Global Inflation Strategy

Introduction to the euro-area inflation markets

August 2011 Laurent Bilke
+44 20 710 22566 laurent.bilke@nomura.com

Rohit Garg
+44 20 710 39794 rohitgarg@nomura.com
Any authors named on this report are research analysts unless otherwise indicated. Please see analyst certifications and important disclosures starting on page 23.

Nomura International plc

Outline

Inflation measures: HICP, CPI, composition Euro-area linkers: outstanding and conventions Illustrative real yields and breakevens spreads Inflation swaps

Main inflation indexes

The euro inflation market was launched on 15 September 1998 with the issuance of the OATi 3% July 2009 based on French CPI. It then developed a euro area HICP-based market following the launch of the euro in 1999. Euro area HICPxT (Harmonised Index of Consumer Prices, excluding tobacco) for all linkers issued by Italy (BTPei), Germany (Bundei) and Greece (GGBei), about half of French linkers (OATei) and euro inflation swaps French CPIxT (Consumer Price Index, excluding tobacco) for the other half of French linkers (OATi) and French inflation swaps Other national indices: Italian CPI FOIxT, Spanish CPI, German CPI, Dutch CPI, Belgium Health CPI for domestic inflation swaps
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HICPs and national CPIs

In most countries, two inflation measures coexist

HICP, which has similar methodology across Europe

national CPIs, which follow their own rules There are various differences between the HICP and the national CPIs, most noticeably: Sales: sales prices have to be included into the HICP, but are not necessarily in the CPI, which can lead to stronger seasonality in the HICP than the CPI (e.g. Italy) Owner-occupied housing: excluded from HICP, while national CPIs use a variety of methods to include them (or not) Aggregation formulae: The HICP uses ratios of arithmetic mean prices or of geometric means, while some national CPIs may use other formulae Geographical and population coverage: The HICP covers all expenditures within the territory, whether by residents or visitors, while some national CPIs cover expenditures by domestic residents both within and outside the country Treating subsidised healthcare and education: The HICP includes net prices paid by consumers, while some national CPIs exclude these purchases or record gross price

Two monthly releases

Flash estimate
Last working day of the month for that month No breakdown (only headline HICP, no HICPxT) Based on partial country data and energy prices

HICP full release Published two weeks after flash, around the middle of following month Complete breakdown across product groups (including HICPxT level) The national HICP previously released can be revised in the meantime Linkers are valued with this first HICPxT release, ignoring later revisions

Typical publication schedule (HICP for month m)

27-30/m 27-29/m

Belgium Spain (P)

Germany (P)

29-31/m

Italy (P) Slovenia HICP Flash

End of HICP month

6-10/m+1

9-12/m+1

11-15/m+1

12-15/m+1

Netherlands

Germany (F)

Spain (F)

France

14-16/m+1
P = Preliminary F = Final No mention means there is only one release

Italy (F) HICP Final

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Country aggregation in the HICP

The euro-area HICP is a weighted average of national HICPs The weights depend on the countries share of relative household consumption expenditure in the euro area They are updated annually with the January release
Country
Germany France Italy Spain Netherlands Greece Belgium Austria Portugal

HICP weight (%)

25.9 20.7 18.5 12.7 4.8 3.8 3.3 3.2 2.2

Country
Finland Ireland Slovakia Slovenia

HICP weight (%)

1.7 1.3 0.7 0.4

Luxembourg
Cyprus Estonia Malta
Note: 2011 weights Source: Eurostat, Nomura Inflation Strategy

0.3
0.3 0.1 0.1

Euro HICPxT sub-components

Energy 11%

Food and beverages 17%

Miscellaneous goods and services 9%

Clothing and f ootwear 7% Restaurants and hotels 10%

Recreation and culture 10%

Housing, f urnishings and water 17%

Communications and education Transport without f uel 4% 11%

Health 4%

Note: 2011 weights Source: Eurostat, Nomura Inflation Strategy

Usual HICP sub-indices

Euro area HICP special aggregates (2011 weights)
HICP HICP ex tobacco HICP ex energy and seasonal food HICP ex food, energy, alcohol and tobacco (usual core measure) 100.00 97.31 85.64 69.23

Processed food (incl. alcohol and tobacco)

12.83

Unprocessed food
Energy Non-energy industrial goods Services
Source: Eurostat, Nomura Inflation Strategy

7.31
10.62 28.92 40.31

Eurostat HICP data are neither calendar nor seasonally adjusted

ECB provides seasonally adjusted data for the headline HICP, processed food, unprocessed food, non-energy industrial goods and services
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Euro HICP vs US CPI and UK RPI inflation

% y-o-y 6 5
4 US Euro area UK

3 2 1 0
-1

-2 -3 Jan-00 May-02 Sep-04 Jan-07 Apr-09 Aug-11 Dec-13

Source: Eurostat, ONS, BLS, Bloomberg, Nomura Global Economics

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Euro index-linked bonds: conventions

Germany (DBRei, OBLei) Inflation index Settlement Coupon freq Floor Indexation lag Inflation adj. dirty price Outstanding bonds Outstanding amount (bn) 4 44.0 Annual Annual EA HICPxT France (OATei) EA HICPxT France (OATi) France CPIxT T+3 Annual Par floor 2-3 months Semi-annual Annual Italy (BTPei) EA HICPxT Greece (GGBei) EA HICPxT

(Quoted price + Accrued interest) x Index ratio

7 78.9 6 66.4 10 109.1 2 14.7
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Euro index-linked bonds

Bond Outstanding amount (nominal, bn) Last supply Nominal benchmark

Germany (OBLei/DBRei) OBLei 2.25% 15-Apr-13 DBRei 1.50% 15-Apr-16 OBLei 0.75% 15-Apr-18 DBRei 1.75% 15-Apr-20 11.0 15.0 3.0 15.0 Italy (BTPei) BTPei 1.85% 15-Sep-12 BTPei 2.15% 15-Sep-14 BTPei 2.10% 15-Sep-16 BTPei 2.10% 15-Sep-17 10.4 14.5 5.8 14.6 13.7 12.3 14.7 3.0 13.7 6.4 27-Aug-08 27-May-05 27-Apr-11 27-May-10 BTPS 4.25% 15-Oct-12 BTPS 4.25% 01-Aug-14 BTPS 3.75% 01-Aug-16 BTPS 5.25% 01-Aug-17 07-Apr-10 08-Sep-10 12-Apr-11 09-Mar-11 OBL 3.50% 12-Apr-13 DBR 3.50% 04-Jan-16 DBR 4.00% 04-Jan-18 DBR 3.25% 04-Jan-20

BTPei 2.35% 15-Sep-19

BTPei 2.10% 15-Sep-21 BTPei 2.60% 15-Sep-23 BTPei 3.10% 15-Sep-26 BTPei 2.35% 15-Sep-35 BTPei 2.55% 15-Sep-41

24-Feb-10
27-Jul-11 29-Mar-10 08-Jun-11 28-Jan-09 27-Oct-10

BTPS 4.25% 01-Sep-19

BTPS 3.75% 01-Sep-21 BTPS 4.75% 01-Aug-23 BTPS 4.50% 01-Mar-26 BTPS 5.00% 01-Aug-34 BTPS 5.00% 01-Sep-40
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Euro index-linked bonds (contd..)

Bond Outstanding amount (nominal, bn) France (OATei) FRTRei 3.00% 25-Jul-12 FRTRei 1.60% 25-Jul-15 FRTRei 2.25% 25-Jul-20 FRTRei 1.10% 25-Jul-22 FRTRei 1.85% 25-Jul-27 FRTRei 3.15% 25-Jul-32 FRTRei 1.80% 25-Jul-40 13.9 14.1 20.0 10.3 20-Sep-04 18-Feb-10 15-Apr-10 21-Jul-11 19-May-11 17-Sep-09 21-Jul-11 BTNS 4.50% 12-Jul-12 FRTR 3.50% 25-Apr-15 FRTR 3.50% 25-Apr-20 FRTR 3.75% 25-Apr-21 FRTR 3.50% 25-Apr-26 FRTR 5.75% 10-Oct-32 FRTR 4.00% 25-Oct-38 Last supply Nominal benchmark

3.4
9.4 7.9 France (OATi)

FRTRi 2.50% 25-Jul-13 BTANi 0.45% 25-Jul-16 FRTRi 1.00% 25-Jul-17 FRTRi 1.30% 25-Jul-19 FRTRi 2.10% 25-Jul-23

15.7 6.6 20.2 7.7 8.7 7.5 Greece (GGBei)

19-Mar-09 21-Jul-11 17-Jun-10 16-Jun-11 21-Oct-10

FRTR 4.00% 25-Apr-13 FRTR 3.25% 25-Apr-16 FRTR 3.75% 25-Apr-17 FRTR 4.25% 25-Apr-19 FRTR 4.25% 25-Oct-23

FRTRi 3.40% 25-Jul-29

16-Jul-09

FRTR 5.50% 25-Apr-29

GGBei 2.90% 25-Jul-25 GGBei 2.30% 25-Jul-30

7.2
7.5

12-Apr-06 29-Jan-08

GGB 5.90% 22-Oct-22 GGB 4.50% 20-Sep-37

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Seasonality impact
Country [Maturity]
Germany France (OATei) -110

Germany [15-Apr-XX]

France (OATei) [25-Jul-XX]

110

Italy [15-Sep-XX]
85 -24

Greece [25-Jul-XX]
110 0

Italy
Greece
Seasonality expressed in basis points

-85
-110

24
0 -24

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The table reads as follows: the French OATei should be 110bp more expensive than a German Bundei of the same maturity to reflect the seasonality difference

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Real yield spreads: OATei and BTPei vs Bundei

bp 400
bp

30 25

350 BTPei17-Bundei16 (lhs)

300

20 15 10 5

OATei15-Bundei16 (rhs)

250

200 0 150
-5 -10

100

-15
50

-20 0 Mar-06 Apr-07 May-08 Jun-09 Jul-10 -25 Jul-11

Note: Last observation is for July 29, 2011 Source: Nomura Inflation Strategy

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Breakeven spreads: OATei and BTPei vs Bundei

bp 60

50 OATei15-Bundei16
40

BTPei17-Bundei16

30

20

10

-10

-20 Mar-06 Apr-07 May-08 Jun-09 Jul-10 Jul-11

Note: Last observation is for July 29, 2011 Source: Nomura Inflation Strategy

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Real yield spreads: French vs Euro inflation (OAT curve)

bp

30 20 10 0 -10 -20 -30 OATei15-OATi17

-40 -50

-60 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11

Note: Last observation is for July 29, 2011 Source: Nomura Inflation Strategy

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Breakeven spreads: French vs Euro inflation (OAT curve)

bp

30 20 10 0 -10 -20 -30 -40 -50 -60 -70 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 OATei15-OATi17

Note: Last observation is for July 29, 2011 Source: Nomura Inflation Strategy

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10yr breakevens: euro vs US and UK

bp

200 150
100

50 0 -50 10yr BE TIPS-OATei -100 -150 -200 Oct-03 Nov-04 Dec-05 Jan-07 Mar-08 Apr-09 May-10 Jun-11 10yr BE UKTi-OATei

Note: Last observation is for July 29, 2011 Source: Nomura Inflation Strategy

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Inflation swap
Euro HICPxT
Linked to Index: Euro area HICP ex Tobacco

Bloomberg ticker: CPTFEMU Index

Lag: Flat 3-month Quoted on zero coupon Settlement: T+2

French CPIxT
Linked to Index: France CPI ex Tobacco Bloomberg ticker: FRCPXTOB Index Lag: Linear 2-3 month Quoted on zero coupon Settlement: T+2

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Other inflation swap markets

Country Italy Spain Netherlands Belgium Germany Linking Index Italian CPI FOI ex Tobacco Spanish CPI Netherlands CPI Belgium CPI health Bundesbank German CPI Bloomberg Ticker ITCPI Index SPIPC Index NECPIND Index BECPHLTH Index GRBC2000 Index Lag Flat 3-month Flat 3-month Flat 3-month Flat 3-month Linear 2-3 month

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Nomura research references

Global Inflation Strategy
NomuraNow - Fixed Income
http://go.nomuranow.com/research/globalresearchportal/pages/fixedincome/fixedincome.aspx?p=3

Global Inflation Monitor (Monthly)

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=453108

Weekly Carry Tables

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=454824

On Bloomberg: NOMR4 (also includes weekly forecast updates) UK linkers primer

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=416400

TIPS primer
http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=392380

Other publications (see on NomuraNow)

European Rates Weekly
US Rates Weekly Global Weekly Economic Monitor
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Contacts
Global
Laurent Bilke Global Head of Inflation Strategy laurent.bilke@nomura.com 44-20-7103-0022

North America
George Goncalves Stanley Sun David Resler Head of Rates Strategy - Americas US Inflation Strategist Chief US Economist george.goncalves@nomura.com stan.sun@nomura.com david.resler@nomura.com 1-212-667-2254 1-212-667-1236 1-212-667-2415

Europe
Laurent Bilke Rohit Garg Philip Rush Lavinia Santovetti Irena Sekulska Head of Rates Strategy - Europe Inflation Analyst UK Economist European Economist Macro-Strategy Analyst laurent.bilke@nomura.com rohitgarg@nomura.com philip.rush@nomura.com lavinia.santovetti@nomura.com irena.sekulska@nomura.com 44-20-7103-0022 44-20-7103-9794 44-20-7102-9595 44-20-7102-6364 44-20-7103-1453

Emerging markets
Olgay Buyukkayali Peter Attard Montalto Anton Kudlay Head of EEEMA Strategy Economist SA, CEE Emerging Markets Analyst olgay.buyukkayali@nomura.com peter.am@nomura.com anton.kudlay@nomura.com 44-20-7102-3242 44-20-7102-8440 44-20-7102-0501

Japan
Naka Matsuzawa Neale Vincent Head of Rates Strategy - Japan Head of Quant Strategy - Japan naka.matsuzawa@nomura.com neale.vincent@nomura.com 81-3-6703-3864 81-3-6703-3842

Takenobu Nakashima

Quant Strategist

takenobu.nakashima@nomura.com

81-3-6703-3873
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