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In which markets are inflation swaps considered liquid enough to be the primary instrument for measuring market inflation expectations (compared to say, inflation-linked bonds)?

Are there specific biases that will cause implied inflation rates from the bonds to diverge significantly from the swap rates?

many thanks!

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Ironically I would say that in any market in which inflation does not matter but fat investment banks roam and harvest. Japan for example, who cares about inflation in this country...(until recently, thank you PM Abe). Thus, in markets such as Japan you hardly see a single TIPS like security crossing the counter, while your snake oil salesmen lurk around to push OTC inflation swaps and all sorts of other off-market instruments to unassuming clients. That is when such instruments are more liquid than liquid government bond-linked/ stripped inflation securities.

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  • $\begingroup$ This is an interesting answer! I can tell you have direct experience with these markets. I spend an unfortunate amount of time with (so-called) Austrian types. They never mention Japan, I realize, which should be a sort of heavenly ideal, as there is never any inflation. As you point out, there is this unfortunate OTC behavior, probably motivated by investors' search for returns, and the snake oil salesman who prey on it. That is a good explanation for what appears to be an anomalous market, where off-market securities become more liquid than government bonds. Have I understood correctly? $\endgroup$
    – Ellie Kesselman
    Jan 6, 2013 at 19:46
  • $\begingroup$ Thanks Freddy. If you are familiar with inflation swaps, do you know why the 1Y rate tends to behave a little erratically compared to the rest of the curve? Is it due to fixings? $\endgroup$
    – andy
    Jan 17, 2013 at 13:48
  • $\begingroup$ good question do you mind elaborating what you mean with "erratic"? $\endgroup$
    – Matt Wolf
    Jan 17, 2013 at 16:04
  • $\begingroup$ I've noticed that occasionally the 1Y point will kink sharply upwards or downwards (often causing an inflection point in the curve) for a short period of time (say 1-2 months) then return to normal. For example, here is the USD inflation swap curve for the month of Feb 2012, each line on the plot is one day that month. $\endgroup$
    – andy
    Jan 17, 2013 at 16:18
  • $\begingroup$ Let me take a look on Bloomberg tomorrow as its quite late here in Tokyo and I am not sitting in front of the terminal. $\endgroup$
    – Matt Wolf
    Jan 17, 2013 at 16:22

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