Avert Future Inflation with Indexed Bonds

Evan Liberman Articles, Corporate, Government 0 Comments

Due to the global economic crisis of 2008-2009, and continued lack of economic growth, governments around the world are coming under increased pressure to solve the problem by any means possible. The solution used by many countries, especially the United States, is to pump (print) more money into their economies in order to stimulate spending. Many leading economists are concerned that this will lead to hyper-inflation in the future. How can we, the private investor, protect ourselves from coming high inflation through investing in Israel?

Two financial vehicles that can help us are government and corporate bonds that are linked to the cost-of-living index. This type of bond provide a steady stream of income while interest payments and principal increase lock-step with inflation. The link to the cost-of-living index provides peace of mind, knowing that our buying power isn't being eroded by inflation. Before each interest and principal payment is made to the bondholder, the payment is automatically adjusted to the Israel Consumer Price Index (CPI), the inflation gauge. Specifically, the government of Israel offers such a bond: the Galil Bond. The current yield to maturity on a 4-year Galil bond is 0.3% annually above inflation (effective yield is 0.3% + 3% inflation expectation = 3.3% per year), and on an 11-year Galil Bond is 1.8% above inflation (which translates to a 4.8% effective yield per year).

Another relatively safe inflation-hedge is buying indexed corporate bonds. Solid investment-grade indexed corporate bonds usually provide a better rate of return than indexed government bonds, with some more risk. Their payments are indexed exactly the same way as indexed government bonds. Here are some corporate bonds you can look into:

Suggested inflation-indexed corporate bonds

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Current Yield to Maturity, the best measure of real rate of return, and even more bond details, can be viewed using the Google-translated Bank Leumi website (the translation to English is problematic).

Ratings

There are two internationally-recognized bond rating agencies that examine Israeli companies' ability to repay their debts: Standard and Poor's and Moody's. Listed below is the meaning of each of their rankings. The S&P's rank can add a fine tuning of + or -; Moody's can add a fine tuning of 1,2 or 3 to better rank a bond within a specific category.

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More details on the companies above

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