Sizing a Breakeven Inflation Trade with Relative DV01

Summary

The note addresses how to size a long breakeven inflation position using an individual inflation-linked bond and a nominal Treasury of similar maturity. It describes a common starting assumption: real yields and nominal yields have a beta of one. Under that assumption, the legs are weighted according to their relative DV01, the dollar change in value for a basis-point yield move, so their interest-rate sensitivities are aligned.

The assumed beta can instead be estimated from historical relationships, which changes the hedge sizing. The response offers no worked calculation, bond details, or discussion of how to estimate beta, and suggests obtaining duration or DV01 from a market data terminal. Actual sizing therefore depends on the chosen comparator, current bond characteristics, and the yield relationship assumed; the short explanation is a sizing principle rather than a complete trade construction guide.

Key ideas

• A breakeven position pairs an inflation-linked bond with a nominal bond comparator.
• With an assumed yield beta of one, relative DV01 determines the risk weights of the two legs.
• Changing the assumed relationship between real and nominal yields changes the hedge sizing.
• Duration and DV01 can be sourced from market data systems, though no calculation is shown.

Tags

# Long Breakeven inflation


# Long Breakeven inflation












I want to go long bei by going long individual 10 year tips and short individual 10 year treasuries. How do I calculate and match the duration?

## Answer by user42108 (score 1)

https://quant.stackexchange.com/a/67951

"In order to setup a breakeven trade, one needs to make an assumption about the beta between real yields and nominal yields. Typically investors assume a beta of 1 however this could be changed based on historical relationships. In a breakeven trade with an assumed beta of 1, the risk weights are a function of the relative DV01 of the linker and nominal comparator bond" - JPM Inflation Linked Markets Guide 2017

My guess is most people would not "calculate" duration (or DV01) but rather just pull it up on Bloomberg or Eikon.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.