Bond and Money Markets

[Sayantani]

• Section 3

Characteristics of cash on deposit and money market instruments
Yield - expected return relative to other assets
It is mentioned that "This does not mean that these investments will give a lower actual return than other investments."
I understand that sometimes even these investments can give higher returns as compared to equities and other classes. But not clear what is meant by actual returns.

• Section 8.4 (Increases in the values of index-linked bonds)

Not able to understand the first point where "less government commitment to a low inflation environment." How does this contribute to greater uncertainty over future expected inflation?​

 

[CapitalActuary]

My guess is the word "actual" is to differentiate the ex-post returns which are actually realised from the ex-ante expected returns. Cash and money market instruments generally have a lower expected return but they are less risky, so might in practice give a higher return than equities, for example, especially over short periods.

If a government (or, more likely, central bank) is less committed to a low inflation target, they will allow inflation to deviate more from their target (if indeed they have a target). Therefore there is more uncertainty over future inflation. For example, a country with a stated aim of keeping inflation between 1% and 3% would, if the country enacts this policy effectively, have lower uncertainty over inflation than a country with no inflation target, or a country with a 'long run target' of 2% where they allow significant variations from 2% in the short term.