![\"structure_of_ez_nominal_10-year_swap.jpg\"](\"http:\/\/www.next-finance.net\/http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/06\/structure_of_ez_nominal_10-year_swap.jpg\")
<\/a><\/p>\nPre-crisis, as highlighted in the chart above, the inflation swap hovered between 2% and 2.5% on the view that the
\nEuropean Central Bank anti-inflation credibility was rock solid. The crisis led to much greater volatility to begin with,
\nbut it was not until 2013, when the deflation risk started to loom high, that the inflation swap subsided sharply.
\nHowever, prospects that the ECB would resort to quantitative easing and then the launch of the PSPP did enable the
\ninflation swap to pick up slightly later on.<\/p>\n
The real component of the nominal swap (i.e. the breakeven swap) displayed far greater volatility over the period
\nthan the inflation premium (standard deviations of 0.92 and 0.3, respectively, over the period). Even when standard
\ndeviations are calculated over shorter period (3 months in the chart below), the breakeven swap nearly always
\ndisplayed greater volatility than the inflation swap.<\/p>\n
Pre-crisis, the breakeven swap hovered between 1.5% and 2.5%. It collapsed immediately after the onset of the
\ncrisis and, especially, sunk into negative territory from 2013 onwards, where it remains to this day.<\/p>\n
When contributions are expressed in percentage terms, this reveals that, pre-crisis, the breakeven swap and inflation The current situation is therefore far removed from normality such as it was pre-crisis (fifty-fifty contributions by the The inflation swap could continue to rise, but rather more on account of the evolution in crude oil prices (over which<\/a><\/p>\n
\nswap contributed just about equally to the formation of the nominal swap rate (see right-hand chart above). In the
\nwake of the crisis, however, the contribution by the breakeven swap tended toward zero percent, then became
\nsignificantly less than zero percent, given that real rates moved into negative territory.<\/p>\n
\ninflation premium and real rate). This raises a number of questions:
\n
1. Will there be a return to the normality of old?
\n
2. Will the inflation swap and breakeven swap end up once again making 50% contributions, i.e. 200bp each?
\n
3. How long will this normalisation take?<\/p>\n
\nthe ECB has no say) than monetary policy measures. Come the end of the year, assuming crude oil prices stabilise, Eurozone inflation could reach around 1.5%. Based on the correlation between inflation and the inflation swap since
\n2005, this suggests that the 10-year inflation swap could reach 2%, up 60bp from current levels, and nearer its
\naverage level pre-crisis.<\/p>\n