I’ve been thinking a lot about how **inflation-linked gilts** behave in market crashes, and something doesn’t quite add up for me.
Most literature and resources I’ve come across — including the (https://www.bogleheads.org/wiki/Treasur … Securities) — seem to assume that during a **market crash or severe recession**, inflation expectations will decline. The Wiki even notes:
Even though both conventional Treasuries and TIPS should respond to changes in real interest rates during market crashes or severe recessions, TIPS may not hold up as well as conventional Treasuries, at least in the short term. This could be because conventional Treasuries are often considered a flight to safety during financial uncertainty.
I understand the general idea — that when investors panic, they tend to buy nominal bonds, yields fall, and that’s what we call a “flight to safety.” I also understand the **breakeven inflation rate** (nominal yield minus real yield = expected inflation), so I’m not asking about that part specifically.
Side confession – Some googling is leading me to believe the current UK ILG Breakeven rate is approx 3-4% on 30yr, but I have to be honest, I’m not a math guy, so I am relying on AI to tell me this.
What I’m trying to understand though is *why* it’s usually assumed that market crashes will lead to falling inflation expectations. Aren’t there examples — like the **1973–74 oil embargo** or the **1979–80 energy crisis** — where the crash was more **supply-side in nature**, and inflation actually stayed high or even rose?
So I guess my questions are:
* Is the idea that TIPS (or ILGs) “don’t hold up as well” just a reflection of how **flight to safety is defined** — i.e., investors traditionally run to nominal bonds?
* Or is it simply that **most historical crashes** have been **demand-side**, deflationary ones?
* Or because TIPS really are much less liquid than Nominal equivalent, that even an inflationary crash wouldn’t drive investors here?
* Or something I haven’t thought of?
* And if the next major downturn were an **inflationary, supply-driven crash** (e.g. energy or geopolitical shocks), would **inflation-linked gilts perhaps become the new “flight to safety”?** Or am I missing something?
I’m asking because I’m currently weighing the **pros and cons of allocating to Inflation-Linked Gilts over nominal gilts**, and it feels like the nature of the next “flight to safety” could depend heavily on whether inflation expectations rise or fall in the next crisis.
On the otherhand, I don’t want to undermine the main reason I allocate to Bonds… Diversifying Stocks for crash scenarios.
Side question – I understand ILGs are still less liquid than Nominals in the UK, but I believe the liquidity difference is not as pronounced as between TIPS and their nominal counterpart?
Would love to hear how others think about this — especially if anyone has seen research comparing how **ILGs and nominal gilts performed during inflationary vs deflationary crashes**.
