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Derivatives

UBS, Merrill Predict More Inflation-Linked CLN Demand

UBS Warburg and Merrill Lynch are structuring more inflation-linked credit-linked notes because of increased investor interest, which they predict will lead to additional business over the next year. Colin Alexander, director in structured products at UBS in London, said his group has structured a handful of transactions in the past month, and expects demand to grow at double that rate each month for the rest of the year. The bank structured a few of these investments over the past year, but Alexander said he is now spending half of his time working on these deals. A Merrill Lynch official confirmed it is working on these deals, declining further comment.

Demand has increased as investors are taking their money out of the equity markets and looking for ways to guarantee a return or protect their purchasing power, Alexander explained. In addition, the adoption of the euro and the use of the euro inflation index by major countries have helped to make the market more liquid, he said.

Derivatives professionals have said recently that this market is being held back by a supply/demand imbalance for inflation-linked securities. Investors want to purchase them to protect their capital, but corporates do not want to borrow at inflation-linked rates because it would mean borrowing costs and operating costs would increase at the same time.

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