Decomposing Inflation-Linked Bond Returns into Rate and Inflation Effects

Summary

The document gives a first-order way to attribute a change in an inflation-linked bond’s value to movements in nominal yields and inflation expectations. It expresses the change in real yield as the change in the issuer’s nominal yield minus the change in expected inflation, then multiplies that real-yield change by the bond’s duration to estimate the price impact. This offers a practical framework for separating the two requested drivers when market data for linked and non-linked bonds are available.

The explanation treats duration as approximately constant over daily or weekly moves, so it is a local approximation rather than an exact valuation decomposition. Duration itself can change as real yields move, and the estimate does not discuss other influences such as accrued indexation, convexity, liquidity, or curve shifts. The document provides no worked example or empirical results, so the relationship should be understood as a simplifying attribution method whose accuracy depends on the size of the move and the assumptions used for inflation expectations.

Key ideas

• Real-yield changes can be approximated as nominal-yield changes minus changes in inflation expectations.
• Multiplying the real-yield move by duration gives an approximate bond-value impact.
• Treating duration as constant is reasonable only as a local approximation for small, short-horizon moves.
• Duration may change when real yields move, which limits the accuracy of the decomposition.

Tags

# How can I break down the change in value for an inflation-linked bond


# How can I break down the change in value for an inflation-linked bond












I am trying to decompose the change in value of an inflation-linked bond into two constituent parts:

1) That due to changing nominal rates on the issuer's non-linked bonds 2) That due to changing inflation

I'm not sure how to go about this, but do have access to a Bloomberg terminal to obtain any necessary data.

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/31711

The change in value of an inflation linked bond is

Change in Real Yield * Duration

= (Change in nominal yield of non-linked bonds - Change in inflation expectations) * Duration

Duration is approximately constant for daily or weekly moves, although it will change if real rates move, so the above is an approximation.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.