Inflation-Indexed Securities

Mark Deacon and Andrew Derry, with Dariush Mirfendereski in the second edition, wrote the standard practitioner reference on index-linked government bonds. Deacon and Derry worked at the Bank of England on the United Kingdom's index-linked gilt programme, which began in 1981 and was the first significant issuance by a developed sovereign, so the book carries the perspective of the issuer as well as the investor.

The content divides into three parts. The first covers why governments issue index-linked debt, including the arguments about reducing the inflation risk premium, signalling commitment to price stability, and extracting information about inflation expectations from the breakeven rate. The second covers the mechanics in detail: indexation lags, the difference between the Canadian model and the older United Kingdom eight-month lag structure, deflation floors, tax treatment, and the cash-flow arithmetic. The third covers the individual national markets, including the United Kingdom, the United States, France, Canada, Australia, Sweden and several emerging markets, with the institutional detail of each programme.

The second edition also treats inflation derivatives, which had grown substantially by 2004. The book's weakness is that it stops before the 2008 crisis, when index-linked markets became severely illiquid and breakeven rates stopped functioning as clean expectations measures, and before the large-scale central bank purchases that further distorted them. Anyone using breakevens as an inflation signal should read the book's own careful discussion of why the breakeven contains a liquidity premium and a risk premium alongside expected inflation.