Bob's Daily Buzzword: `Linkers'

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Sept. 20 (Bloomberg) -- Bob Rice, general managing partner with Tangent Capital Partners LLC, explains "Linkers." (Source: Bloomberg)

." it's time for one investment term to improve your vocabulary.

Linkers is the word.

Tell us about it.

Inflation linked securities issued by lots and lots of governments around the world.

Their most famous in this country as tips, the largest linker market -- the most liquid market.

With a linker, especially a tip, what happens is especially the cpi goes up.

The principle of the bond goes up.

The coupon does not change.

The principal goes up.

Your total interest payments go up.

A lot of people think tips work by adjusting the coupon.

That's not right.

They don't all work the same way?


there are other linkers in the world that work the opposite way.

They adjust the interest payment according to whatever the local inflation index is showing you from time to time.

In either case, all of these bonds are linked to inflation.

I would imagine this is attractive for people interested in rapidly developing countries.

The dominant theme in the investment market is the search for yield.

When you are going overseas and you can see sovereign bonds that are paying well north of what u.s. bonds are paying and they are inflation linked, that starts to look pretty attractive.

You have to worry about the fx, the currency risk.

There's always a but.

We have a chart that explains.

This is one of these classic things.

The idea is awesome, almost inarguable as you heard.

Look at that drop.

Massive drop.

People in these linkers have been hurt.

We have another chart that shows you essentially the same thing.

The reason for that is pretty simple to understand.

Everyone realized, all of the central banks were pouring liquidity into the system.

Surely inflation will result, so we want to protect ourselves.

The prices of the securities reflected that expectation.

As we know, despite everyone's best efforts, no inflation has shown up.

It sounds like a new idea.

It's not, is it?


This text has been automatically generated. It may not be 100% accurate.


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