There was a question in Parliament on whether would the government  consider issuing inflation-linked bonds for the retail market considering the low interest but high inflation environment. The full question and answer can be found at MAS website HERE.

The reply was that “MAS is studying the feasibility of such bonds. However, we have to recognize that market-pricing for an inflation-linked bond under the current very low interest rate environment could mean investors having to pay a large premium for such bonds.  Furthermore, investors will suffer a loss should inflation fall below expectations.”

The following are my explanations on why this is so:

First, the word ‘premium’ means paying a high price. High price is associated with low return or even making losses. Assuming there are two identical bonds which are zero coupon bonds and years to maturity. But one of them is not an inflation linked ...