Although the bonds were successful, the concept of indexed bonds was set aside until the 20th century. Finland introduced indexed bonds in 1945, Sweden in 1952, Iceland and Israel in 1955. Since then, indexed bonds have usually appeared in countries experiencing very high rates of inflation, such as Brazil in 19642, Chile (1966), Colombia (1967), Argentina (1972) or even the UK in 1975, with the issuance of so-called “granny bonds”, i.e. non-marketable indexed-linked savings retirement certificates. Later on, in 1981, the UK issued a marketable instrument - the index-linked giltin a context of rapidly increasing prices. In all of these cases, the issuance of inflation-indexed debt instruments by the government was aimed at developing long-term capital markets and improving the credibility of anti-inflationary policies. As regards this last point, such a rationale is, however, ambiguous as it can also be argued that debt indexation can fuel the inflationary process by spreading inflation-linking to other contracts, such as wage contracts for instance. Given this historical background, it might appear paradoxical that, since 1980, indexed bonds have largely been issued by industrialised countries, characterised both by low inflation rates and price stability - oriented monetary policies: Australia (1985), Canada (1991), Sweden (1994), New Zealand (1995), The United States (1997), France (1998 and 2001) and recently Italy and Greece (2003). The rationale behind the issuance of these indexed bonds was mainly to reduce the cost of debt and to develop complete financial markets.
Anecdotal evidence suggests that a surge in demand for OATi originated from banks, which tried to hedge against this new regulation. An insufficient outstanding amount of French inflation linkers relative to the overall demand for hedging purposes led to an upward pressure on the prices of other euro area linkers (Greece and Italy). To conclude this point, all these biases are likely to be small, but they add together, potentially in a non-systematic way. They are also likely to vary over time. It is therefore difficult to smooth out all these noises to get a good proxy of inflation expectations over the medium to long-term. Two main lessons may be drawn from the existence of the various premia and biases affecting the break-even inflation rates. First, it may be more informative to focus on the changes in the break-even rates rather than on their levels. This is however at a cost since the level by itself conveys relevant information for the central bank. Second, break-even inflation rate may provide interesting information as regards long-term inflation expectations, although it is necessary to cross-check against other inflation expectations’ measures. This leads me to my third and final point. 3. Other useful indicators of expected inflation  Inflation-indexed bonds are not the sole financial instrument to provide information on long-term expectations of inflation, as similar information can be extracted from inflation-linked swaps. The market for inflation-linked swaps has developed rapidly since 2002 in the euro area.