Deutsche Bank launches first UCITS III fund in the inflation-linked Treasury space
Deutsche Bank has launched the first UCITS III fund enabling investors to access the US inflation-linked Treasury bond (TIPS) market in a convenient format. The Platinum IV Enhanced US Treasury fund offers exposure to US inflation-protected US Treasuries and Deutsche Bank expects to see significant inflows as a result of increased investor interest in this market.
The unique dividend-paying structure of the Platinum IV Enhanced US Treasury 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 1%) 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," said Manfred Schraepler, head of fund structuring at Deutsche Bank. “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. Simultaneously, de-leveraging by traditional investors in inflation-linked assets led to greater selling pressure on TIPS compared 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,” said Markus Heider, head of European inflation research at Deutsche Bank.
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About the fund
The DB Platinum IV Enhanced US Treasury fund is a UCITS III fund that matures in 2029. It invests exclusively in TIPS with maturities of between 2025 and 2029 and will hold those bonds until maturity.
The fund has the possibility to offer share classes in EUR, USD, JPY and GBp, paying 3M Libor + spread or alternatively a fixed, annual dividend rate. The EUR share class, paying 3M Euribor + 80 bps net was launched on April 1 2009. The fund exclusively targets institutional investors, especially European financial institutions and pension funds. The minimum subscription is EUR1 million ($1 million, £1 million, JPY100 million). The management fee is 0.05% with administration costs of 0.15%.