Dow Jones Indexes, a leading global index provider, today announced the launch of the Dow Jones Long-Term Inflation Indexes. This family of indexes measures the market's expectation of the future rate of U.S. inflation. The indexes are intended to serve as the underlying basis of financial products such as exchange-traded funds, swaps and structured products.
The main index in the family is the Dow Jones Long-Term Inflation Index, which tracks the difference in returns of long-term Treasury Inflation Protected Securities (TIPS) and the long-term Ultra Treasury Bond futures contract listed at the Chicago Board of Trade. Two sub-indexes individually track returns of the component instruments.
The index methodology was developed in the New York office of Credit Suisse Group AG. Dow Jones Indexes, which is 90% owned by CME Group and 10% by Dow Jones & Company, will calculate, maintain, market and license the indexes.
"This project is an exciting example of how our joint venture is able to incorporate and leverage successful CME Group products, data and relationships -- in this case with Credit Suisse -- to bring innovative new index products to market," said Michael A. Petronella, president, CME Group Index Services. "These indexes track very liquid instruments in a unique way to produce a transparent measure of inflation expectations. The indexes thus become indispensable tools for market participants who want or need to take future inflation into account in their investment strategies."
"The Dow Jones Long-Term Inflation Index is designed to closely track long-term inflation expectations as embodied in the nominal and inflation-linked Treasury market, while avoiding undue complexity," said Tim Blake, head of the North American interest rate products group at Credit Suisse. "The elegantly simple design creates unique, powerful indicators for everyone from retail investors to the most sophisticated institutional clients."
"Our approach to this new family of index products is centered on three differentiated strategies," said Baldwin Smith, head of fixed income index products, Credit Suisse. "These products offer a unique and efficient way to measure exposure to long maturity inflation and interest rate expectations using component instruments that are liquid and enable straight-forward replication."
The Dow Jones Long-Term Inflation Index measures the difference in returns of the on-the-run 30-year TIPS bond - which pays a fixed coupon and, at maturity, a principle amount linked to the inflation rate as measured by the Consumer Price Index - and the Ultra Treasury Bond futures contract.
The 30-year TIPS bond is the longest maturity of this security available in the market, and it has liquid and transparent pricing.
The Dow Jones Long-Term Treasury Index reflects the performance of a theoretical investment in futures contracts for the longest-maturing U.S. Treasury bonds. The index combines the performance of an Ultra Treasury Bond futures contract with a theoretical investment in a money market instrument paying the Federal Funds rate.
The Dow Jones Long-Term Inflation Indexes are calculated in U.S. dollars during U.S. trading days as defined by the Bond Market Association holiday calendar, and are published at the end of each trading day based on the 3.00 PM close of the U.S. Treasury bond market. The indexes are reviewed monthly at the close on the last business day of the month.
Since February 26, 2010, the Dow Jones Inflation Index posted total return of negative 6.16 percent; the performances of the Dow Jones Long-Term TIPS Index and the Dow Jones Long-Term Treasury Index were 8.20 percent and 9.59 percent, respectively, as of July 9th, 2010. 1 To compute the long-term inflation index, the return of the Long-Term Treasury Index is adjusted to equalize the duration of long-term TIPS and long-term U.S. Treasury bonds underlying the futures contract. In the February-June period, that factor was approximately 1.5 (it varies monthly), which is why the inflation index had a negative return.
