MAJOR INFLATION-LINKED BOND MARKETS
In the post-war era, the relatively few examples of sovereign issuance of inflation-linked bonds can be grouped in three broad categories. The first includes countries experiencing high and volatile inflation, which made inflation-linked instruments their best – if not the only – available option to raise long-term capital in the bond market. Chile (in 1956), Brazil (in 1964), Colombia (in 1967) and Argentina (in 1973), for instance, all issued inflation-linked bonds in similar circumstances. France and Finland had done the same in the immediate post-war era, the latter continuing to do so until 1968, when indexing of financial instruments became prohibited by law. Italy issued one inflation-linked bond in 1983 with a ten-year maturity, at a time when it was unable to issue nominal bonds with long maturities. Highly indexed economies, such as Israel or to a lesser extent Iceland, also have a long history of issuing indexed debt.
The situation of the second group of countries, which started issuing indexed debt in the 1980s and early 1990s, is fundamentally different in that they used inflation-linked bonds not out of necessity but as the result of a deliberate policy choice. The United Kingdom (in 1981), Australia (in 1985), Sweden (in 1994) and New Zealand (in 1995) all started issuing inflationlinked bonds in the context of more or less credible disinflationary policies. The issuance of inflation-linked debt served both to add credibility to the government’s commitment to these policies and to reduce its cost of borrowing, by capitalising on excessive inflation expectations in the market.
Partly overlapping with the previous category, a third group of industrialised countries developed an inflation-linked bond programme in more recent years, in the context of fairly low and stable inflation and inflation expectations. By contrast with the arguments put forward by the previous group, more weight was often attached here to the social welfare benefits of indexed debt. Issuance of inflationlinked bonds was presented in particular as a further step towards completing financial markets by providing an effective hedge against inflation in the long-term (especially in the context of pension management). Most notable among this group of countries to start raising funds by issuing inflation-linked bonds were Canada (in 1991), the United States (in 1997) and more recently France (in 1998), Greece and Italy (in 2003), Japan (in 2004) and Germany (in 2006). Many of the countries mentioned in the previous category continued (United Kingdom) or revived (Australia) their issuance programmes using similar arguments.