6 Jun 2014
What is the best hedge against in inflation? – Rabobank
FXStreet (Guatemala) - Analysts at Rabobank suggested that based on historical data ranging from 1977 up to and including 2013, they conclude that a 3-month treasury bill is the best hedge against total inflation with an investment horizon of one year...however...
Key Quotes:
“This is not very surprising, as the existing literature already indicated that a 3-month T-bill would have a significant inflation hedging ability. Due to the short maturity of the T-bill, investors face little inflation risk”.
“When we take a closer look, we observe that the 3-month T-bill offers the best hedge against the expected inflation and the unexpected “other” inflationary pressures’.
“However, the return on a 3-month T-bill and unexpected non-core inflation are negatively correlated. Examples of non-core inflation surprises
include an oil price shock. Therefore, it does not come as a surprise that, according to our analysis, the best hedge against the unexpected non-core inflation component is oil”.
“Furthermore, we find that the returns on gold and real estate are significantly correlated with all three types of inflation. This implies that they have a reasonable inflation hedging ability. In contrast, equity and common government bond indices provide a rather poor hedge against the risk of inflation, in the short run”.
"We conclude that “the” best hedge against inflation does not exist, but merely depends on what kind of inflation the investor wants to hedge”.
“It also depends on the time horizon being considered. Our analysis focuses on short term hedges, whereas investors with a longer term investment horizon are perhaps better off via other investment products. For example, government bonds might not be an appropriate hedge against short term inflation, but for longer term purposes, as our literature study also indicates”.
Key Quotes:
“This is not very surprising, as the existing literature already indicated that a 3-month T-bill would have a significant inflation hedging ability. Due to the short maturity of the T-bill, investors face little inflation risk”.
“When we take a closer look, we observe that the 3-month T-bill offers the best hedge against the expected inflation and the unexpected “other” inflationary pressures’.
“However, the return on a 3-month T-bill and unexpected non-core inflation are negatively correlated. Examples of non-core inflation surprises
include an oil price shock. Therefore, it does not come as a surprise that, according to our analysis, the best hedge against the unexpected non-core inflation component is oil”.
“Furthermore, we find that the returns on gold and real estate are significantly correlated with all three types of inflation. This implies that they have a reasonable inflation hedging ability. In contrast, equity and common government bond indices provide a rather poor hedge against the risk of inflation, in the short run”.
"We conclude that “the” best hedge against inflation does not exist, but merely depends on what kind of inflation the investor wants to hedge”.
“It also depends on the time horizon being considered. Our analysis focuses on short term hedges, whereas investors with a longer term investment horizon are perhaps better off via other investment products. For example, government bonds might not be an appropriate hedge against short term inflation, but for longer term purposes, as our literature study also indicates”.