With all the talk about gold being a good inflation hedge, why not buy an asset class that provides actual inflation protection? Unlike gold, government backed real return bonds pay you a rate of return and have no storage costs. In fact real return bonds may be the least risky financial investment in Canada. Unlike regular bonds, real return bonds pay a semi annual interest rate which is adjusted for changes in CPI and at maturity repay the investor the principal in inflation adjusted dollars. Our favourite issue is the Canada December 1, 2021 4.25% coupon real return bond. It currently pays an inflation adjusted interest rate of 3.2% and if inflation rears its ugly head over the next couple of years, this yield will go higher.
Inflation is a rise of the level of prices for goods and services in the economy over a period of time. Most economists agree that high rates of inflation are caused by an excessive increase in the growth of the money supply. Since September of last year, the Federal Reserve has printed almost $1.8 trillion dollars of money. Although most of it has remained on the balance sheets of US “Zombie” banks, the fear is that the Federal Reserve does not contract the money supply at a fast enough rate when the economy begins to improve on its own. You may not get rich owning real return bonds, but we believe it is an excellent insurance product for your portfolio.