EFF/KRF: Short-term high grade bonds are a good hedge against inflation. If hedging inflation is your overriding goal, short-term high grade bonds are the route for you. (Gene has been saying this for about 40 years.) But don't expect much in the way of a real return. Short-term bonds maintain purchasing power, but they don't enhance it, since the real returns they produce are quite low (for example, less than %1 per year on T-bills). In other words, if you don't take much real risk, you can't expect much real return.
In contrast, long-term nominal bonds are terrible inflation hedges. For example, the current yield on the ten-year government bond is 2.82% and yields on longer-term governments are also quite low. This reflects a forecast that inflation is likely to be quite low even long-term. If inflation - and expected inflation - turn out to be higher than forecast, interest rates will rise and longer-term bonds will suffer capital losses. The capital losses and the reduction in purchasing power are a double whammy to future consumption. In short, long-term bonds may be risk-free in nominal terms but they pose serious hazards to your long-term consumption.
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Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.