They are using swaps or structured notes to benefit from a global disconnect in inflation, which is becoming apparent after a period of disinflation.
“We are seeing some clients wanting to play, for example, de-coupling of North America compared to Latin America, playing the inflation indices,” said Brice Benaben, Deutsche Bank global head of inflation trading in London. “It will be products like a structured note or swap, where you play the spreads between, say, the forward inflation in the U.S. compared to the forward inflation in Brazil.”
International Monetary Fund figures (see graph) show a dramatic increase in inflation over recent months. Food price increases are a key driver behind the spike—and because food has a relatively higher weighting in emerging markets’ consumer price indices, inflation in those countries is rising faster than in developed markets.
Boston-based State Street Global Advisors released its first international inflation-linked bond exchange-traded fund last month. James Ross, senior managing director, said in a statement investors are looking to hedge against inflation and U.S.-dollar exposure, while improving diversification.
State Street’s ETF tracks the Deutsche Bank Global Government ex-U.S. Inflation-Linked Bond Capped Index, which includes 120 inflation-indexed bonds from 18 developed and emerging countries outside the U.S.
Alongside the trend toward de-coupling plays is a rise in inflation options trading, said Benaben. Previously, he said, the central banks provided a natural hedge by keeping inflation at low levels. Referring to the U.S., U.K, and Europe, he said, “Central banks are perceived to be less effective...[investors] are concerned about the high inflation risk and [are] buying protection against high inflation.”
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