Inflation derivatives house of the year: Citi

Risk Awards 2026: US bank gets CPI swaption market off the ground and expands cross-market trading capabilities

Bari Spielfogel, global head of inflation products at Citi

Photo: Alex Towle

When Donald Trump won the US presidential election on November 6, 2024, one-year swaps linked to the US measure of inflation, the consumer price index (CPI), jumped 15 basis points as markets recalibrated their outlook.

Expecting inflation to accelerate in 2025, investors flocked to the front end of the US inflation curve, taking a punt that it would realise higher, and to protect assets against the looming impact of heavy tariffs on global trade.

But not everyone wanted to express their convictions outright. Some macro accounts preferred to trade inflation swaptions – options to enter CPI inflation swaps at a given level – which are a more flexible way to position for rising prices while also limiting the potential downside, given only premium is at risk. The problem, though, was that the market is very illiquid and trades by appointment.

Citi set out to change that. In late 2024, it began actively market-making inflation swaptions in a bid to open the market to a broader range of clients. 

The first step was to shift US dollar non-linear inflation trading, which had previously been done out of the US, to London to be run by G10 non-linear inflation head Jack Morrison-Betts.

We constructed [inflation swaptions] to be exactly the same as interest rate options… for a lot of accounts, it’s really been just kind of plug and play

Jack Morrison-Betts, Citi

To calibrate the inflation swaptions’ fair values, the bank had to tap realised and implied volatility levels across different inflation options globally, as well as established interest rate swaptions.

To make potential clients comfortable with the product and to provide transparency on pricing, the bank also launched an inflation hub on its Citi Velocity single-dealer platform. Here clients can see live inflation swaption market levels updated every 15 minutes and can pull the data into their own systems via an API.

Morrison-Betts says this was particularly helpful in enticing more systematic players to the product towards the end of last year.

Douglas Cypel

The first three months required Citi to warehouse much of the swaptions risk on its balance sheet until an organic market started to appear from clients wanting to sell volatility to collect premium or to use swaptions to express macro views on the inflation curve.

So far, Morrison-Betts says around 95% of the inflation swaptions the bank has traded this year have been done by accounts that had never traded inflation options before, such as equity portfolio managers who want inflation tail hedges to manage the correlations within their portfolio.

“We constructed [inflation swaptions] to be exactly the same as interest rate options, it’s just an inflation swap instead of a rate swap. So, for a lot of accounts, it’s really been just kind of plug and play,” he says.

“They just use the same models that they have for rates options, and they instead do it on inflation, so it’s allowed a lot of accounts to get set up quickly.”

$2 billion

The largest payer spread Citi did after the Liberation Day tariff announcement in April

During the three weeks around president Trump’s so-called Liberation Day tariffs announcement on April 2, Citi executed more than $5 billion notional in CPI inflation swaptions, which delivered into swaps with one- and two-year maturities, known as tails.

A trader at one hedge fund who executed an inflation swaption trade with Citi at this time says they have already unwound that trade and put on another one. 

“We’ve been happy with how they’ve managed it and how they marked it,” says the trader.

The tariffs were expected to have a big impact on inflation, but when this softened after Trump paused and eventually rolled back the heavy tariffs, the CPI swaption trade meant clients caught on the wrong side had only their premium at risk.

“[The inflation swaptions trade] has protected clients from losses by their macro view not necessarily manifesting. So, it’s been a good way to play that,” says Morrison-Betts.

While tariffs and inflation uncertainty has meant trading has typically been in the top left corner of the grid in US dollars, such as one-year options on one-year US CPI swaps, Morrison-Betts says clients are now discussing the possibility of longer-term inflation trades.

“I’m starting to see more inquiries on five-year and 10-year tails, whereas previously, it was predominantly one- and two-year tails,” he says.

Citi is currently market-making inflation swaptions for euro and US dollar and will soon roll out the product on sterling inflation.

In Europe, trading has so far also focused on one- and two-year tails, but the desk saw more demand for longer tails in March after Germany’s incoming chancellor, Friedrich Merz, announced plans to bypass the country’s strict borrowing limits to increase defence spending, clouding the outlook on European inflation.

Payer spread

The Liberation Day tariff announcement created a big discrepancy between inflation priced in for 2025 and 2026, with the latter trading far higher than the former.

Citi’s fast money sales team put out a trade idea to clients to enter payer spreads, which involves a client buying a pay-fixed CPI swaption at-the-money and selling another pay-fixed swaption at a higher strike.

The idea was that inflation is going to increase but is unlikely to go to beyond a given point, so selling the higher strike will offset the premium on the at-the-money swaption, making the structure cheaper.

Photo: Alex Towle

Dan Haehnel, Citi

Morrison-Betts says the higher strike would typically be 75–80bp higher than the at-the-money strike, but it varied between clients – some wanted to do it 50bp higher, others wanted to do it 100bp higher.

“It comes back to that customisation,” he says. “It’s no longer a by-appointment market where only individual strikes can trade. Clients can customise for whatever they think is going to be the exact macro scenario.”

The largest payer spread Citi did shortly after the tariff announcement in April was $2 billion notional, but the bank also traded in other sizes.

Citi took the position on its books and recycled the risk over the next month. The bank was able to recycle the higher strike swaption at a discount with clients who wanted to buy cheap tail hedges. It recycled the at-the-money swaptions with relative value accounts who were happy to sell the volatility to collect the premium.

During this period, the bank was also able to provide $3 billion notional of high-strike tail hedges to clients.

“We’ve had some buyers of just clean higher strikes, where people just picked up tails for pretty cheap, buy an option for five cents or something like that, and in the scenario where the rest of your book is losing money because we’re in an inflation world, this cheap hedge will pay off,” says Morrison-Betts.

Citi was able to internally offset the delta risk from a single $2 billion swaption within two days.

Cross-market inflation book

As well as expanding into new market-making areas, clients say Citi has stood out for its ability to provide consistent liquidity in inflation swaps throughout an often turbulent year.  

As well as running inflation books locally on each currency, towards the end of last year, Citi’s cross-market inflation book based in Paris took off. The desk is run by Douglas Cypel, who has oversight of US, UK and European inflation.

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Whereas normally a client wanting to buy US inflation and sell European inflation would need to go to New York for one leg and Paris for the other, Citi is able to provide the price from one desk. It also means that Citi can price US dollar inflation overnight before the New York open.

For US clients, it has allowed the bank to show opportunities in the global inflation market; for Europeans, it has allowed them to use the US market as an extra source of liquidity beyond their local market.

The cross-market book was particularly helpful for clients that wanted to trade the US and EU cross-market spread to take advantage of the differences in trade and central bank policies.

Cypel says the cross-market book enables the bank to offer tighter prices on those spreads compared with its competitors because the bank is “able to warehouse the risk and doesn’t have to price it as two entirely different transactions.”

Inflation QIS

Two years ago, Citi began looking at the growing trend of quantitative investment strategies (QIS) as a way of getting non-inflation experts involved in the inflation market.

Core inflation, a measure that excludes volatile elements like food and energy, is not currently a tradeable instrument. Citi therefore looked to develop a QIS index that would replicate core inflation by hedging out those fluctuating elements from inflation swaps by using commodity derivatives. The bank has gone live in the US and Europe in two-, five-, 10-, and 30-year tenors.

Bari Spielfogel, global head of inflation products at Citi, says the product is a way for non-traditional rates or inflation traders to hedge core inflation out of their portfolios or to take a view on the market.

She says the bank has seen interest in the product from global pension funds, macro hedge funds that don’t have an inflation specific arm, and real money accounts that have inherent exposure to real rates or real inflation.

“Given we roll it, and we have backtested the way to hedge out the commodities exposure, they don’t need to do their own regular maintenance of the product – they just enter into a swap,” says Spielfogel.