Barcap’s inflation inspiration

Barclays Capital has launched the AUD Inspire Index, which is designed to provide synthetic inflation protection for Australia using a weighted combination of actively traded and liquid inflation swap indexes from the US, UK and euro area.

Inspire is based on a proprietary model that dynamically replicates inflation measures of a target country at various horizons, using a combination of zero-coupon inflation swap breakeven rates from the US, UK and Europe. The AUD Inspire index is offered in five-year, 10-year and 20-year maturities and returns are expressed in Australian dollars. It can be offered at any additional tenor upon request.

Breakeven rates from zero-coupon inflation swaps have three main components: future expected inflation, term premium and liquidity premium. If the last two components are small or stable through time, in most cases breakevens would constitute a good proxy for expected inflation. Thus, in the AUD Inspire replication algorithm, the best inflation measure would have been the breakeven rates in Australia. However, the illiquid nature of the Australian inflation-linked market calls for an alternative inflation measure to breakevens. Therefore, an inflation measure is constructed, which reflects similar statistical properties to the breakevens.

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