Issuance of sterling-denominated inflation-linked bonds is set to at least double next year and this should give the swaps market a boost. Inflation-linked bonds have been relatively uncommon in the sterling market, but pent up demand from pension funds and institutional investors is fueling increased interest from corporate and government issuers in the asset class, according to Mark Capleton, bond strategist at Barclays Capital in London. To date, there has been roughly USD1.5 billion in inflation-linked bonds issued this year and Capleton expects to see USD3 billion plus next year.
Colin Alexander, director in structured products at UBS Warburg in London, said increased debt issuance should enhance liquidity in inflation-linked swaps. He predicted the swaps market could grow 30% over the next year, adding that investors are predicting inflation in the U.K. is likely to be higher than in Europe or the U.S. in the short term.
Pension funds seeking to better match their assets and liabilities are repositioning their portfolios from equities into bonds and inflation-linked issues are an excellent means to achieve this match. However, until recently the sterling market for this product has been relatively small. "It's true to say [the inflation-linked] market has been largely ignored by most issuers," said Nick Medd, head of debt capital markets at HSBC in London.
