Given present concerns about inflation due to rising commodity prices and the effects of global stimulus packages, investors are watching developments closely and seeking more information about how to protect their portfolios.
Interest in emerging-market inflation, in particular, is growing, among both Asian and global institutional investors, says Ralph Segreti, global head of inflation-linked products at Barclays Capital in London. "People will be looking to these markets for clues as to whether we start getting global inflation," he adds.
Segreti says Barclays' inflation business is the busiest it has been for the past two years. "The desire for education and information from clients looking at inflation-linked products is greater now than in recent memory," he adds.
In Asia, institutions are starting to look much more at emerging-market inflation than developed-market inflation. There is also demand from central banks and sovereign wealth funds, which also have foreign currency fixed-income assets, said Segreti during a trip to Singapore last week. For such organisations, inflation-linked bonds are a de facto currency hedge, due to currency changes feeding into Consumer Price Index inflation through import prices.
"If you're forced to hold dollar-based assets, you might as well hold Tips [Treasury Inflation-Protected Securities] rather than Treasuries," he says. "And if you're holding euro, you may as well hold inflation-linked [instruments]. Essentially what you're doing is adding a floating-rate element to your portfolio here."
As a result, Barclays Capital has seen a pick-up in both the breadth and depth of buying from official institutions and is also seeing more interest from high-net-worth and institutional investors in the region, particularly pension funds and insurance firms. "Long duration investors are realising that a resurgence in inflation will have serious implications for the assets in their portfolio," adds Segreti.
Something that may also help boost demand, in Asia and globally, is an increased supply of inflation-linked instruments. Segreti notes that Thailand will start issuing inflation-linked bonds next year, while on September 29 the Australian Office of Financial Management launched its first treasury indexed bond since 2003.
The Japanese and South Korean markets are also showing signs of coming back, he says. "Japan needs to sort out its market, because it essentially failed [due to the crisis], but it will be coming back at some point," says Segreti, "and it's a similar situation in Korea."
On the retail side, global investor interest is still fairly quiet, he adds, since retail interest tends to come when inflation has already started, while institutional interest tends to be more forward-looking. In Asia, specifically, there isn't much of a market as yet, with only "modest" interest in Hong Kong in the past, for example.
Having said that, one of the Japanese retail banks -- with Barclays Capital's help -- launched inflation-linked deposit accounts before the crisis, says Segreti. "These were picking up quite dramatically, and we expected to see that happen elsewhere, but then the crisis hit."
If retail investors do buy, they purchase notes that are leveraged, such as 2x inflation, and other asset classes floored in inflation. "So you might invest in the GSCI index, and rather than saying in 10 years' time you'll get performance or some measure of it floored at par, you'll have it floored in inflation using options," Segreti says. "So, in real terms, that $100 will then be worth whatever $100 was worth at the start of the contract."
In fact, one of the problems in the retail inflation market has been the difficulty of setting these floors. "Typically we use options [to create inflation floors], and that's been the biggest hurdle in the past two years to bringing retail products to market," he says. This is because the US inflation market -- and related instruments -- are in dollars, and costs for inflation vol have been prohibitive.
Hence, Segreti sees more of those inflation products being offered to retail investors now that these markets are opening up.