A return to domestic inflation

Activity in Europe’s domestic inflation derivatives markets dropped away after the collapse of Lehman Brothers. Now, dealers report buyers and sellers are starting to return. But there is likely to be less warehousing of risk by banks and a greater focus on matching both sides of the trade at execution. By John Ferry

Matching eurozone country-specific inflation demand with supply has long been tricky for investment banks. While some dealers claim to have always looked to line up buyers and sellers on each trade, thereby running books that are more or less flat, big market-makers in domestic European inflation have traditionally only been able to offer liquidity across the country-specific inflation curves by retaining some risk on their balance sheets.

That is largely a function of the size of the markets