The inflation rate has dropped significantly from its record high in the summer, but it remains a topic. Of course, the price trend plays a role at the supermarket checkout. On the other hand, your investment strategy must be adjusted accordingly.

It is important: The return should always be above the inflation rate. Otherwise you will be gradually expropriated.

In the past years, bank advisors often recommended inflation-indexed bonds as a safe, inflation-protected investment.

The special thing: Investors receive a fixed real interest rate. The real interest rate is the nominal interest rate minus the inflation rate. The coupon, i.e. the interest of the inflation-indexed bond, is multiplied by a coefficient that reflects the inflation development. This coefficient is also referred to as the „index ratio“. If inflation rises, the index ratio will be larger – and so will the actual interest rate. In other words: With inflation-indexed bonds, the issuer, in the case of bonds the German state, takes on the inflation risk.

Inflation-indexed bonds were popular Before the Corona pandemic and before Putin’s invasion of Ukraine, inflation-indexed bonds were anything but attractive, because the bonds yielded very little in low inflation. However, when the inflation rate continued to rise last year and it was difficult to obtain inflation protection with safe investments, the papers were very popular.

The fixed real interest rate is quite expensive from the point of view of the federal government. That is why there will be no more inflation protection for government bonds in the future. According to tagesschau.de, the German Financing Agency announced last week that no further inflation-indexed government securities will be issued or outstanding securities increased from 2024. Only previously issued securities should remain tradable on the market. These are securities worth 66.25 billion euros with remaining maturities between two and a half and 22.5 years.

Why the end of this investment form came The inflation protection is apparently too expensive for the Bund. According to tagesschau.de, Finance Minister Christian Lindner spoke as early as June 2022 of „a sheer wall facing us“. He also criticized previous governments that had issued government bonds. „We used to make money with it, now we pay billions for it,“ Lindner is quoted on tagesschau.de.

In fact, Lindner had to lock the brakes so that the inflation-indexed government bonds could be repaid. According to tagesschau.de, a document from the Budget Committee of the Bundestag shows that the federal government deposited an additional 2.2 billion euros into a fund in 2022 as a result of the high inflation.

After the end of inflation-indexed government bonds, you may be looking for other investments that offer you inflation protection. You can of course now focus on other countries, such as the USA, but you must also consider the currency risk.

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