Inflation Hedge Strategy — Protecting Purchasing Power
The inflation hedge strategy focuses on maintaining positive real returns by investing in Angola government bonds whose nominal yields exceed the inflation rate. With current CPI inflation at 15.7% (December 2025) and OTNR yields ranging from 18% to 22%, the entire kwanza yield curve delivers positive real yields — a favorable but historically unusual condition that rewards proactive allocation.
The Core Principle
Real Yield = Nominal Yield - Inflation
When real yields are positive, bondholders earn returns that exceed the erosion of purchasing power from inflation. The wider the spread, the greater the inflation protection. Angola’s current real yield environment is the result of the BNA maintaining a restrictive policy rate of 17.5% above the 15.7% inflation rate.
Current Real Yield Landscape
| Instrument | Nominal Yield | Inflation | Real Yield | Inflation Cushion |
|---|---|---|---|---|
| BT 91-day | ~17.5% | 15.7% | ~+1.8% | Thin |
| BT 364-day | ~18.5% | 15.7% | ~+2.8% | Moderate |
| OTNR 2-year | ~19.0% | 15.7% | ~+3.3% | Moderate |
| OTNR 5-year | ~20.5% | 15.7% | ~+4.8% | Strong |
| OTNR 10-year | ~22.0% | 15.7% | ~+6.3% | Very strong |
The “inflation cushion” measures how much inflation can rise before real yields turn negative. A 10-year OTNR at 22% can withstand inflation rising to 22% before delivering zero real returns — a significant buffer.
Implementation: Two Approaches
Approach 1: Lock-In Strategy (Recommended When Real Yields Are Wide)
When real yields are at attractive levels (as they are now), the optimal approach is to lock in long-duration exposure:
- Purchase 5-10 year OTNRs at 20-22% yields through primary market auctions
- Hold to maturity using the buy-and-hold approach
- Rationale — Even if inflation rises temporarily, the locked-in coupon continues to pay. Over a multi-year horizon, inflation is more likely to moderate than to persistently exceed 22%.
Approach 2: Rolling Short-Dated Strategy (Recommended When Inflation Is Uncertain)
When inflation is volatile and direction is unclear, shorter maturities provide flexibility:
- Roll 91-day or 364-day BTs weekly or at each maturity
- Advantage — If the BNA raises rates in response to rising inflation, new BT yields adjust immediately, maintaining the real yield
- Disadvantage — If the BNA cuts rates faster than inflation declines, the real yield compresses
Inflation Risk Scenarios
| Scenario | Impact on Strategy | Recommended Action |
|---|---|---|
| Inflation falls to 10% | Real yields widen further; locked-in yields very attractive | Hold existing positions; consider adding |
| Inflation stays at 15-16% | Current real yields maintained | Continue strategy as designed |
| Inflation rises to 20% | Real yields compress; short-end may turn negative | Shift toward longer maturities with higher coupons |
| Inflation exceeds 25% | Real yields negative across much of the curve | Rotate to OTX USD-indexed bonds for currency protection |
Why This Strategy Matters in Angola
Angola has experienced several episodes of severe inflation that destroyed the purchasing power of fixed-income savings:
- 2016-2017 — Inflation exceeded 30%, far above then-prevailing bond yields, causing deeply negative real returns
- 2018-2020 — The BNA aggressively tightened policy to restore positive real yields, marking a turning point
- 2022-Present — Inflation has moderated to the mid-teens while yields remain elevated, creating the most favorable real yield environment in over a decade
The lesson is that positive real yields are cyclical and should not be taken for granted. The current environment offers a window to build inflation-protected positions before the BNA eventually begins an easing cycle.
Monitoring and Adjustment
Key indicators to watch:
- Monthly CPI releases — Published by the Instituto Nacional de Estatistica (INE), the primary input for real yield calculations
- BNA policy rate decisions — Rate cuts narrow real yields; rate holds or hikes support them
- Fuel and utility price adjustments — Administered price changes can cause inflation to spike
- Kwanza exchange rate — Currency depreciation feeds through to import prices and CPI
For the full real yield analysis, see real yields. For the complete risk picture, see risk analysis.