The Letter - Bordier & Cie

ate of 2.5% for an OATi, both issues being kept until maturity and
having a principal sum of EUR 10,000.
Cash-fl ow of the conventional bond:
• 10 coupons of EUR 400 = EUR 4000
• Redemption of the principal EUR 10,000
• Loss on the principal because of aggregate infl ation of 21.9%
= EUR 2190
• Result of the investment EUR 14,000 – EUR 2190 =
EUR 11,810.
Cash-fl ow of the index-linked issue:
• 10 indexed coupons ranging from EUR 256.25 in the fi rst year
to EUR 320 in the tenth year = EUR 2870.80
• Redemption of the principal at EUR 12,190
• Result of the investment EUR 12,190 + EUR 2870.80 =
EUR 15,060.80
Clearly, the higher the rate of infl ation the more advantageous it will
be to hold index-linked bond issues.
114
112
110
108
106
104
102
100
98
COMPARATIVE TREND OF PRICES OF AN OAT AND OATI
96
2002 2003 2004 2005 2006 2007 2008 2009
OAT FRANCE 2003 4% 25/04/13 - DEFAULT PRICE
OAT-I FRANCE 2003 2 1/2% 25/07/13 INDXLK. - DEFAULT PRICE
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114
112
110
108
106
104
102
100
98
96
Source: Thomson Datastream
8. Conclusion: it will soon be time to buy infl ation-linked
bond issues
Gold provides a long-term hedge against infl ation, but buy timing
is vitally important. Moreover the two steep rises in the gold price
are not due solely to infl ation because the fi rst was set in motion by
the hostage taking in Teheran which sparked off an oil price shock,
followed by infl ation, while the second was motivated by economic
euphoria and then by the crisis of the American banking system. In
view of the recent gold price trend we believe that an investor who
buys gold now would be taking a very bold step.
Commodities are an appropriate way of hedging against infl ation at
a time when it is accelerating. They are at one and the same time the
cause and the consequence of infl ation. However, their price trend
depends on factors which have little to do with infl ation: fl oods,
droughts, extremely high growth in some emerging crises, geopolitical
crises, inadequate relationship between supply and demand on
some markets.
Property certainly provides good protection against infl ation unless
it is acquired during a speculative bubble. However, property is an
asset which lacks liquidity and for family or other reasons it is often
hard to take the profi ts on such an asset.
The debate over equities as a vehicle to fi ght infl ation is still open.
To overcome the obstacle of narrowing PERs and rising interest rates
against a background of steep infl ation, stock picking would seem
to be vital; of course we must identify companies which manage to
pass on price rises. Equities are the best asset in periods of economic
growth with low infl ation.
Infl ation-linked bonds by their very nature provide effective protection
against infl ation and enable the investor to avoid damage
caused by infl ation which the bond market has not anticipated cor-
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