UBS Inflation-Linked Strategy - Euromoney Conferences
UBS Inflation-Linked Strategy - Euromoney Conferences
UBS Inflation-Linked Strategy - Euromoney Conferences
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TIPS should now trade cheap to fair value<br />
It is important to know who is the price setter in the market<br />
Fair<br />
value<br />
Idealised view of a market dominated<br />
by mean-reverting type investors<br />
Mean-reverting price action, with average close to fair value<br />
Average marginally below fair value<br />
♦ Non mean-reverting investors (buy-side<br />
portions of the real money universe, e.g.<br />
passive fund managers and real rate based<br />
investors) are generally buyers of the market<br />
♦ This implies that the market will trade<br />
‘cheap’ to fair value as these investors will<br />
only buy below fair value…<br />
♦ …and take profit as we approach fair-value<br />
Source: <strong>UBS</strong><br />
♦ Mean-reverting type investors (leveraged,<br />
proprietary desks, active fund managers,<br />
etc.) want the market to trade at fair<br />
value and then ‘play the range’<br />
♦ Essentially the mean-reverting investor is<br />
selling volatility, therefore creating<br />
‘stability’ in the time series<br />
♦ This leads to a self re-enforcing feedback<br />
loop being established<br />
Fair<br />
value<br />
Idealised view of a market dominated by<br />
non mean-reverting type investors<br />
Mean-reverting price action, with average close to fair value<br />
Average below fair value<br />
3
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