The nominal yield of a g-sec, expected inflation and the real yield of an IIB are linked through a simple relationship. Trading opportunities in IIBs arise when market perceptions of inflation differ from the breakeven level. Such trading will enable the discovery of real yields and inflation expectations in the market. 

The first issue of inflation indexed bonds will be launched next week. The bond structure adopted for the IIB ensures that both interest and principal payments are protected against inflation. This note explains the usefulness of index ratios in adjusting payouts for inflation. 

The Abenomics policy aims to pull Japan out of deflation through strong monetary and fiscal stimuli, and structural reform.  Though GDP and stock markets have reacted positively, bond yields are high and rising. A combination of inflationary expectations, high government debt, and large bank holdings of debt are creating uncertainty in bond markets.

Ambiguity in Fed statements about exiting the asset purchase program set up a volatile up and down day in stock markets around the world. Financial markets have come to rely on easy money through QE, any reversal could cause a sharp downturn in markets of emerging economies.

Regulatory arbitrage occurs when two sets of rules of regulations create a loophole that can be exploited without violating either law. Market players cleverly use such arbitrage in product design and features until these gaps are reduced or removed.