By Dhara Ranasinghe, Saikat Chatterjee and Davide Barbuscia

LONDON (Reuters] – Inflation-linked bond have quickly become a hot commodity in global financial markets. This pits banks against hedge fund in a fight for market share, and the scarce trade talent.

Linkers are a $4.4 trillion marketplace for inflation-linked bonds. This market has seen prices surge in post-pandemic times of high government spending, supply chain issues, and rising costs.

Ben De Forton of BNP Paris’ head of Debt Capital Markets SSA France (OTC:) stated, “There is enormous demand for the product.

Inflation in 1997 was at its lowest point. The United States’ first Treasury Inflation Protected Security, TIPS, issued in 1997. Today, prices are growing at 7%.

Since many centuries, there have been investment products with payouts that rise or fall according to inflation. Their current form dates back to 1980s, when Britain published its first linker. This was followed by Canada, Mexico and several other emerging economies.

Although linkers may not be new, many fixed-income traders in London and New York have been working since the end of the 1970s, when there was a major inflation flare up in developed countries.

These people will likely have a history of selling and buying bonds, against the backdrop of record-low price growth.

It is unlikely that anyone who has traded linkers daily or in large quantities will have done this, as the market was dominated by pension investors and long-horizon insurance investors.

According to Cyril Rousseau, head of France’s debt agency, orders for a French linker worth 3 billion euros ($3.43 trillion) exceeded 23.5 billion euros last month. Nearly 200 investors purchased in, more than double what was the norm on previous linker deals.

Another linker sale last week, by Italy, was almost four times subscribed and France is now exploring a green linker https://www.reuters.com/markets/europe/france-keeps-2022-bond-issuance-plans-steady-eyes-green-linker-2021-12-08.

PICTURE OF BULLISH INFLATION

Charles Bristow in London was the global head of rates trading for JPMorgan (NYSE) and stated, “This inflation volatility is driving a significant change in volumes” about the shift.

Globally, the market for linkers has nearly doubled from $2.4 billion a decade back, however, there is still a tight supply, which has led to more volatile trading, as well as inflation fears.

Tradeweb’s data show that average daily trading volumes of inflation-linked eurozone sovereign bonds maturing in five years or less was up to 90% in January, compared with the previous year.

The Securities Industry and Financial Markets Association reports that TIPS volumes averaged $22 billion per day in 2013, the highest ever, and it was also the most profitable year on record.

Su Liu (Managing Director in Rates Trading at Citibank) stated that despite being involved with rates trading for 12 years, she has always been bearish about inflation.

    “The day is a lot more volatile, a lot busier.”

While outstanding TIPs are worth $1.6 trillion, they make up only about 8% in the U.S. Treasury’s debt portfolio. In comparison, linkers comprise roughly 10% of French or Italian issuance and 24% for Britain.

BlackRock (NYSE) confirms that the record investment flows in inflation-sensitive exchange-traded products (ETPs), which exceeded $47billion last year, is a sign of the changes underway. It’s equivalent to cumulative inflows between 2015 and 2020.

BUMPER REVENUES

The top 15 global trading desks earned $2.3 billion in trading inflation products. This is more than double the 2019 level and a decade-high, according to consultancy Vali Analytics.

Inflation swaps may drive growth, according to traders. Hedge funds, insurance companies, and pension investors use swaps to reduce inflation exposure, while hedge funds bet on inflation direction and single data print.

Colm Murtagh from Tradeweb was the head of U.S. institutional rate. He said he’d “definitely noticed” an increased demand for inflation swaps that were launched through its platform last fiscal year.

    The boom is forcing some firms to beef up desks. A trader who did not want to be identified said that the London bank he was employed by aggressively hired mid-tier counterparts.

LinkedIn, a professional networking website for professionals shows that banks and hedge funds are aggressively increasing their inflation knowledge. Inflation traders were among the top five most active in last year’s searches.

Carl Tannenbaum is chief economist at the Central Bank of Canada. Northern Trust (NASDAQ:) Who worked in the Fed’s Risk Section during 2008’s crisis.

Tannenbaum stated that “most of your career was characterized by falling rates on the long-end.” It looks as though we may be beginning something. Although it might not be extreme it is a complete reversal. How do you respond?

($1 = 0.8756 euros)