The dog that didn’t bark was how the IMF described inflation. But might the fall in emerging market currencies reverse the current picture of largely benign inflation?

Nick Shearn, a portfolio manager at BlueBay Asset Management, sees the rise in inflation as not an if but a when, which makes inflation-linked bonds (linkers in common parlance) a good idea. These would hedge not only against EM but also G7 inflation — he calculates the correlation between the two at around 0.8 percent. He says linkers outperform as inflation uncertainty increases, hence:

As a result of the loose monetary policies of recent years that have been implemented to promote growth within emerging market economies, we believe rising as well as persistent inflation should become a trend….. Currently we are seeing the early signs of an inflation dynamic in isolated countries such as in Brazil. But, as inflation begins to rise across the region, inflation uncertainty will also begin to rise and consequently inflation-linked bonds should perform well.

The way linkers work is that the principal of the bond is indexed to inflation and the coupon is calculated using the nominal rate and the inflation index. A rise in inflation expectations would lead to a higher coupon.

There has indeed been some investor interest in EM linkers of late. State Street Global Advisors’ ETF arm, SPDR Europe, in April launched the first exchange-traded fund for EM inflation-linked bonds. It said at the time that three-quarters of the investors it surveyed expected global inflation to rise in the next 1-3 years, with developing countries especially hard hit.