Trillion-Dollar Linker Deluge

Around the world, governments are issuing record volumes of bonds linked to consumer prices, betting that inflation will stay low.

Governments from the U.S. to Italy are boosting sales of inflation-linked bonds, wagering consumer prices will remain in check even after central banks inundated the world with cheap cash.

Thirty-five nations issued $1 trillion of the securities in the past three years, the most on record, according to data compiled by Bloomberg. The amount of government debt in developed countries tied to consumer prices is now equal to 7.9 percent of the fixed-rate sovereign bond market, the most since 2008, index data compiled by Bank of America Merrill Lynch show.

“As long as there is some inflation risk premium priced in, meaning inflation expectations are above what the market prices is likely to occur, then there’s an argument to issue such bonds,” Anton Heese, head of European inflation research at Morgan Stanley, said in a telephone interview from London.

The gap between five- and 10-year index-linked bond yields in the global market widened to 0.69 percentage point last month, more than at any time since 2011, according to index data compiled by Bank of America. The so-called steeper real yield curve is a sign of increasing risk that living costs globally will rise at a faster pace as the decade progresses.

The opposite is happening in emerging markets, where inflation is accelerating. Price pressures are being compounded by investors pulling money from developing nations as the Fed scales back its stimulus, weakening currencies from the Turkish lira to the South African rand.

Emerging-market currencies have swooned, with the lira plunging to a record and the rand tumbling to the lowest since 2008. In Latin America, an index tracking the region’s foreign-exchange rates slumped to the weakest in a decade this month. Currency depreciation adds to price pressure by making foreign goods more expensive to buy.

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