France||OATi and OAT€i||Agence France Trésor||France CPI ex-tobacco (OATi), EU HICP ex-tobacco (OAT€i)|
|Canada||Real Return Bond (RRB)||Bank of Canada||Canada All-Items CPI|
|Australia||Capital Indexed Bonds (CAIN series)||Department of the Treasury (Australia)||Weighted Average of Eight Capital Cities: All-Groups Index|
|Germany||Bund index. and BO index.||Bundesrepublik Deutschland Finanzagentur||EU HICP ex Tobacco|
|Greece||EU HICP ex Tobacco|
|Hong Kong||iBond (domestic retail bonds)||Hong Kong Government||Composite Consumer Price Index|
|Italy||BTP€i||Department of the Treasury||EU HICP ex Tobacco|
|Italy||BTP Italia (domestic retail bonds)||Department of the Treasury||Italy CPI ex tobacco|
|Japan||JGBi||Ministry of Finance (Japan)||Japan CPI (nationwide, ex-fresh-food)|
|Sweden||Index-linked treasury bonds||Swedish National Debt Office||Swedish CPI|
Inflation-indexed bond indices include the family of Barclays Inflation Linked Bond Indices, such as the Barclays Inflation Linked Euro Government Bond Indices, and the Lehman Brothers U.S. Treasury: U.S. TIPS index.
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