It turns out that the Argentinian President may well have been fiddling the nation’s inflation numbers. As a result it’s estimated that holders of Argentinian inflation-linked bonds have lost $250 million in interest payments, and the bond prices have fallen by 24% this year. Merrill Lynch reckons that inflation is actually rising at 17% per year, twice the published rate from the bonds price.
The global inflation-linked market has grown exponentially in recent years – the UK was one of the pioneers, back in the 1980s, when the authorities thought that developing the market would not only help pension funds to more accurately match their future liabilities, but also would instil discipline on the government to keep inflation low and thus keep the bond interest bill under control.
Nowadays we have significant issuance in the US, Germany, France and Italy, and a newer market in Japan. And emerging market economies have followed suit – mainly in order to give comfort to bond investors who have been badly burnt by inflation in the past.
Not much comfort in this case it seems. Happily in the UK we can wholeheartedly trust the government and the integrity of the ONS’s inflation statistics. More comforting even than that though is the fact that the Bank of England is mandated to keep an independent eye on any changes to the inflation data that might be detrimental to bond holders. Any monkey business and we get our money back.