The Risks of Fixed Income and Fixed Annuities
Inflation can be a positive for the owner of a fixed mortgage since the real value of future mortgage payments decreases.
Inflation is terrible for the receiver of fixed payments since the real value of future receipts is eroded by inflation.
As Brett Arends of the Wall Street Journal suggests in a recent column, owners of Treasurys and other fixed income investments (bonds) should be acutely aware of the risks that exist in the current environment.
One scenario suggests that owners of 10 year Treasurys would lose 16% before inflation if yields were to return to "average" levels within one year.
Owners of fixed annuities should take note. While sales of fixed annuities have been booming in the wake of the financial crisis, inflation would have the same devastating impact on these fixed receipts if they are not inflation-protected.
Source: Wall Street Journal (subscription required)
