 Hey guys, it's MJ the student's actuary and yes, that's Tinkerbell and that is the Loch Ness monster You might recall from one of my earlier videos that I was going through a website when I came across an article Titled Tinkerbell, Loch Ness and Inflation Link Bonds and I said I would make a YouTube video on it Now if you were expecting to see Tinkerbell or the Loch Ness monster Unfortunately, you've fallen prey to clickbait. Yeah, I know don't worry So have I the I read through the article. There's nothing on Tinkerbell or the Loch Ness monster. It was all about Inflation link bonds. Now. I know these things are known to be boring You know, here's some boring facts that you can read about them. Yeah, okay, cool Let's skip all of that But what the the guy wanted to talk about were these myths around the inflation link bonds and the two myths were that one They're too expensive and two they are Illiquid and I keep thinking to myself. Are they too expensive? Are they too liquid? You know, there's some thinking around it but the person who wrote this article is Sean Leviton and We know he's very very very smart because he went to the University of the Witz-Witz-Watzestrand And he studied actuarial science. So very very smart guy and in the article I want to just highlight the one piece of information that he says here He says some people have naively commented that the acid class is expensive at these levels expensive Expensive relative to what you can see he's quite passionate about it. He even puts the word naively in bold So who are these some people that he's talking about? Well, I started reading Another article around inflation link bonds. You can see this one is titled how low can they go and right the end? I've zoomed up what he said there and he's and this is an investment company saying we think that the current rate of around 2% is too low, which is why we currently hold very little So this is the person who Sean thinks is being naive But who is this person? This person is Renee Prince Lou. I hope I'm pronouncing you so deprically But you should remember him because Tada, he's one of the guys who have written the actuarial notes for the fellowship in finance And we came across his LinkedIn profile in my other video when we were stalking my examiners on LinkedIn But let's go back to his article and see what is the reason or what is the reason why he thinks inflation link bonds are so expensive and One of the things he says there is that Historically inflation link bonds were trading at a 7% real yield Whereas now they're around this 2 to 3% But he has said that the market has become much more liquid, which is you know making up for that the one myth that Sean was talking about But to go from 7% all the way down to 2% was that 5% all the way down to just the liquidity premium or as The market had this realization that inflation link bonds are actually Amazing because they are almost the perfect asset for liability driven investment strategies Now if you don't know what that that is it's because you haven't been studying exterior science for long enough This is like the new cool thing on the block before to a strategic asset allocation now everyone's talking about liability driven investment strategies But what was interesting is Renee did write this article back in 2011 Okay, and that's the thing is finance changes things change So I don't think we can call him naive still to this day Maybe back in 2011 things were a little bit different and also the inflation link bonds were around 2% He says around 2% we don't know anything more than that and Sean in his article talks about them being at 3% And his article was written at 2015 Now South Africa has had a lot of crazy crazy going on in its bond market with being downgraded and all that Yet I went and I saw the latest inflation link government bond auction results Which we've done just last week and we can see that the clearing yield is at 2.35% so it still remained incredibly low and The reason for this is that this is this is essentially a risk-free asset There's no risk at all even from currency like let's say the South African ran drops Then inflation will go up and this thing will will rise as well So it is one of the closest things that you'll ever get to a risk-free rate of return But what should this risk-free rate of return be Sean saying 2% 3% that's brilliant and Renee is saying 2% oh my gosh, that's way too low Thing is every country has a different answer I went on to Sean's Twitter profile and we can see look at what his latest tweet is the real yield of a 10-year UK inflation link government bond is now minus 2% so in the UK the real The real return is negative and so South Africa at positive That's why he's saying it's such a it's actually a good thing Which now comes down to this whole this is why we have markets is because Renee is basically well 2011 rate was Renee was basically saying sell whereas 2015 Sean was saying buy Now what I have done you might see on my channel is I've just released A video where I'm talking about this defined contribution retirement fund investment strategies at appropriate default I know it's a very long title and the video. I think it's it's like 53 minutes So it's very very long But what I do is I go through the entire paper presented by the Sean guy And he talks about how good these inflation link bonds are so if you do want an in-depth Look at actuarial science and what the whole philosophy is go and check out that much longer video But interestingly enough you should see that he co-authored it with a person called RC Merton Now if that name sounds familiar to you It's because RC Merton has his own Wikipedia page because he won the Nobel Prize So he's also smart almost as smart as somebody who went to vits because he's got a Nobel Prize So definitely make sure you check out that video if you have the time. I know 53 minutes is a long long time But anyway, thanks so much for watching and uh, yeah, I hope you guys enjoyed this video. Cheers