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Inflation Hedging It & Trading It

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Inflation Hedging It & Trading It Deutsche Bank Corporate and Investment Bank Inflation Hedging it & Trading it Doremus Deutsche Bank ClearPath 210x297mm 300944 Proof 01 07-07-2011 Deutsche Bank Corporate & Investment Bank Winning for our clients: Inflation Derivatives House of the Year. At Deutsche Bank, we are dedicated to setting the stage so that our clients can perform at their best. We appreciate winning awards that recognize the quality of service that we deliver. This advertisement has been approved and/or communicated by Deutsche Bank AG London. The services described in this advertisement are provided by Deutsche Bank AG or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Deutsche Bank AG is authorised under German Banking Law (competent authority: BaFin – Federal Financial Supervising Authority) and regulated by the Financial Services Authority for the conduct of UK business. Securities and investment banking activities in the United States are performed by Deutsche Bank Securities Inc., member NYSE, FINRA and SIPC, and its broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG, and its banking affiliates. © Copyright Deutsche Bank 2011. Contents Introduction Why inflation, why now? 6.0 Inflation Options 1.0 Deutsche Bank’s capabilities and credentials in this market 6.1 Inflation Options 1.1 How Deutsche Bank’s inflation offering differs from 6.2 Who are the major players in the options market? competitors 6.3 Option Products 2.0 Market Overview – the rise and rise of inflation volatility 6.4 What are the trading opportunities? 2.1 Components of Inflation indices 6.5 Option Strategies 6.6 Creating Optimal Hedges 3.0 Inflation Linked Bonds 3.1 Inflation Linked Bonds 7.0 Deflation tail risk 3.2 Real Yield and Breakeven Inflation and Inflation Protection 7.1 Deflation Tail Risk: DB 5 Year Note 3.3 Indexation and Breakeven Inflation 8.0 Case Study – Zero-Coupon Option Trade 3.4 Risk Measures, EM Sovereign Linkers, Seasonality, and US TIPS 9.0 Further Reading 3.5 UK Index Linked Gilts, EUR Sovereign Linkers, and other 9.1 Inflation Hedging for Institutional Investors Important Markets 3.6 ILB coupon frequency and settlement characteristics 10.0 Contacts 10.1 Deutsche Bank Global Inflation Team 4.0 Inflation Swaps 4.1 ILS Swaps and Markets 4.2 UK Swaps, Corporate Linkers, and US Swaps 4.3 ILS Indexation 4.4 ILS Pension Fund demand 5.0 Assessing Relative Value 5.1 Linker Asset Swaps and the Leverage Effect 5.2 5 sources of Asset Swap Difference 5.3 What is the ‘Fair’ Price for Inflation Protection? 5.4 Fair Credit Spread of Inflation Linked Bonds 5.5 Hedge with Bonds or Swaps 5.6 Summary Inflation —Hedging it & Trading it Deutsche Bank Introduction Why inflation, why now? Inflation Derivatives House of the Year There has never been a better Deutsche Bank is very strongly The Deutsche Bank inflation time to talk about inflation positioned to advise clients on team has developed this briefing what to do document to: – Inflation looks set to be volatile – We were recently voted the – Set out the challenges for the next 5 to 10 years Best Inflation Derivatives house and opportunities faced by – Any client with a bond portfolio in the industry by Risk magazine clients is exposed to inflation risk – We have a large global inflation – Explain the products and – Clients with revenues or derivatives trading and strategies we have developed. liabilities indexed to inflation structuring team are especially vulnerable. – We have extensive experience The Deutsche Bank Global of helping clients find inflation Inflation team can help solutions Inflation —Hedging it & Trading it Deutsche Bank Deutsche Bank’s credentials and capabilities in the Inflation market How Deutsche Bank’s inflation offerings differ from 1 competitors Inflation —Hedging it & Trading it Deutsche Bank Contents 1.0 Deutsche Bank’s credentials and capabilities in the Inflation Market Deutsche Bank’s credentials and capabilities in the Inflation Market We offer a full range of Issuing long dated inflation in large inflation services sizes can be difficult to manage; debt Our primary capabilities are managers turn to the strongest banks demonstrated by our leading position who have the best track record for in the league tables; we’ve also played risk management and distribution – an important role in maintaining order Deutsche Bank leads in this space in the secondary markets, distributing and recycling bonds and swaps across the world. DB is the global leader in inflation-linked bond syndication. Lead syndication mandates awarded to market counterparties *between September 2009 and February 2011 Source: Bloomberg, Deutsche Bank No. Date Deal DB UBS RBS Barc HSBC GS JPM Nomura BNPP SG Calyon MPS Leads 24 Sep 09 UKTI50 4 1 1 1 1 29 Sep 09 ACGBi25 3 1 1 1 21 Oct 09 BTPei41 4 1 1 1 1 27 Jan 10 UKTI40 4 1 1 1 1 21 Apr 10 BTPei21 5 1 1 1 1 1 11 May 10 UKRAIL47 2 1 1 26 May 10 UKTI50 4 1 1 1 1 27 Jul 10 UKTI40 4 1 1 1 1 14 Sep 10 ACGBi30 3 1 1 1 01 Feb 11 NZGBi25 1 1 Total number 7 6 5 3 3 3 2 1 1 1 1 1 Inflation —Hedging it & Trading it Deutsche Bank 1.0 Deutsche Bank’s credentials and capabilities in the Inflation Market We are outperforming the competition around the world Deutsche Bank is: – No 1 in ICAP market share for EUR Inflation/Asset Swaps (2009, 2010) – No 3 in ICAP market share for UKRPI Inflation/Asset Swaps (2009, 2010) – No 1 in BGC market share for all US products (Inflation, Asset Swaps, Options) 2010 Fig.1: Fig. 2: Fig. 3: Global Linker Syndications as Lead Total Syndication Size for Global USD Inflation Market by Volume 2010 Manager Linkers (mm) Source: Bloomberg, Deutsche Bank Deutsche Bank Source: Bloomberg, Deutsche Bank Source: Bloomberg, Deutsche Bank Competitors Deutsche Bank Deutsche Bank Competitors Competitors 8 Number of 7,000 Total Syndication 12,000 Syndications Size 7 6,000 10,000 6 5,000 8,000 5 4,000 4 6,000 3,000 3 4,000 2 2,000 1 1,000 2,000 0 0 0 GS GS DB DB ML ML MS MS RBS RBS RBC RBC ANZ ANZ UBS UBS Barc Barc MPS MPS BNPP BNPP HSBC HSBC JPMC JPMC Calyon Calyon SocGen SocGen Nomura Nomura Inflation —Hedging it & Trading it Deutsche Bank 1.0 Deutsche Bank’s credentials and capabilities in the Inflation Market We are outperforming the competition in the UK Fig. 1: Fig. 3: UK Linkers Syndications as Lead UK Linkers Total Syndication Size (mm) Manager Source: Bloomberg, Deutsche Bank Deutsche Bank Source: Bloomberg, Deutsche Bank Competitors Deutsche Bank Competitors 3.5 3,000 3 2,500 2.5 2,000 2 1,500 1.5 1,000 1 0.5 500 0 0 DB UBS RBS Barc HSBC GS JPM Nomura DB UBS RBS Barc HSBC GS JPM Nomura Fig. 2: Fig. 4: UK Linkers and Nominals Syndications UK Linkers and Nominals Syndications as Lead Manager as Lead Manager Source: Bloomberg, Deutsche Bank Source: Bloomberg, Deutsche Bank Deutsche Bank Deutsche Bank Competitors Competitors 3.5 4,000 3 3,500 3,000 2.5 2,500 2 2,000 1.5 1,500 1 1,000 0.5 500 0 0 DB UBS RBS Barc HSBC GS JPM Nomura DB UBS RBS Barc HSBC GS JPM Nomura Inflation —Hedging it & Trading it Deutsche Bank 1.1 Deutsche Bank’s credentials and capabilities in the Inflation Market Integrated trading, structuring Fig. 1: and research Our inflation page on Bloomberg DBII Unlike some of our competitors, Deutsche Bank’s inflation trading, structuring and research professionals work closely together, combining strategic and technical expertise with the macro-economic insights so important to this offering. Bloomberg Forecasts, inflation linked bonds, inflation swaps and inflation linked options. US options will be added soon (figure 1) Fig. 2: Inflation on Trade Finder – new The market is pricing much more improvements coming soon upside risk than downside risk – contrary to what we see in other markets Trade Finder Currently being upgraded, it will soon include additional functionality: e.g. forward matrices – five year forward on Eurozone or five year to 25 year forward. In Frankfurt and Mumbai, real live zero coupon lives and forward matrices and cross market indicators will soon be added (figure 2) Inflation —Hedging it & Trading it Deutsche Bank Market Overview 2 Components of Inflation indices Inflation —Hedging it & Trading it Deutsche Bank Contents 2.0 Market Overview – the rise and rise of market volatility All G7 nations issue inflation-linked Industrial country sovereign linker Fig. 1: bonds markets – Other important markets A Fast Growing Asset Class include Australia, Canada and Sweden. Source: Deutsche Bank US ITL Markets AUD: govt suspended issuance in UK DEM JPY Gr FRF SEK US TIPS – the US Sovereign linker 2003, started again in 2009. Sweden: CAD AUD market is the largest globally with a linkers account for almost 30% of total 1,600 total outstanding, $ bn total market value of over USD700bn govt bond market, higher share than in 1,400 but less liquid than EUR any other industrial market 1,200 1,000 UK – IL Gilts – first issuance 1981; total 800 EM sovereign linker markets - most 600 market value exceeds GBP270bn LatAm inflation markets have long 400 histories; Brazil is the largest market, 200 EUR sovereign linkers - expanding suppression of investment restrictions 0 rapidly; total market value exceeding in 2006 spurred international demand. ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 EUR320bn as of now; France, Italy, Chile, Colombia & Uruguay also issue Germany & Greece issue ILBs.
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