The premium for bonds linked to economic growth can vanish, then reappear

A new paper looked at French government bonds from 1956 to see how much extra investors demanded for bonds whose payments were tied to industrial production. It turns out, these 'state-contingent' bonds initially cost the government a lot more, but that premium disappeared within a few years, only to rise again after a major strike.

Governments sometimes consider issuing bonds where payments change based on economic conditions, like GDP growth. This paper shows that while these bonds might seem expensive at first, the market can quickly adjust their price, making them cheaper over time. But it also shows that unexpected economic shocks can make them expensive again.