As inflation becomes more persistent across developed nations, there is an costly bill looming for governments.
In recent years, governments have exploited rising investor demand for bonds with returns that are linked to inflation, issuing increasing amounts of such instruments. The terms were attractive for issuers, with investors willing to accept negligible yields while inflation was low.
But now the bill to issuers is rising as inflation surges. An example of this can be seen with the UK, which pioneered this form of bonds, known as “l(fā)inkers”, in the 1980s and is struggling to restore fiscal credibility after its abortive “mini” budget in September.