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Derivatives

Inflation Swaps To Pick Up Down Under

Inflation-linked swaps are expected to gain ground in Australia as more corporates are issuing consumer price index-linked bonds.

Inflation-linked swaps are expected to gain ground in Australia as more corporates are issuing consumer price index-linked bonds. Francisco Sarmiento, associate director in structured trading and derivatives at Macquarie Bank in Sydney, said issuance of inflation-linked structures has picked up in recent months with deals such as Sydney Airport Finance Co.'s AUD200 million capital index-linked bond. Inflation-linked swaps have been structured on the back of such deals. "Synthetic ways to trade inflation are becoming a greater focus for both investors and issuers," he noted.

Gary Vassallo, head of derivatives at Macquarie, expects another AUD300 million or so in CPI-linked bonds to be launched in Australia in the coming months. "There are concerns that inflation could rear its head again and some investors are looking for protection on longer-duration assets," he said. Other Aussie investors are also looking to take on inflation exposure by swaping straight bond issues to inflation-linked structures. "There's still a limited amount of inflation-linked assets in the market and this is an alternative," said Sarmiento. While inflation-linked swaps will continue to pick up in activity, a deep interbank market is still a few years away, noted market officials.

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