Index-Linked Bonds in Australia: Inflation Protection for 2025

For Australians looking to safeguard their savings from the eroding effects of inflation, index-linked bonds have never looked more compelling. With the Reserve Bank of Australia (RBA) navigating a post-pandemic economic landscape and global inflationary pressures still lingering in 2025, these inflation-protected securities are making a comeback among both institutional and retail investors.

What Are Index-Linked Bonds?

Index-linked bonds, also known as inflation-linked bonds, are government or corporate debt securities where both the principal and interest payments are adjusted in line with a specific inflation index—commonly the Consumer Price Index (CPI) in Australia. This means your returns keep pace with the cost of living, preserving purchasing power even during periods of rising prices.

In Australia, the most prominent examples are Treasury Indexed Bonds (TIBs) issued by the federal government. Unlike regular fixed-rate bonds, which can lose real value when inflation rises, TIBs automatically increase both their capital value and interest payments in line with official CPI figures.

Why Index-Linked Bonds Matter in 2025

After the inflation spikes of 2022–2023, the RBA has kept a close watch on price stability. While inflation cooled from its peak, supply chain bottlenecks and ongoing global uncertainty have kept it above the long-term target range in early 2025. This environment makes inflation protection a front-of-mind concern for many investors.

• Policy Spotlight: The Australian Office of Financial Management (AOFM) confirmed in January 2025 that new tranches of TIBs would be issued, responding to renewed demand from super funds and SMSFs.
• Yield Trends: As of Q2 2025, real yields on TIBs remain modest (hovering around 1% above inflation), but that’s a meaningful advantage compared to some traditional term deposits and fixed-rate bonds that risk falling behind rising living costs.
• Super Fund Adoption: Several leading superannuation funds have increased their allocation to index-linked bonds in their defensive portfolios, citing the need for real (inflation-adjusted) returns for retirees.

How Do Index-Linked Bonds Work in Practice?

Let’s break down a typical scenario for an Australian investor:

1. You buy a $10,000 Treasury Indexed Bond with a 10-year term and a real coupon rate of 1%.
2. If the CPI increases by 3% over the first year, the principal value of your bond is automatically adjusted to $10,300.
3. Your next year’s interest payment will be 1% of $10,300 instead of $10,000—so both your capital and your income rise with inflation.
4. At maturity, you receive the inflation-adjusted principal amount, not just your original investment.

This structure makes index-linked bonds uniquely valuable during periods of unexpected inflation. While you won’t get rich quickly, you can rest easy knowing your money isn’t losing ground in real terms.

Risks and Considerations

No investment is risk-free, and index-linked bonds come with their own set of trade-offs:

• Lower Nominal Yields: Because they provide inflation protection, the starting (real) yields are typically lower than those of comparable fixed-rate bonds.
• Market Liquidity: While TIBs are liquid for institutional investors, retail investors may face wider bid-ask spreads if they need to sell before maturity.
• Deflation Risk: If Australia experiences a period of deflation (falling prices), the bond’s principal could decrease, though the RBA’s mandate makes this scenario unlikely in the near term.

How to Invest in Index-Linked Bonds

There are several ways for Australians to gain exposure to index-linked bonds in 2025:

• Direct Purchase: Buy TIBs via the Australian Securities Exchange (ASX) or through participating brokers. Minimum investment amounts apply.
• Bond ETFs: Several ASX-listed ETFs provide diversified exposure to inflation-linked bonds, including both Australian and global issuers. These funds offer liquidity, diversification, and ease of access for smaller investors.
• Super Funds: Many superannuation funds include index-linked bonds in their conservative or balanced options. You can review your fund’s asset allocation to see your exposure.

2025 Outlook: Who Should Consider Index-Linked Bonds?

Index-linked bonds aren’t for everyone, but they’re especially relevant if you:

• Are nearing or in retirement and want to preserve purchasing power.
• Have a low tolerance for inflation risk but still want fixed-income exposure.
• Are looking to diversify your defensive asset mix beyond term deposits or traditional government bonds.

With the RBA’s inflation target still under review and the government reaffirming its commitment to issuing new TIBs, the stage is set for index-linked bonds to play a bigger role in Australian portfolios over the next several years.