Re: Does Bogleheads wiki imply “Flights to Safety” are always Deflationary? [UK and US inflation-linked bonds]

ryanlpconnell wrote: Thu Oct 30, 2025 1:40 pm

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?

Let’s distinguish between “Market Crashes”, like October 19, 1987 and after Lehman (Sept 15-October 2008), from “bear markets” like 2000-03 or in the 1970s. Accepting that when you are in the middle of one the difference may be academic or not clearcut.

Bear markets can definitely be inflationary. The 1970s a perfect example.

Another cause of a bear market can be the Central Bank response to higher inflation – higher interest rates. 2022 wasn’t a bear market per se, but equities experienced a negative return. A better example would be the 1980-82 period when Paul Volker at the Federal Reserve, and the UK equivalent at Bank of England, slammed on the interest rate brakes to fight 10%+ inflation.

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?

2008-09 there was fear of outright depression (justified in my view). But the movement of TIPS to over 3% real interest rates (nearly 4% from memory) was because TIPS were used as collateral by market participants – when the value of the other side of the transaction fell, they were forced to sell TIPS.

Later there was concern that Quantitative Easing (UK & US & other countries) would lead to runaway inflation.

* Or is it simply that **most historical crashes** have been **demand-side**, deflationary ones?

As above.

* Or because TIPS really are much less liquid than Nominal equivalent, that even an inflationary crash wouldn’t drive investors here?

If they are less liquid, then a smaller amount of additional demand would drive up the prices, and the yields down. Illiquidity cuts both ways.

* 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?

If ILGs and TIPS work as they are supposed to, they would be the ideal hedges.

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.

Yes but be sure of risk. If inflation is below expectations that are priced into Breakeven Inflation (the gap in yields between the nominal gilt and the ILG), then you bet on unexpected inflation, and you lost. If on the other hand, inflation is above Breakeven, then you bet against inflation and you have a reduction in your buying power. If inflation went to 9% again, say, as it did in 2022/23, then you potentially lost around 7% of your buying power — in one year.

On the otherhand, I don’t want to undermine the main reason I allocate to Bonds… Diversifying Stocks for crash scenarios.

It depends upon what macroeconomic factors cause or are associated with the crash or bear market. Cash is sure to hold its nominal value, bonds are not, due to interest rate risk.

Say a repeat of the Covid “crash” of 2020 (about -30% on markets in 6 weeks). Where markets are convinced that the biomedical and societal responses will be less rapid. Then the solvency of governments might come into question (due to the falls in economic activity if we are all too scared to interact).

OTOH if the Persian Gulf is blockaded and the world price of oil goes to $160-200/bl, there will probably be a flight into inflation-linked bonds.

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?

c 10% US govt debt is TIPS. c. 25% UK govt debt is ILGs. On a fully inflation-accreted basis. On that basis we should assume liquidity ILGs > TIPs. *However* I don’t know what particular studies have said. And the very long dated ILGs (30 years +) are not liquid.

Liquidity should not really be a concern for the ordinary investor. It’s an institutional problem, mostly.

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**.

I don’t worry. I know what I hold ILGs for: a certain amount of money (in real terms, so of buying power) at a fixed point in the future. Some (inflation indexed) income on the way. Avoiding capital gains taxes arising from principal accretion.

Nominal gilts I would suggest staying on the shorter end of the curve. 10 years or less. Because of the long run risks of inflation to an individual. Also the long duration of the gilt index : which if you are in a SIPP or ISA, you can “barbell” by holding either:

1. Short term gilt fund + gilt index fund (conceptually, more cash + gilt index fund). However the barbell won’t perform exactly the same way as a genuine shorter duration gilt fund (mathematically, because the 2nd derivatives wrt interest rate changes are different). But close enough (probably).

2. (my choice) hold at global bond index fund, sterling hedged. Returns should approximate a shorter than index term gilt fund, over time (although not necessarily in any given year; there will be a +/- “hedge return” which will embody differences in interest rates between countries and bond markets).