Headline CPI printed high, CPURNSA over 219.9, and the Jan-09 breakeven is up 45bps so far. The price implies a terminal CPI (using the same method as before) of 218.65. That is, if you can find someone to offer them...
August 2008 Archives
The interbank inflation market is pricing tomorrow's CPI-U (for July) at 219.0 - 219.3 market.
But at a price of 101-00, the Jan 2009 TIPS imply a settlement index of only 218.16 for Jan 15, 2009 (which will be interpolated betwen the October and November CPI-U setitngs. There are at least two ways you can get to that number. Here is one of them:
I can earn 2.10% on an OIS basis to 1/15/09. Alternatively, I can buy the Jan-09 TIPS at 101-00, for a full price of 134.3964. To earn 2.10% annualized on an initial investment of 134.3964, I would have to end up with 134.3964 * (1 + 2.10% * 154/360) = 135.604.
I only have one cash flow left, constituting the coupon (1/2 of 3.875% rate) and the principal. That flow, in nominal dollars, will be $100 * [ 1+(3.875%/2) ] * EndCPI / 164.00000, where the last expression is the index adjustment. It is a simple matter then to show that, for this flow to equal 135.604 (and so for me to be indifferent), the EndCPI must be 218.16.
In the Great Depression nobody needed to look at OIS-Libor spreads to tell you things were bad
