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Inflation-linked debt issues to rise

More inflation-linked bonds from non-sovereign European issuers could be a feature of the debt capital markets in 2005 as the inflation derivatives market grows.

The success of Italy's 30-year, 2.35% BTPei last September and Cades's e1 billion 15-year inflation-linked benchmark bond in November, the French agency's longest inflation-linked bond to date, showed how demand for linkers has grown with the need to match real liabilities.

The fact that breakevens have widened since the first European linkers were issued shows investors are also ready to receive a lower yield in return for inflation. Linkers are less volatile than conventional bonds in a rising rate environment. And long-dated investors in inflation are here to stay.

Cades will issue between e2 billion and e5 billion of inflation-linked debt this year. Non-sovereign issuers other than Cades have been constrained by not having inflation liabilities. ?We have done some small inflation-linked deals and we like linkers,? says Horst Seissinger, head of capital markets at KfW. ?But we have to rely on a window in the swap market, and that is still developing.?

The question is, is it already developed enough? Some bankers think so. Barclays Capital says turnover in inflation swaps has increased ten-fold in the past two years.

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