Regional governments mull inflation-linked bonds issue
By Ng Baoying, Channel NewsAsia | Posted: 02 July 2008 2112 hrs

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SINGAPORE : Governments across the region have been hard-pressed to rein in runaway prices amid rising inflation, and a growing number are expected to raise interest rates.

But to further strengthen investor confidence, some are considering issuing inflation-linked bonds. The bonds pay out a sum that factors in the inflation rate, and hence, such an issue would be read as a sign of the government's commitment to tame rising prices.

Currently, Korea and Japan are the only two countries that have rolled out such bonds, but analysts said more could be coming up.

Gregor Carle, Investment Director, Fixed Income, Fidelity International, said: "It conveys a positive view to the market, about how seriously (governments) are fighting inflation - something which investors like to see under control.

"In the past, countries with high inflation have issued inflation-linked bonds to send a clear signal to the market that they want to tame inflation.

"I'm sure there are many (countries) out there that have similarly high levels of inflation, and the governments who are scratching their heads and trying to work out what they are going to be doing in the future. There are very smart people in Singapore, so I'm sure they're looking at that too."

Fidelity said it has been approached by some governments to discuss the issue of such a bond. Already in the pipeline is a global inflation-linked bond fund which will be launched in Singapore sometime next week.

Given that the fund tracks global inflation rates, investors in countries where inflation rates are higher may find the fund less attractive, while other asset classes like high yield bonds or equities may prove more interesting.

Despite this drawback, Fidelity said the new product is trying to address a global phenomenon, rather than serve as a panacea for investors.

"The idea is that it gives (investors) the possibility of some protection against inflation. While you may lose on not getting an exact match on how it hits your personal wallet at home, you gain from having that diversity and depth of market from having a global product," explained Carle.

Fidelity said it is not looking at region specific inflation-bond fund yet, as there seems to be a lack of critical mass of products in countries that are experiencing strong inflation. - CNA /ls