U.S. dealers are seeing more interest in inflation-linked products, according to John Kapustiak, managing director and head of rates trading at Bank of America. Corporates in industries, including utilities and auto manufacturing are likely players to come to the market and as the two sided inflation-linked cash market develops so too will a market in inflation-linked derivatives, he said. Accounting rules that require trades to be marked to market, will also have the likely consequence of spurring an options market linked to inflation in order to deal with bottom-line volatility, he added.
Meanwhile, the recent U.S. tidal-wave in refinancing home mortgages has resulted in a structural shortage of volatility, which has had to be met by dealers, said Kapustiak. Given the shortage of players in the market who are short volatility there is a need for more diverse players to come into this space, which at the moment is dominated by relative value players, such as hedge funds. Likely entrants to this field include real-money accounts and pension funds.
