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Derivatives market: New drivers for US dollar inflation swap activity

Roger James reports on why the market might finally be ready for takeoff.

A version of this article first appeared in Total Derivatives.

Total Derivatives is the prime source of real-time news and analysis of the global fixed income derivatives markets.

Despite the slow start to the inflation derivatives markets in the US, a combination of factors are converging to speed up flows and promise sharp growth in the near future.

Recent research from Barclays Capital notes that: “After very little trading over the past year, interest in receiving inflation on the 30-year CPI swap has picked up, leading to a richening in that part of the curve. Initially this did not prompt opposing flow due to the perception of illiquidity.”

Ian Hale at RBS agrees that the dollar inflation market is on the up, even if a year ago and in the first half of 2006 US CPI-linked zero coupon inflation swaps flow was dismal. He says: “US swaps have been a lot busier in the last couple of months. There are now regular prices in 30 years, with 4 to 5 basis-point bid-offer spreads, whereas in all of 2005, 30 years probably traded a total of three times.”

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