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Deutsche Bank launches first Ucits III fund in inflation-linked treasury space

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Deutsche Bank has launched the first Ucits III fund enabling investors to access the US inflation-linked treasury bond market in a convenient format.

Deutsche Bank has launched the first Ucits III fund enabling investors to access the US inflation-linked treasury bond market in a convenient format.

The Platinum IV Enhanced US Treasury fund offers exposure to US inflation-protected US treasuries. Deutsche Bank says it expects to see significant inflows as a result of increased investor interest in this market. 

The dividend-paying structure of the fund allows investors to monetise dislocations between the cash and derivative US inflation markets in a simple and transparent way.

The fund invests in US government inflation linked bonds (Tips) and hedges direct inflation, interest rate and FX risks via swap transactions with Deutsche Bank. The counterparty risk is kept to negligible levels (less than one per cent) so that investors holding the fund until maturity bear only the risk of a default by the US government.

The trade idea behind the fund is to take advantage of Tips being cheaper than they should be in fundamental terms and also cheap on a relative basis compared to inflation swaps. This allows clients to lock in the attractive premium and to benefit from any potential reversion to lower, historical levels in the spread differential between asset-swapped Tips and swap rates.

"This innovative fund allows investors to capture the return of inflation market dislocation in a cost efficient and regulated way," says Manfred Schraepler, head of fund structuring at Deutsche Bank (pictured). ‘We believe this fund is the only Ucits product in the market to give investors access to a Tips on asset swap strategy in a liquid, regulated and accounting-friendly format’.

Tips are currently trading at 100-150 basis points over other US treasuries on asset swap, despite having the same credit risk. This anomaly arose when investors moved into US treasuries in a ‘flight to quality’ but did not move into the relatively less deep Tips market to the same degree, according to Deutsche Bank. Simultaneously, de-leveraging by traditional investors in inflation-linked assets led to greater selling pressure on Tipscompared to inflation swaps, making the former relatively cheap. 

Deutsche Bank research believes that these anomalies will be corrected as the financial markets stabilise, liquidity concerns ease, and the de-leveraging process comes to an end.

‘Historically, Tips have yielded around 30-40 basis points more than US treasuries on asset swap. If they return to that level, the mark to market gains on a Tips ASW portfolio would be significant,’ says Markus Heider, head of European inflation research at Deutsche Bank.

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