BarCap predicts debt demand rise

Barclays Capital predicts great times ahead for the European inflation-linked bond market and forecasts the global market to soar to €1 trillion by the end of the decade as borrowers start to realise the potential benefits of using inflation-linked debt and diversifying their liabilities.

The UK bank values the non-gilt inflation-linked market at over £6 billion and last month launched a sterling inflation-linked bond index to satisfy investor demand for such a benchmark.

“An optimal asset for the investor and an optimal liability for the borrower,” says Mark Capleton, head of global inflation-linked research at Barclays Capital. “The market exists for the mutual benefit of both parties.”

Inflation-linked debt offers balance sheet risk reduction, improves a company’s creditworthiness and thus tolerates a higher level of borrowing, he adds. Benefits for borrowers are the ability to match their assets and liabilities, and hedge themselves against higher expenditure when inflation rises.

A number of utilities, such as National Grid and Transco, have already tapped the market and others, such as water companies, are expected to follow suit.

“With the development of private pension plans in Europe as well as an increasing desire by corporates to have real liabilities on their balance sheets and concerns that global recovery could put pressure on inflation, we will see further growth,” says Capleton.