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The Handbook of Fixed Income Securities, Eighth Edition, 8th Edition by Steven V. Mann, Frank J. Fabozzi

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CHAPTEREIGHTEENINFLATION-LINKED BONDS

JOHN B. BRYNJOLFSSON, CFA

Managing Director and CIOArmored Wolf, LLC

Inflation is the key driver of investment performance. It determines how much each dollar of return is worth, and it dictates asset returns themselves. Consider the 17-year period from 1983 to 2000, a period marked by falling inflation. Falling raw materials prices allowed corporate margins to expand. Simultaneously, falling interest rates had a positive impact on the price-to-earnings multipliers being applied to those expanded corporate earnings. The result was doubly explosive equity returns. For different reasons, the inflation-adjusted returns of bonds and cash similarly were favorably affected by falling inflation during this period. ...

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