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Inflation-Linked Marts Poised To Grow

Sales of inflation-linked sovereign bonds in Europe and Asia are expected to gain pace this year, with the obvious impetus being a growing global economy and the inherent risks associated with it.

Sales of inflation-linked sovereign bonds in Europe and Asia are expected to gain pace this year, with the obvious impetus being a growing global economy and the inherent risks associated with it. Japan and Poland are two sovereigns tapped as potentially substantial issuers in the inflation-linked market.

Japan sold three issues last year, each increasing in size, and while its market is currently dominated by local investors, it may become a massive issuer, said Luca Jellinek, senior relative value and product strategist at ABN AMRO. Japan's first issue was the equivalent of $100 billion and closed to foreigners and the subsequent two increased in size and were open to outsiders, with its December issue at $500 billion, he explained. Poland, meanwhile, has held five inflation-linked auctions since August and has the equivalent of $1.2 billion outstanding. The markets are still a couple of years away from allowing investors to make curve trades, Jellinek added.

As the more established U.S. and Europe markets have developed, investors are increasingly viewing inflation as an investable security as opposed to a hedging tool, Jellinek explained. ABN AMRO's most recent client survey, for example, revealed asset managers and pension funds are getting more involved in the inflation-linked game for yield opportunities and the market is no longer primarily composed of banks managing their liabilities.

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