UK - Investment bank J.P. Morgan has started quoting prices for Consumer Prices Index swaps after the government announced it would change the indexation basis for pension increases from RPI to CPI this summer.
The bank said a CPI market would help pension funds be able to hedge out their liabilities and value their future liabilities.
J.P. Morgan head of European inflation trading Kari Hallgrimsson said: “J.P. Morgan thinks it’s crucial that the CPI market will develop and hence we were the first bank to decide to quote on it.
“We have been showing live two way prices since mid August in CPI swaps all the way from two-year maturity to 30-year maturity in order to kick-start the CPI market.”
However, Hallgrimsson said it will be difficult for the CPI market to become as liquid as the RPI market currently is, unless the Debt Management Office issues CPI-linked bonds in the future.
He said: “To develop a deep and liquid CPI market, we need the DMO to enter the market. They are going to look to issue as we get more clarity on the legislation changes, then I would expect some sort of announcement from the DMO.”
However, P-Solve deputy chief investment officer Ben Clissold said the quoted prices “were not very helpful or competitive at the moment” and noted the CPI market was currently not very liquid.
He added: “Even next year if the DMO issues linkers from April, and nothing but CPI-linked debt, it would take about a year and a half to issue as much CPI as RPI debt.”
The DMO said it would examine the market’s ongoing response to the Department for Work and Pensions’ consultation.
It said: “We have made clear we would consult fully with the market before introducing any new instruments, although it seems sensible to defer a consultation until there is further clarity on DWP’s statutory intentions – which they are currently considering.”
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