Inflation-linked bonds, which ostensibly offer protection against inflation, have struggled alongside the broader bond market due to rising prices driven by the Iran war. This situation has led many investors to favor soaring stock markets. Since the conflict commenced in late February, BlackRock’s London-listed global inflation-linked government bond exchange-traded fund (ETF) has declined approximately 2 percent, according to LSEG data. This trend mirrors the performance of the firm’s global government bond ETF, while the S&P 500 index has surged 7 percent, reaching record highs this week.
Jonathan Hill, head of U.S. inflation strategy at Barclays, noted, “U.S. inflation-protected bonds and linkers generally provide relative inflation protection versus nominal bonds. If you think that it’s a pure inflation hedge, then you’re going to be disappointed.” The premise behind inflation-linked bonds is that they help safeguard investors’ purchasing power over the long term, particularly if held to maturity, as the payments are indexed to inflation rates.
However, in the short term, when markets anticipate that central banks will increase interest rates or not proceed with anticipated cuts, bond prices can depreciate. This is because fixed payments become less appealing compared to the potential higher returns from new debt issuances. Inflation-linked bonds are not exempt from this phenomenon.
Large institutional investors, like pension funds, that hold these bonds to maturity may reap the anticipated inflation protection. Nevertheless, their market prices can decline as real yields—interest rates adjusted for expected inflation—rise. Hill elaborated, “If inflation goes up, but real yields go up as well, then the duration side of the bond sells off the same as all bonds.” Duration indicates a bond’s sensitivity to changes in interest rates, with longer-term bonds being affected more significantly.
Dorian Carrell, head of multi-asset income at Schroders, remarked, “Generally fixed income is unattractive. You’re better off looking for inflation-adjusted revenue streams, probably on the equity side,” suggesting sectors such as materials, energy, and utilities as potential investment opportunities.
Notably, some investors remain interested in inflation-linked bonds. BlackRock reported $2.6 billion in inflows into these ETFs in March, marking the highest monthly influx since the onset of Russia’s invasion of Ukraine in 2022, with an additional $2.2 billion in April. An appealing factor is that these assets have historically outperformed conventional bonds over longer periods.
Hill from Barclays observed that shorter-dated U.S. inflation-linked bonds, which are less vulnerable to yield fluctuations that could offset the inflation benefits, have yielded significantly better returns than the broader Treasury market over the past five years. This trend may persist if inflationary pressures remain strong, a possibility bolstered by U.S. tax cuts and substantial investments in artificial intelligence (AI). He indicated that, historically, short-dated linkers tend to outperform regular bonds when unforeseen inflation occurs.
Lloyd Harris, head of fixed income at Premier Miton Investors, cautioned that while short-dated linkers may be advantageous, long-dated ones carry excessive duration risk in an inflation-driven bond market sell-off.
It is essential to note that inflation-linked bonds often have longer maturities. For instance, the average maturity of Britain’s index-linked gilts was 18 years in 2024, compared to 13 years for standard bonds. Marion Le Morhedec, global fixed income chief investment officer at Fidelity International, has sought protection through inflation swaps or breakevens—strategies that provide direct exposure to inflation expectations. “The question is really how long this inflation uncertainty will remain,” she stated, emphasizing the importance of maintaining short-dated inflation protections in their portfolios.
As of March, U.S. inflation rose to 3.3 percent, influenced by increasing energy prices due to the Iran conflict, up from 2.4 percent in February. British inflation also climbed to 3.3 percent in March, while the euro zone’s rate increased to 3 percent in April.
Amid these developments, investors have naturally turned their attention to rising markets. PIMCO, the world’s largest bond investor, noted last week that commodities have behaved as expected, experiencing substantial gains. Meanwhile, BlackRock’s Investment Institute holds a “neutral” stance on inflation-linked bonds but is “overweight” on U.S. stocks, concluding that “contained damage to global growth from the Mideast conflict and strong earnings expectations—particularly in tech—keep us risk-on.”
Published on May 8, 2026.
