Less than zero

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The spectre of deflation has haunted inflation desks for the past six months. Having sold billions of dollars in structured notes with embedded 0% floors in 2003 and 2004, dealers were sent into a panic in October last year as inflation expectations fell sharply. A rush of hedging activity ensued, pushing the front end of the inflation swaps curve to unprecedented lows, in turn aggravating the short floor exposures of dealers.

The price for one-year zero-coupon inflation swaps in the US plummete

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