Inflation swap market lacks transparency, impacting inflation expectations and risk hedging.
Inflation swaps are used to trade fixed payments for floating payments based on inflation rates. Recent studies show that inflation swap rates are usually higher than expected inflation rates from Treasury bonds. The difference is attributed to mispricing of Treasury bonds, not inflation swaps. Some argue that the difference comes from liquidity premiums in both markets. The lack of transaction data has made it difficult to understand how these markets operate. Regulatory efforts are being made to improve transparency in derivatives markets.