WHEN ITALY JOINED the e70 billion European inflation-linked bond market last year with a five-year issue, investors welcomed the move and banks highlighted it as a trigger for a wave of new interest in the instruments.
But the success of the deal was not driven by demand for five-year inflation in itself. Rather, because so many market participants had been using inflation-linked derivatives, they needed to hedge their exposure with five-year paper. That meant that derivatives desks were among the most active buyers of the bonds.
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