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Wednesday, December 12, 2018

Inflation-Linked Bonds In Portfolios: Hedging Efficiency

This article is an excerpt from my latest book, Breakeven Inflation Analysis (link to book description), being the first half of Section 4.8. It is a discussion of the efficiency of inflation-linked bonds as an inflation hedge. The second half of Section 4.8 discusses how these bonds fit within a portfolio construction, which will be published in another article.

Monday, December 10, 2018

Paperback Edition Of Breakeven Inflation Analysis Now Available

My latest book Breakeven Inflation Analysis (link to book description page) is now available as a paperback at online stores. It is available at the regional Amazon sites, as well as being listed on some other retail book websites.

The book is effectively an extended report, at 124 pages, excluding end matter, and an appendix that is a reprint of a section from an earlier book.

If you order the paperback edition from Amazon, the book is enrolled in the Matchbook programme, which means that you are also eligible to get the Kindle ebook version for free as a bonus. Please note that it may take up to a few days for this feature to be available.

 In case you have missed the earlier book announcement, this book is at an intermediate level of difficulty, and aimed more at a professional audience with a technical interest in inflation-linked bonds. There is a discussion of the pricing mechanics and market behaviour for those who are not familiar with the bond markets. It also includes a discussion of the macroeconomic forces that affect breakeven inflation levels. However, the book does not attempt to cover the theory of what determines inflation, as that is a controversial subject in economics, and would overshadow the rest of the contents of the book.

Source code used to do pricing calculations is available online at As the name suggests. the calculations are simplified to allow ease of understanding, and so abstracts away from the complications like day count conventions, calendar quirks, etc. By pushing the calculations to this library, the book is not cluttered with the equations.

Now that the all the editions are available, I will now attempt to market it. I will be running excerpts of some sections over the coming weeks.

Wednesday, December 5, 2018

New Data Resource: DB.nomics

Some French agencies (including the central bank) have rolled out a useful new data resource called  DB.nomics - This site acts like a "European FRED," with a large variety of official data sources rolled into a single data provider. And like FRED, it comes at the wonderful price of free. (The advantage of being backed by central banks is that they have money to burn...) I have been looking at hooking into external data providers as a side project, and DB.nomics looks like an excellent option for most economic analysis purposes.

(Editorial note: I was hit by a cold last week, and have to catch up on various things. I expect that I will have a publishing pause until next week. I was working on my PCA tutorial, but I want to take time on that.)

Sunday, December 2, 2018

Principal Component Analysis And Hedge Ratios

Chart: First PCA Factor

Principal Component Analysis (PCA) has two main applications in my area of interest: yield curve analysis, and in the creation of composite indicators. This article explains how PCA analysis is used in fixed income, in particular from a hedging perspective.

Wednesday, November 28, 2018

Representative Agent Macro And Recessions

J.W. Mason kicked off the latest skirmish in the never-ending macro wars with his Jacobin article "A Demystifying Decade for Economics." (Note: at the time of writing, the article was taken down until its publication in Jacobin.) This prompted a Twitter debate about representative agent macro, which eventually led to this Beatrice Cherrier article on heterogeneous agent models. In my view, the debate about representative agent models is a red herring. Mainstream macroeconomists main skill is in framing debates in a fashion that is congenial to the mainstream; however, the preferred framing leads to dead ends. My current research focus is on recessions, and although I have not gone too far in refreshing my survey of mainstream macro, the value of mainstream macro theory in this debate is limited.

Sunday, November 25, 2018

Brief TIPS Market Comment

Chart: 10-Year U.S. Breakeven Inflation Rate

The U.S. inflation-linked bond (TIPS) market is in an interesting position right now. Inflation protection seems cheap, but the question always remains: is it cheap for a reason? Unfortunately, I am not able to answer that question, I am going to just briefly outline the debate.

Wednesday, November 21, 2018

The U.S. Debt Limit (Preliminary Primer)

The debt limit in the United States is currently not an object of worry, but it represents one possible avenue to default. From the perspective of a non-American, it is rather difficult to understand how such a strange custom could arise. This article outlines very briefly the history of the debt limit, and then moves to discuss the risks associated with it. This issue underlines the argument that default risk in floating currency sovereigns is political risk, not financial.