Good morning. The price of five-year credit default swaps on SpaceX debt jumped 194 basis points yesterday after our colleagues reported the AI-slash-rocket maker is trying to raise another $40bn in debt to buy Nvidia’s chips. The costs for other Big Tech companies’ CDSs have risen to near-record highs in the past few weeks. Investors prudently taking out a little insurance, or speculators sensing blood in the water? Email us: unhedged@ft.com.

The yields on Treasury inflation-protected securities look attractive right now. Five, 10 and 30-year Tips yields are 2.6, 2.9 and 3.4 per cent, respectively, the highest since the financial crisis. If held to maturity, those are compelling yields, especially if you think inflation is set to rise further.

Larry Kotlikoff of Boston University and the Economics Matters substack, argues there’s a strong case for Tips right now:

If that seems a bit too good to be true, it is. Tips compensate investors for realised inflation, as measured by the consumer price index. But vanilla nominal Treasury rates change with moves in expected (that is, break-even) inflation, along with moves in underlying real rates. So for Tips to outperform vanilla Treasuries, it’s not enough for inflation to rise. If nominal rates rise even more than inflation, because of higher inflation expectations or higher real rates, Tips underperform regular Treasuries.

Ed Al-Hussainy, Unhedged’s fixed-income svengali, is firmly against Tips:

But can’t these risks be avoided by holding to maturity? Well, Al-Hussainy of Columbia Threadneedle notes, “everyone thinks they’re going to hold Treasuries until maturity, whether it’s Tips or nominals”. Nobody plans to need liquidity all of a sudden, but sometimes they do. Tips are just about 7 per cent of the total Treasury market; the figure is an astounding 25 per cent in the UK (see next item). But the lack of liquidity in the Tips market compared to Treasuries creates wide bid-ask spreads when volatility goes haywire, making them look more like corporate bonds than a safe-haven government security, notes Brij Khurana of Wellington Management.

If you’re confident inflation is set to run hot for years and are certain you can hold until maturity, Tips might be a good bet. Otherwise, just buy plain old Treasuries.

(Kim)

Inflation-linked gilts — “linkers”, in the parlance — have marginally outperformed their plain-vanilla siblings this year. This isn’t surprising. We’re experiencing an inflationary shock, which is precisely what linkers are meant to protect against. What is perhaps surprising is that they’ve done so poorly: the return in 2026 has been negative and only 1.5 percentage points better than conventional gilts.

With CPI inflation tracking at 3.1 per cent and expected to rise above 4 per cent early next year, why aren’t linkers doing better? Both linkers’ principal and their coupon payments adjust regularly to reflect realised inflation. But (just as with Tips, see above) the attractiveness of buying linkers at any given moment hinges on the break-even expected inflation rate, implied by the difference between linker’s yield and a same-maturity conventional gilt. For example, the 10-year gilt yield is now just less than 5.5 per cent, while the real yield on the linker is 1.9 per cent. The difference of 3.6 per cent is the embedded expectation for inflation. If the inflation over the life of the bonds comes in lower than this, the linker underperforms the gilt, and vice versa.

As Jonathan Hill at Barclays told us, the market is pricing in a sizeable inflation risk premium in the UK. “This complicates the attractiveness of gilt linkers,” he said.

But there is some nuance to this story, which is that short-duration linkers have generally performed better than longer ones. According to Hill, this is in part because the short end has accrued the positive returns from recent inflation and is not as exposed to the higher term premium — that is, higher real interest rates — at the long end of the curve. Inflation-indexed bonds hedge inflation, but their price (like that of Tips) remains sensitive to changes in real rates (as the world discovered, in Technicolor, in the 2022 Liability-Driven Investment crisis). In the UK, where about a quarter of the debt is indexed to inflation (the highest level in the G7), and the stock of linkers is also unusually long-dated, the performance of the broad linker index therefore reflects a hefty dose of duration risk.

Another issue is that the UK is still dealing with the transition from one inflation index to another. The official policy target is measured by the consumer price index. But linkers are still indexed to the retail price index, which ceased to be an official national statistic in 2013 because of flaws in the methodology. RPI inflation has tended to run at between 0.7 and 1 percentage points above CPI inflation. From 2030 the calculation of RPI will be aligned with CPIH (Consumer Price Index including housing costs of owner-occupiers), and any linkers maturing after that date will reflect the new methodology. So, the investor in long-dated linkers needs to account not only for inflation expectations but also for which measure of inflation they’ll ultimately be compensated against. That wedge is already reflected in the price, but it does make deciding whether to invest in linkers quite a bit trickier.

Linkers are providing inflation protection, but they’re already expensive; they do not protect investors against higher real interest rates. For them to be a good investment, inflation would need to get a lot worse than what’s already in the price, and real rates have to stabilise. Maybe just buy the gilts.

(MacFadden)

Trouble with ‘The House’