: Jessica James, Michael Leister, Christoph Rieger
: Inflation-Linked Bonds and Derivatives Investing, hedging and valuation principles for practitioners
: Walter de Gruyter GmbH& Co.KG
: 9783110787474
: The Moorad Choudhry Global Banking SeriesISSN
: 1
: CHF 66.60
:
: Betriebswirtschaft
: English
: 129
: Wasserzeichen
: PC/MAC/eReader/Tablet
: ePUB

Disruptions in supply chains and consumption patterns triggered by the pandemic together with stimulus packages and the energy crisis have catapulted inflation rates to levels last seen in the 1970s. For inflation markets, it's hard to understate this sudden and enormous change in fortunes. Understanding the future evolution of consumer prices has become crucial for investors across all asset classes as central banks tailor their policy responses with a view to anchoring inflation expectations.

Infla ion-Linked Bonds and Derivatives condenses more than 15 years of dedicated coverage of inflation markets. It provides investors, issuers and policy makers with all the relevant tools to navigate inflation markets, starting with the nuts and bolts of consumer price indices, forwards, carry and trading strategies, to advanced topics like seasonality adjustments and the use of inflation options.

With its many illustrative graphs and tabulated data, this exceptional book will benefit traders, corporate treasury departments, fixed income investors, insurance companies and pension funds executives.



Jessica James is a senior quantitative researcher at Commerzbank in London, and previously was head of the Quantitative Solutions Group. She joined Commerzbank from Citigroup where she held a number of FX roles, latterly as global head of the Quantitative Investor Solutions Group. Prior to this, she was the head of the Risk Advisory and Currency Overlay Team for Bank One. Before her career in finance, James lectured in physics at Trinity College, Oxford. She holds a BSc in physics from Manchester University and a D. Phil. in atomic and nuclear physics from Oxford University.

Her significant publications include theHandbook of Exchange Rates (Wiley),Interest Rate Modelling (Wiley), and 'Currency Management' (Risk Books). Her latest bookFX Option Performance came out in 2015. She has been closely associated with the development of currency as an asset class, being one of the first to create overlay and currency alpha products.

Jessic is a visiting professor both at University College London and at Cass Business School. She is a managing editor forQuantitative Finance. Apart from her financial appointments, she is a fellow of the Institute of Physics and has been a member of their governing body and of their Industry and Business Board.

Christoph Rieger is heading the Rates& Credit Research at Commerzbank. Together with his research teams, he covers the full range of fixed income products, from money markets, government bonds and SSAs to covered bonds, financials and corporates, developing big-picture themes alongside commercial trading and funding strategies.

Prio to this role, Christoph was Head of Rates Strategy at Commerzbank and he worked as senior interest rate strategist at Dresdner Kleinwort with a specific focus on money markets and interest rate derivatives. Before joining Dresdner Kleinwort in 2004, Christoph held various positions in fixed income research, starting in 1998 at Commerzbank as a government bond analyst before moving to London in 2001, where his main focus was on interest rate strategies using derivatives. His academic background is rooted in economics, in which he holds two degrees: an MA from Temple University (Fulbright Scholarship in Philadelphia, PA) and a diploma from the University of Cologne (Germany). Christoph is a member of the ECB Bond Market Contact Group.

Michael Leister is responsible for interest rate strategy at Commerzbank. His research team of four analysts covers the full range of liquid and structured rates products for the major currencies, in cash as well as in derivatives space.

Michael joined Commerzbank London in 2012 with a focus on ? rates and global inflation markets, after working as Interest Rate Strategist for WestLB in Düsseldorf and London with a focus on government bonds.

He holds a masters degree in economics from the University of Mannheim and has been awarded the CFA charter in 2012. Beyond financial markets he is a frequent participant in city and mountain marathons (PB 2:47).

Chapter 1 Inflation Indices


Introduction


Inflation-indexed products (“linkers”) promise investors a certain real return, including the effect of inflation. The cash-flows of these products are linked to a price index (usually a consumer price index [CPI]), which captures the changes in the prices of goods and services of the country where the product is based. CPIs form the backbone of inflation markets and in this chapter we present the key characteristics and components of the major euro area and US price indices and discuss measurement issues as well as metrics for assessing underlying inflation. The inflation markets are constantly changing and thus metrics for size, flow and product popularity change with time. We have supplied dates for figures where relevant; otherwise the numbers are those extant at the end of 2021/spring 2022.

Euro Area – HICPx


Since its inception in 1998 the European linker market has evolved into a mature and liquid market. In the euro area, the benchmark index is the non-seasonally adjusted HICP ex tobacco (Harmonised Index of Consumer Prices [HICPx]). Tobacco prices tend to distort the index and thus the version of the index that omits them is more widely used.

German, French, Spanish and Italian inflation-linked bonds (ILBs) amount to €620.7bn or about 9.8 percent of government bonds outstanding for these issuers. Not all linkers are alike; France, for example, has linkers outstanding tied to its domestic inflation index (i.e., though they trade in euros they reference the French inflation index not the HICPx) and Italy has about €77.5bn in BTP Italia, which are linked to domestic inflation and target domestic retail investors. SeeFigure 1.1 for detail.

Figure 1.1: Euro Area Linker Volumes.Source: Bloomberg, Commerzbank Research.

Inflation swaps referenced to HICPx are actively traded across maturities and inflation options also trade on a regular basis.

HCPIx Versus CPI


As CPIs can vary on a national level, for example due to different calculation methods or coverage of households, HICPx provides a consistent framework across euro area countries.

Key differences between HICPx and national CPIs concern the treatment of owner-occupied housing (see also below for details), subsidized healthcare and education costs as well as the geographical coverage of households. The HICP is published on a monthly basis by Eurostat, typically two weeks after the end of the month. It can be found on Bloomberg via the CPTFEMU index. The current reference year for the index is 2015 (index = 100 at this point in time).

The following charts inFigure 1.2 illustrate the major constituents and country weights of HICPx. Note that household final consumption expenditure is the underlying concept for the product as well as country weights that can vary on an annual basis.

Figure 1.2: HICPx Composition.Source: Eurostat, Commerzbank Research.

HICPx is obtained by aggregating the respective country indices. There are pronounced differences in the item weights across countries, however, arising from the differences in domestic consumption patterns, as shown inFigure 1.3.

Figure 1.3: HICPx weights per country.Source: Eurostat, Commerzbank Research.

France – FRCPI


The French CPI (Indice des prix à la consommation [IPC]) is the other major inflation index in the euro area. Outstanding French government bonds linked to FRCPIx amounted to €66.7bn in 2021. The index is published by INSEE (Institut national de la statistique et des études économiques) at about the 22nd of the subsequent month. The current reference year for the index is 2015. It can be found on Bloomberg via the FRCPXTOB index.

The following chart inFigure 1.4 highlights the major constituents:

Figure 1.4: French CPI weights.Source: INSEE, Commerzbank Research.

HICPx Index Events and Their Market Implications


In February 2019, the euro in