(Bloomberg) – When traders and investors advising the US Treasury launched the idea of selling inflation-linked bonds in the areas of health and education, they relied on work initiated there. a generation ago by Nobel laureate Robert Shiller.
It is also a job that Michael Ashton, a fund manager specializing in hedging specific inflation risks, mastered more than a decade ago. It was then that he and Shiller attempted – unsuccessfully – to create an exchange-traded mechanism to hedge the health care component of the consumer price index.
"Being able to negotiate subcomponents is the Holy Grail," said Ashton, whose Twitter account is @inflation_guy. "Everyone has a different exposure to inflation, a different experience of it. It is therefore necessary that the unique solutions are finally removed because not everyone wants a black Model-T. "
Shiller, professor of economics at Yale University, had been involved in creating a comparable product related to the price of oil and had then launched one for the price of single-family homes. Both efforts have finally failed and the latest bond proposal may be struggling to gain ground. Ashton and Shiller nevertheless argue that the coverage of the CPI components is a laudable idea whose time will come.
Consider the risks
"There are a lot of risks that people face without insurance, including health care and education," Shiller said during an interview. Global warming is another, he said. "There are all kinds of assets that should be created."
The United States began issuing CPI-related treasury securities in 1997. The idea that the government could sell debt related to health care and education costs was among those tabled by the Committee. of Treasury borrowing at the end of last month. TBAC, made up of 17 bond market professionals who pass on the industry's advice to the country's national finance officials, was invited to report on how the United States could best meet its growing needs in the area of domestic finance. borrowing.
In a list that also included 15-to-20-year treasury bills, perpetual debt and zero-coupon bonds, the TBAC said the new TIPS "will likely result in more savings than the new ones." related to the entire basket of the CPI ".
The current approach "does not provide good coverage for investors exposed to specific risks of inflation," the report says. For example, corporate and state health care plans may prefer the medical cost-indexed TIPS system, while university-based savings plans may favor education-related securities.
In reading the TBAC report in his office in Morristown, New Jersey, Ashton acknowledged the merit of the proposal he had worked on with Shiller in 2007 and 2008. In 2004, he presented on the potential exchange of IPC components in a barclays. Conference on inflation-indexed bonds in Key Biscayne, Florida. At the time, Ashton was responsible for inflation derivatives at Barclays in New York.
Ashton says that he predicted to Key Biscayne that by five years ago, people would exchange the components of inflation.
"It takes longer than I thought," he said. Ashton Company, Enduring Investments LLC, was founded in 2009 and helps clients protect themselves against significant or unusual inflation risks.
The subject of Ashton's presentation in 2004 was consistent with Shiller's work for his 1993 book "Macro-Markets: Creating Institutions to Manage the Biggest Economic Risks in Society." The main idea of the book is that financial markets lack easy-to-create tools that would allow investors to deal with individual risks.
"Things like this take a long time to get established," Shiller said. "People are not as calculative as economists prefer to assume it."
In 1999, Shiller co-founded MacroMarkets LLC, an investment manager who developed MacroShares – a legal structure for publicly traded trusts (more user-friendly for individual investors than for futures) that would make distributions based on price variations of specific products or indices. In 2006, she listed MacroShares Oil Up and MacroShares Oil Down, referring to crude oil.
At the time, Ashton worked for Natixis Capital Markets, creating markets for derivatives derived from inflation. He urged Shiller to use the MacroShares model to index healthcare-related inflation stocks, and both presented the idea to asset managers including Calpers, Pimco, TIAA-CREF and Western Asset. Management.
The story continues
In January 2008, MacroMarkets filed an offer document covering the actions Medical Inflation Up and Medical Inflation Down. Then the financial crisis hit. Oil stocks ceased operations in mid-2008. Macro markets listed in mid-2009 were associated with the value of the S & P Case-Shiller Composite-10 housing price index. They ceased operations in December 2009, although the indexes remain.
Shiller attributes these failures – as well as the wider lack of tools available to cover specific risks – to inertia. For example, fire insurance was not widespread until the mortgage industry had demanded it, even though cities were regularly ravaged by flames, he said.
The financial sector could issue TIPS from the CPI sub-component, which is comparable to the way bond brokers created the first zero-coupon treasury bills in the early 1980s, several years prior to the band market. . That was the vision he had at Key Biscayne in 2004.
TIPS could be placed in a trust and separate inflation exposures sold separately. The problem, he said, is that health care and education are relatively small parts of the CPI (with weights of about 8.6% and 3%) .
Role of the Treasury
Although some investors pay excessive fees for specific types of protection, "you can not sell them expensive enough for the rest to be cheap enough to sell," said Ashton. This is why a direct issue by the Treasury is probably necessary.
The Fed could help test such a product in the market by recovering some of the treasury bills accumulated during the financial crisis, including TIPS, Ashton said. He exposed this idea in a blog post in September.
By selling specific inflation exposures and keeping the rest, the central bank "would probably have the important positive effect of reviving a very large market."
To contact the reporter on this story: Elizabeth Stanton in New York at email@example.com
To contact the makers of this story: Benjamin Purvis at firstname.lastname@example.org, Mark Tannenbaum
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