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Derivatives

U.S. CDO Structurers Add Inflation-Linked Feature

U.S.-based structurers of synthetic collateralized debt obligations are offering inflation-linked exposure to structured credit deals. Matthew Zola, co-head of North American structured credit at Morgan Stanley in New York, noted that while inflation-linked deals are more common in Europe, they have started to be issued in the U.S.

U.S.-based structurers of synthetic collateralized debt obligations are offering inflation-linked exposure to structured credit deals. Matthew Zola, co-head of North American structured credit atMorgan Stanley in New York, noted that while inflation-linked deals are more common in Europe, they have started to be issued in the U.S. The rising interest-rate environment has led to concerns about inflation increasing and investors are realizing that adding inflation exposures to structured credit is a source of extra returns, he said.

Abib Bocresion, managing director at JPMorgan in New York, agreed that clients have been asking to add inflation exposure to senior synthetic CDO tranches. Typically dealers offer clients inflation exposure by entering into an inflation swap, in which they exchange a LIBOR-based rate for a CPI-based one. A triple A tranche which pays LIBOR plus 75 basis points, for example, would currently roughly pay CPI plus 165bps.

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