If there is deflation does the Inflation receiver not only pay the fixed leg but also receives a reduced CPI?

I.e. does he lose twice?

  • $\begingroup$ What do you mean by "lose twice"? If there is deflation, receiver would get a lower floating payment. Where is the other "loss"? $\endgroup$
    – D Stanley
    Commented Sep 17, 2019 at 20:26
  • $\begingroup$ My wording was bad but let me rephrase to see if I'm getting this right. If there is deflation the Inflation Receiver would 1) "Lose" the fixed leg 2) "Lose" in getting less money than if he had bought a nominal bond $\endgroup$
    – JorgeT
    Commented Sep 17, 2019 at 20:32
  • 5
    $\begingroup$ He only loses once, but he loses more. He pays a (presumably positive) fixed; and receives a negative realised. Which is a bigger spread, but it's one just "bigger" loss. There's nothing special about eg -1bp and +1bp realised here. And he's directionally "the other way" to buyers of nominal bonds in the first place. $\endgroup$
    – demully
    Commented Sep 17, 2019 at 20:39

1 Answer 1


sorry, I cannot comment yet as I have less than 50 reputation. So I will to have to put another answer here.

I think you are probably right. This is the same as you are paying fixed on a interest rate swap contract but the floating rate goes negative. In this case, in theory, you will have to pay both legs.

usually, for an inflation swap (either zero coupon swaps or year on year swaps), the quote on the fixed side is a rate and the payment of the floating side is the return rate of the inflation indices in a period, which makes inflation swap case similar to interest rate swap case discussed above.

For inflation linked bonds, there is usually a floor with strike set to zero to protect it from going deflation.

  • 1
    $\begingroup$ This is right answer. Additionally, with negative rates or inflation the fixed rate will have a negative mid market rate, so paying a (negative) fixed rate means cashflow wise you will end up receiving cash on the fixed leg and paying cash on the floating leg, ironically!! $\endgroup$
    – Attack68
    Commented Feb 16, 2020 at 13:36

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