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Europe Falls For "Linkers"


Stocks are volatile, ordinary bonds are a risk because interest rates are about to rise, and inflation is once again a threat. So where should an investor seeking a safe haven put her money? Europeans are increasingly choosing an asset class that has long been popular in the U.S.: inflation-linked bonds. These are government-issued securities -- known as "linkers" in London -- whose coupon rises with inflation. The thirst for them in Europe is intense. Last year, European governments issued $52 billion worth of inflation-linked bonds, according to Dealogic, a London capital-markets research firm. That's more than double the $21 billion issued in 2002 -- and a huge jump from the $9 billion in 2000. Issuance this year continues strong, with $39 billion already in the market.

The U.S. Treasury has been issuing what it calls TIPS -- Treasury Inflation Protected Securities -- since 1997, and Britain has been issuing its version since the early 1980s. But Continental governments are just getting into the game. France didn't begin its program until 1998. Italy and Greece discovered them last year, and Germany is still only thinking about issuing them. "It's the ultimate defensive asset," says Denis Gould, British head of fixed-income at AXA Investment Managers Ltd. in London. "If we do get an inflationary episode, equities certainly won't do well."

Institutional investors are getting interested. Dutch pension funds have been active, since new rules require that they adjust pension payments to the rate of inflation. Likewise, French banks have been snapping up the securities to hedge against a new government scheme requiring savings-account returns to be linked to price rises. "Demand is clearly growing," says Susanne van Dootingh of State Street Global Advisors in Brussels. It's not hard to see why. Over the past 12 months, according to Merrill Lynch & Co., European government bonds have returned 0.6%, while French inflation-linked bonds returned 3.6%.

The securities are so hot that asset managers are setting up funds specializing in them. Barclays Global Investors, Credit Suisse Asset Management, and State Street all offer funds that invest in a mix of TIPS, inflation-linked gilts, and euro inflation-linked bonds. "We've seen good inflows," says Benno Weber, European head of inflation-linked products at Credit Suisse in Zurich.

With consumer prices in the euro zone creeping up, demand will rise. "In an environment where inflation is higher, you do well in this asset class," says Emanuele Ravano, executive vice-president at PIMCO Europe Ltd. in London. "It's certainly better than cash." In other words, linkers, or TIPS, or whatever the next issuer labels them, are in Europe to stay.

By Laura Cohn in London


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