workflow-fi-inflation-linked

# Fixed Income: Inflation-Linked Instruments ## What this skill covers A three-phase pipeline covering inflation-linked bond analytics and inflation derivative pricing. Phase 1 prices TIPS and extracts real yields and breakevens. Phase 2 constructs the breakeven curve and interprets inflation expectations. Phase 3 prices zero-coupon and year-on-year inflation swaps, and caps/floors. Every number must come from `tips_analytics` or `inflation_derivatives` — no hand-calculated inflation arithmetic. ## Core Rules - TIPS real yield = TIPS YTM net of CPI indexation; breakeven inflation = nominal Treasury yield − TIPS real yield at matched maturity. - 10Y US breakeven of 2.0–2.5% = well-anchored; > 3.0% = elevated inflation fears; < 1.5% = deflation concern. - Deflation floor: TIPS principal redeems at max(indexed principal, par) — price this floor explicitly using `tips_analytics`. - Liquidity premium: TIPS yields embed a liquidity premium vs nominal Treasuries (typically 10–30 bps); adjust breakeven accordingly. - Inflation swap fair value must be benchmarked against TIPS-implied breakeven (should be within 10–15 bps in liquid markets; larger gaps = dislocation). ## Workflow ### Phase 1 — TIPS Pricing and Real Yield 1. Collect TIPS security inputs: | Field | Notes | |---|---| | Coupon (real) | Typically 0.125%–2.0% for recent issuance | | Maturity | 5Y, 10Y, 30Y standard tenors | | Settlement date | T+1 for on-the-run TIPS | | Index Ratio | CPI index ratio = CPI(settlement) / CPI(base date) | | Reference CPI series | US: CPI-U (NSA); UK: RPI or CPIH; EU: HICP | 2. Pull current CPI index ratio and reference CPI series: - US: `fred_series` with series CPIAUCNS (CPI-U NSA) - UK / EU: `lseg_economic_indicators` for RPI or HICP 3. Pull the matched-maturity nominal Treasury yield: - `fred_yield_curve` or `fmp_treasury_rates` at the matched tenor. 4. Call `tips_analytics` with real coupon, maturity, index ratio, reference CPI, settlement date, and optional market price. - Outputs: - **CPI-adjusted principal** (index ratio × face value) - **Clean real price** and **dirty real price** - **Real YTM** (yield on CPI-adjusted cash flows) - **Breakeven inflation rate** (nominal yield − real YTM at matched maturity) - **Deflation floor value** (put option on principal; value > 0 for recently issued near-par TIPS) - Note: for deeply discounted TIPS (index ratio << 1 due to deflation episode), deflation floor value is material; flag accordingly. 5. Sanity check: real yield must be lower than nominal yield (breakeven > 0 in most environments). If real yield > nominal yield, breakeven is negative — this implies deflation expectations; flag explicitly. ### Phase 2 — Breakeven Curve and Inflation Expectations Analysis 6. Compute breakevens across the standard TIPS tenor curve (5Y, 7Y, 10Y, 20Y, 30Y) by repeating step 4 for each. 7. Adjust for liquidity premium: - **Liquidity-adjusted breakeven** = raw breakeven − estimated liquidity premium. - Liquidity premium proxy: 10–30 bps for US TIPS vs on-the-run Treasuries (use 15 bps as default; adjust if bid-ask spread data is available). - Document the liquidity premium assumption explicitly. 8. Derive the **5Y5Y forward breakeven** (inflation expected 5 years from now over the subsequent 5 years): 5Y5Y breakeven = ((1 + 10Y breakeven)^10 / (1 + 5Y breakeven)^5)^(1/5) − 1 9. Interpret: - 5Y breakeven reflects near-term inflation expectations (more sensitive to current CPI prints). - 5Y5Y breakeven reflects long-run inflation anchoring (closer to the central bank's 2% target in anchored regimes). - Divergence between 5Y and 5Y5Y > 100 bps signals de-anchoring risk. ### Phase 3 — Inflation Derivative Pricing 10. For an inflation swap or cap/floor request, collect: - Notional - Tenor (standard: 1Y, 2Y, 5Y, 10Y, 30Y) - Floating leg: CPI index - Fixed rate (for a fair swap, this equals the breakeven at the tenor) - For caps/floors: strike inflation rate 11. Call `inflation_derivatives` with swap type (zero-coupon or year-on-year), notional, tenor, fixed rate, CPI index, and current CPI path from Phase 1. - Zero-coupon inflation swap: - Fixed leg pays: notional × [(1 + fixed)^T − 1] at maturity - Floating leg pays: notional × [(CPI_T / CPI_0) − 1] at maturity - Outputs: **fair value**, **mark-to-market PnL** if rate differs from contract rate, **inflation DV01** (change in value per 1 bp change in breakeven). - Year-on-year inflation swap: - Outputs: **fair value per payment period**, **total mark-to-market**. - Inflation cap/floor: - Outputs: **cap/floor premium**, **implied inflation volatility**, **delta** (sensitivity to breakeven move). 12. Cross-check: zero-coupon inflation swap fair value at inception should be zero if the fixed rate equals the TIPS-implied breakeven (adjusted for liquidity premium). Document any basis. ## Output Format **TIPS Pricing** | Metric | 5Y TIPS | 10Y TIPS | 30Y TIPS | |---|---|---|---| | CPI-adjusted principal ($) | X,XXX.XX | X,XXX.XX | X,XXX.XX | | Real YTM | X.XX% | X.XX% | X.XX% | | Breakeven inflation (raw) | X.XX% | X.XX% | X.XX% | | Liquidity premium adjustment | −X bps | −X bps | −X bps | | Liquidity-adjusted breakeven | X.XX% | X.XX% | X.XX% | | Deflation floor value | $X.XX | $X.XX | $X.XX | **Inflation Expectations Summary** | Measure | Value | Interpretation | |---|---|---| | 5Y breakeven | X.XX% | Near-term inflation pricing | | 10Y breakeven | X.XX% | Medium-term anchor | | 5Y5Y forward breakeven | X.XX% | Long-run inflation anchor | | Anchoring status | ANCHORED / ELEVATED / CONCERN | Based on benchmarks above | **Inflation Derivative** | Metric | Value | |---|---| | Instrument | Zero-coupon / YoY inflation swap | | Tenor | X years | | Fixed rate | X.XX% | | Fair value (at inception) | $X | | Inflation DV01 | $X per 1 bp breakeven move | **Tool-Call Traceability Table** | # | Tool | Key Inputs | Output | |---|---|---|---| | 1 | `fred_series` | CPIAUCNS | CPI-U index level | | 2 | `fred_yield_curve` | as-of date | nominal Treasury par yields | | 3 | `tips_analytics` | real coupon, maturity, index ratio | real YTM, breakeven, deflation floor | | 4 | `inflation_derivatives` | swap type, tenor, fixed rate | fair value, inflation DV01 | ## Quality Gates - [ ] CPI index ratio sourced from market data tool, not hand-keyed - [ ] Real yield is lower than nominal yield (breakeven > 0) or deflation expectation flagged explicitly - [ ] Liquidity premium adjustment stated and documented (default 15 bps if bid-ask unavailable) - [ ] 5Y5Y forward breakeven computed and interpreted - [ ] 10Y US breakeven benchmarked: 2.0–2.5% = anchored; deviations flagged - [ ] Inflation swap fair value cross-checked to TIPS-implied breakeven (basis < 15 bps or dislocation explained) - [ ] Deflation floor value reported for near-par TIPS issuance ## Related Skills - `workflow-fi-bond-valuation` — nominal bond pricing for breakeven spread computation - `workflow-fi-yield-curve-construction` — builds the nominal curve for breakeven derivation - `workflow-fi-alm-strategy` — uses real yield curve for inflation-matching in pension portfolios - `corp-finance-analyst-fixed-income` — deeper inflation derivatives (caps, floors, swaption overlays)