The euro zone inflation-linked bond market is set to make a comeback in 2010 with supply seen doubling to a record, recovering from the shock of the financial crisis as economic revival banishes deflation fears. Gross issuance of inflation-protected bonds, or linkers, is expected to hit about 60 billion euros this year, nearly twice 2009's depressed supply. Linkers' coupons rise or fall with consumer prices.
That compares with almost 1 trillion euros of euro area gross conventional sovereign bond supply expected this year. "Funding needs have increased very sharply over the last couple of years and the inflation markets weren't able to expand accordingly. Now they're catching up given the market is relatively efficient again," said Alan James, an analyst at Barclays Capital.
The linker market was hit hard by the financial crisis, practically freezing up in late 2008 after the collapse of Lehman Brothers, as prospects of a global depression and deflation helped kill demand for inflation protection.
Many major economies have emerged from recession and deflation fears have receded, putting moderate inflation back on the agenda, although the outlook remains patchy. With normality returning to the linker market, this is an opportune time for issuers to deepen their linker market and potential entrants to establish one as price pressures will undoubtedly rise in the years ahead.
Germany made a significant change by targeting sales of 3-4 billion euros of linkers per quarter in 2010. France said around 10 percent of government bond issues would be linkers.
Spain is seen as the most likely and significant candidate to make a debut in the market later this year, while Belgium and Ireland have indicated their interest.