Strategies · Library · Weather, energy, inflation
§14.1Hedges and structures
Inflation hedging – inflation swaps
Buy an inflation swap to receive actual inflation and pay a fixed rate, or sell one for the reverse. The fixed rate is usually the yield gap between Treasury and inflation-protected bonds. Profit comes when realised inflation beats what was priced in. Variants pay once at the end or every year.
Open in the builderAs a long-only proxy; see how ARCANE uses it.
- Asset class
- Weather, energy, inflation
- Held for
- Years
- Data
- ARCANE has part of the data
- Symphony
- Builds as a long-only proxy
The rule
- Signal
- Realised inflation index change versus the fixed breakeven rate.
- Entry and exit
- Enter a swap with a chosen maturity; settle at the end or yearly.
- Sizing
- Swap notional.
How it fails
- Inflation surprises the other way
- Counterparty risk
- Mispriced breakeven
Data it needs
- CPI
- inflation swap rates
- Treasury and TIPS yields
ARCANE has TIP and IEF/TLT prices that give a rough breakeven view but no CPI series or swap quotes.
How ARCANE uses it
A Call on an inflation print could compare the breakeven implied by TIP against IEF for context, paper only.
Builds as a long-only proxy. A long-only mix of TIP, GLD and cash approximates an inflation tilt; the swap itself is not expressible.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §14.1, p. 105 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.