Citi 30-Year TIPS (Treasury Rate-Hedged) Index INDEX METHODOLOGY

Transcription

1 Citi 30-Year TIPS (Treasury Rate-Hedged) Index INDEX METHODOLOGY f 01

2 Citi 30-Year TIPS (Treasury Rate-Hedged) Index The Citi 30-Year TIPS (Treasury Rate-Hedged) Index is designed to track the Break Even Rate of Inflation (BEI) which is the difference in yield between a US Treasury bond and a US Treasury Inflation Protected Securities (TIPS). The index includes three positions the first is a long position of the most recently issued 30-Year TIPS, the second is a short position of a US Treasury bond 1, and the third is a cash equivalent security that represents the repo rate earned on the short position. The short position is the Cheapest-to-Deliver (CTD) Treasury bond 1 for the Nearest-to-Expiry Ultra US Treasury Bond Futures Contract. The par amount of the short position is determined by creating a duration dollar neutral position between the short position relative to the 30-Year TIPS (long position), see the Hedging Methodology section below for more details. Composition and Design Criteria Figure 1 Citi 30-Year TIPS (Treasury Rate-Hedge) Index Design Criteria and Calculation Assumptions Coupon Currency Maturity Minimum Issue Size Minimum Credit Quality Composition Rebalancing Reinvestment of Cash Flow Fixed-rate USD At least one year TIPS (Long Position): USD 5 billion US Treasury bond 1 (Short Position): USD 5 billion public amount outstanding (excludes Federal Reserve holdings) BBB- by S&P or Baa3 by Moody s 30-Year TIPS, Cheapest-to-Deliver (CTD) US Treasury bond 1, cash equivalent security Once a month on the last business day of the month (pricing as of the last business day of the monthly and settlement as of the last calendar day of the month.) TIPS Position: At the daily average of the one-month Euro deposit rate, calculated from the actual scheduled payment date of the cash flow through the end of the reporting period. Pricing Calculation Frequency Settlement Date Fixing Date Cash Equivalent Position: An average of the bid and ask prices on the 1-Month Government Repo Rate as of the Fixing Date. Citi trader bid-side pricing at 3:00 p.m. (New York) Daily Index Base Date February 28, 2010 Monthly Settlement is on the last calendar day of the month Daily Same day settlement except if the last business day of the month is not the last calendar day of the month; then, settlement is on the last calendar day of the month Each month, the upcoming month s index constituents are fixed on the profile fixing date. The profile fixing dates for each year are available on the Citi Fixed Income Indices website. PRICING Citi trader bid-side pricing is used. Citi s fixed income indices are calculated Monday through Friday except Christmas Day (observed) and New Year s Day (observed). When a market observes a holiday, Citi Fixed Income Indices uses the closing prices from the previous available business day as the closing prices for index calculations on such holiday for that market. In order to determine whether a holiday is applicable for index determination purposes, Citi Fixed Income Indices considers the local market where the bond is domiciled as well as the location of the trading hub ( Trading Center ) for that sector. For example, New York is the Trading Center for US Treasury bonds. INDEX QUALITY An index quality is assigned to each index bond as of profile fixing. The quality is first mapped to the Standard & Poor s Financial Services LLC ( S&P ) rating. If a bond is not rated by S&P but it is rated by Moody s Investor Service, Inc. ( Moody s ), the S&P equivalent of the Moody s rating is assigned to the index quality. If a bond is rated by neither S&P nor Moody s, the bond is not assigned an index quality. If a bond is rated as investment-grade by one rating agency and high-yield by the other, the S&P equivalent of the investment-grade rating is assigned to the index quality. These ratings remain unchanged for the entire performance month. 1 The CTD Treasury bond is determined using the Yield Book s Treasury Future Option Model.

3 DEFAULTS When an issuer defaults, or is assigned a D rating by S&P, or enters into Chapter 7 or Chapter 11 bankruptcy protection in the US (or equivalent in its local market), its bonds remain in the index until the end of the month. The bonds will be included in the index return calculation and are calculated without coupon payment or accrued interest, where applicable. However, the bonds will not be included in the calculation of the profile statistics of the index. HEDGING METHODOLOGY On Fixing Day, the duration dollars of the 30-Year TIPS is calculated. Duration dollars are defined as: Duration Dollars = DV01 Par Amount Where DV01 is the magnitude of the price change for the security when the yield curve moves one basis point. The CTD of the Nearest-to-Expiry Ultra US Treasury Bond Futures Contract is determined using the Yield Book s Treasury Future Option Model. The par amount for this short position is the amount such that the duration dollars of the short position is equal to the duration dollars of the long position, as defined below: DV01 TIPS Position Par Amount TIPS Position = DV01 Treasury Position Par Amount Treasury Position After the par amount of the short position is determined, a cash equivalent security is added to represent the repo rate earned on the short position. The amount of the cash position is equal to the market value of the short position as of Fixing Date. RETURN CALCULATION METHODOLOGY Returns are calculated based on the dollar return of each position in the index. Any coupon paid during the month from the long position is reinvested at the daily average of the one-month Euro deposit rate, calculated from the actual scheduled payment date of the cash flow through the end of the reporting period. The cash equivalent security is reinvested at the average of the bid and ask prices on the 1-Month Government Repo Rate as of the Fixing Date. The overall index return is calculated based on the summation of the dollar returns of each position divided by the beginning market value of the long position: Dollar Return Long Position + Dollar Return Short Position + Dollar Return Cash Position Beginning Market Value Long Position DATA CORRECTION Citi Fixed Income Indices strives to produce error-free indices; however, there are occasions when erroneous data is published. These circumstances may be caused by, but not limited to, calculation or pricing errors, missing data, or incorrect indicative data. On rare occasions, and only in extreme cases, the Citi Fixed Income Indices team may conclude that restatement is required. When determining if restatement is necessary, factors such as the magnitude of the error, the overall impact on the data, the sector affected, and whether the error affects daily and/or monthly results are taken into consideration. If Citi Fixed Income Indices finds it necessary to restate, an announcement will be posted on the Citi Fixed Income Indices website ( and the revised index data will be redistributed. Subscribers to Index Production News will automatically receive all correction notifications via . Figure 4 Ticker* for the Citi 30-Year TIPS (Treasury Rate-Hedged) Index Ticker CFIIRINF Index Citi 30-Year TIPS (Treasury Rate-Hedged) Index * The ticker could be used to access data on Bloomberg and other vendor platforms. 03

4 Unless otherwise stated, the index follows the general methodology for Citi s fixed income indices. For details, please see Citi s Index Guide on CITI FIXED INCOME INDICES REGIONAL CONTACTS Americas Asia Pacific EMEA Japan fi.index.tk@citi.com 04

5 The information and data (collectively, Index Data ) contained in this Citi Fixed Income Indices Introduction Paper (the Introduction Paper ) is provided by Citigroup Index LLC ( CitiIndex ) solely for information purposes with respect to the index discussed herein (the Index ) and nothing in this Introduction Paper constitutes (a) a recommendation or an offer to sell or a solicitation to deal in any financial product, enter into any transaction or adopt any investment strategy or (b) legal, tax, regulatory, financial or accounting advice. None of CitiIndex, its directors, officers, employees, representatives, delegates, contractors or agents (each, a CitiIndex Person ) makes any express or implied representations or warranties as to (a) the accuracy, adequacy or completeness of the Index Data, (b) the levels of the Index at any particular time on any particular date, (c) the advisability of purchasing or entering into any financial product the performance of which is linked, in whole or in part, to the Index, (d) the results to be obtained by the issuer of any product linked to the Index or by any other person or entity, from the use of the Index or any data included therein for any purpose, (e) the merchantability or fitness for a particular purpose of the Index, or (f) any other matter. Each CitiIndex Person hereby expressly disclaims, to the fullest extent permitted by applicable law, all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to the Index and any Index Data. To the fullest extent permitted by applicable law, no CitiIndex Person shall have any liability (direct or indirect, special, punitive, consequential or otherwise) to any person even if notified of the possibility of damages. CitiIndex is not under any obligation to continue the calculation, publication and dissemination of the Index nor shall any CitiIndex Person have any liability for any errors, omissions, interruptions or delays relating to the Index. CitiIndex acts as principal and not as agent or fiduciary of any other person. The Index reflects the performance of notional investment positions in its constituents. There is no actual portfolio of assets to which any person is entitled or in which any person has any ownership interest. The Index merely identifies certain hypothetical investment positions, the performance of which will be used as a reference point for the purpose of calculating the level of the Index. The Index and the information contained in this Introduction Paper are CitiIndex s proprietary material. No person may use the Index in any way or reproduce or disseminate the information contained in this Introduction Paper without the prior written consent of CitiIndex. The Index is not in any way sponsored, endorsed or promoted by the issuer or sponsor, as applicable, of any of its constituents. 2016, Citigroup Index LLC. All rights reserved. Citi, Citi and Arc Design, and Citi Velocity are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. The Yield Book is a registered service mark of The Yield Book Inc. and is registered in the U.S. and other countries.