Inflation Derivatives

[jamesr1ley]

Correct me if I am wrong, but I couldnt seem to find anything on here for inflation derivatives. I am not sure how many of you are involved in this market but thought it would be good to start a thread on the subject.

The inflation swaps market is really starting to pick up from a very quiet period in February and March this year. This is largely driven by the financial risk managers realising that any recovery is likely to see higher inflation levels. The inflation derivatives markets are definitely showing significant signs of vibrance

Expectations of UK inflation are slowly starting to rise. In the next 2-5 years we will see quantitative easing starting to take effect. Combined with a pickup in economic demand for goods, VAT cuts being removed and weaker sterling all indications are pointing towards higher inflation prices in the future.

any thoughts?

 

[Martinghoul]

There's been no real quiet period in the RPI swap mkt. It's been humming along nicely, as well as the bonds, but there's been more activity lately, that's for sure.

I don't know if I agree... The mkt is pricing in a VERY VERY sharp V in inflation and I just don't see it. I would argue that recovery/inflation, when it comes, will not be as aggressive as people expect.

As usual, all the interesting action in RPI swaps is happening in the long end with 30y RPI going bid again after collapsing in December.

 

[arabianights]

What I *do* know is that your post looks a LOT like search engine optimisation...

...Curiously, search engine optimisation for a company you were posting about joining last year.

What a coincidence!

(Mind you, it's so blatant I have to admire you for it... and it seems to be for a legit company... and I don't think the moderators will bother reading this, so good luck to you!)

 

[gooseman]

"i broke inflation swaps please trade with me"

 

[Martinghoul]

There are some big brokers dominating the space... Good luck to the dude in his difficult job of taking biz away from those guys!

 

[jamesr1ley]

Martinghoul - Interesting points, from our side we see in general inflation markets getting busier. In terms of sharp volitility being priced in I agree but keep in mind, a lot of people have been burnt recently, as a result they are being more cautious, so inflation swap prices as a result will continue to be higher priced. September last year UK RPI YoY was at 5% its now -1.2%

How do you think this IL32 reopening will go tomorrow? Seems a little vulnerable with the recent rally and the further reopenings...

 

[Martinghoul]

It's gonna go great... The bond's been massively squeezed in repo, so the DMO had to create a whole bunch of them to help the shorts. If I were short (which I ain't), I'd be willing to pay up in the auction to cover. Moreover, 32s are the sweet spot for PFs, no matter how you slice it, which is why they got squeezed in the first place. Finally, if I were a dealer I would use this as an opportunity to show the DMO that I am a nice guy and I play ball.