Inflation-Linked Markets

Gang Hu and Stefania Perrucci

Since 1981, when the UK government issued the first inflation-linked bond (linker),¹¹ Obviously, we are referring to the modern inflation-linked market. Historically, the indexation of government debt has deeper roots that can be traced back to bills linked to the price of silver issued by the Massachusetts Bay Colony in 1742. the linker market has established itself as a distinct asset class within the global fixed income universe. With a market notional close to US$2.5 trillion outstanding (Table 7.1), including both developed and emerging countries, this asset class has attracted a variety of market participants, ranging from asset managers, retail investors and pension funds to central banks. In addition to this global bond market, liability-matching programmes in the European Union (EU) and the UK and corporate issuance in the US have planted the seeds for the development of a growing inflation derivatives market, which has quickly gained global acceptance and liquidity.

In this chapter, we focus on inflation-linked bonds and linear inflation derivatives. The first two sections provide a brief recap of the different characteristics of linkers, and give a specific example