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ILB Seasonality Working paper final

Valuation of inflation-indexed bonds is closely linked to the price index seasonality. The lack of understanding thereof can therefore hinder investors’ attractiveness to such market. Indeed, the Euro market of inflation-indexed bonds, which counts 38 benchmarks totaling 400 billion euros, is a particularly complex market due to the diversity of (1) the Sovereign issuers (France, Italy, Germany, Spain), (2) the inflation indexes that can be national or European (e.g. FRCPI ex tobacco for France, Eurozone HICP ex tobacco for Eurozone) and (3) the reference months of these inflation benchmarks (April, May, July, September, November). Furthermore, the present article reminds that the influence of seasonality on the relative value of inflation-linked bonds is all the more pronounced as their maturity approaches. In the Eurozone, 12 different inflation-indexed bond issues, accounting for circa 150 billion euros, will come to maturity within five years and will be increasingly impacted by the seasonality herein discussed. In this context the French Bond Association gathered a study group on this subject. A better understanding of inflation-indexed bond seasonality and its consequences on the value of such bonds will help better compare the real interest rates on different Sovereign bonds within the Euro zone, as well as better estimate the yield curve of each inflation-linked bonds issuer. The following working paper lays out both investors and issuers’ point of view and suggests a method for calculating real yield and break even points of seasonality-adjusted inflation.

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last update 05 August 2020