REITs and inflation-linked bonds for the age of inflation REITs and inflation-linked bonds for the age of inflation REITs and inflation-linked bonds for the age of inflation

REITs and inflation-linked bonds for the age of inflation

Equities 8 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  In today's equity update we take a look at REITs and inflation-linked bonds providing the five largest UCITS ETFs in each category as investors should prepare for a longer period of inflation and thus must think about how to shield the portfolio against inflation. REITs have historically performed well during high inflation, but the question is whether high real estate valuations will make it more difficult this time. Inflation-linked bonds did not exist during any meaningful period of inflation so this period will be the first real test.

Is the “age of residential inflation” coming?

A new economics paper Comparing Past and Present Inflation by Marijn A. Bolhuis et. al. deals with the changes to the US CPI basket over time in order to make the current inflation more comparable to past inflation. The findings are that the current inflation regime is much closer to previous peaks. The main conclusion is that to return to 2% core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker. Also, today’s CPI basket consists of more stickier components compared to the 1970s basket which consisted of many more transitory goods components and thus inflation may be more difficult to get down; especially rents are a bigger part of the CPI basket and Larry Summers calls the new inflation period the “age of residential inflation”. In any case, inflation is here and as we have argued many times over the past 18 months the limits we have hit in the physical world will continue to underpin inflationary pressures.

The chart below shows the official CPI Index and an OER (ownership equivalent rent) corrected CPI Index.

Source: Bolhuis et. al.

REITs and inflation-linked bonds are worth considering during inflation

Given that inflation will stay with financial markets for longer investors must address it in their portfolios. We argued for over a year that commodities are a must asset as a lot of the first wave inflation is coming from the supply side of the economy and in particularly commodities. We are also of the view that the world will be in a commodity super cycle during this decade driven by the green transformation, underinvestment in commodities over the past decade, urbanization, and the fallout from the war in Ukraine. Other themes that have done well during the past year’s inflationary regime are renewable energy, defence, logistics, India, and cyber security. All themes are still themes we like with India probably being the biggest short-term risk due to being an emerging market country with high equity valuations.

Outside equity themes many market participants talk about REITs (real estate investment trust) and inflation-linked bonds. REITs existed during the 1970s inflation period and were a catastrophe, but the real estate market and REITs have evolved a lot since the 1970s so it might be a stretch to expect something similar. Real estate is attractive during inflation because rents are linked to CPI indices and some rent agreements come with shorter duration which means they can catch up to inflation faster. Real estate valuations have also historically held up well during inflation and then there are no storage costs (but there are maintenance costs) which is used as argument for choosing real estate over gold during inflation; but even choose between the two, why not hold both assets? Bernstein data also show that US REITs have done well, even better than bonds and equities, in inflationary environments with inflation rates above 5% y/y. The key risks to REITs from rising interest rates, which we do expect given higher inflation, are summed up well by S&P Global:

Undoubtedly, rising interest rates pose challenges for REITs. All else being equal, higher interest rates tend to decrease the value of properties and increase REIT borrowing costs. In addition, higher interest rates make the relatively high dividend yields generated by REITs less attractive when compared with lower-risk, fixed income securities, which reduces their appeal to income-seeking investors.

Inflation-linked bonds are another instrument available to investors that want some inflation protection components in their portfolio. The US issued their first TIPS (Treasury Inflation-Protected Securities) in 1997 which are designed so that their interest payments rise with higher inflation as the principal of the bonds are adjusted for the CPI Index. Morningstar has a good description of inflation-linked bonds and one thing investors must be aware of is that inflation-linked bonds are often issued with longer maturity than the majority of nominal bonds which means that the interest rate risk is higher in the short-term, but longer term inflation-linked bonds will offer a better return after inflation than nominal bonds if inflation is trending higher.

The table below shows the five largest UCITS ETFs within each category.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.