Inflation-linked products debate: Putting a price on inflation

March 05, 2009

The market is relatively young but it has had a brutal education over the past year as the financial crisis has swept through every corner of the financial markets. Where next for inflation-linked products?

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Executive summary

• The inflation-linked market has faced its own set of difficulties in the financial crisis

• Inflation is no longer the key issue. Now investors seek deflation protection

• Volatile commodity prices have had a big impact

• Government debt managers are now more alive to counterparty concerns

• Pension funds face a difficult choice between volatile equities and low-yield inflation-linked bonds

MH, Redington 2008 was a cataclysmic year. What has the credit crunch meant for us?

CA, RBS The inflation market is still young, so supply and demand is crucial to how it operates and prices. Several years of favourable terms for long-dated corporate issuance, cheap monoline wrapping and attractive asset swap levels meant that we came out of 2006/07 with our most balanced market yet, particularly in the UK. For the first time, even inflation swaps were trading at a discount to bond breakevens. It was oversupply.

Inflation-linked products debate: Putting a price on inflation

The market is relatively young but it has had a brutal education over the past year as the financial crisis has swept through every corner of the financial markets. Where next for inflation-linked products?

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