Dow Jones Indexes works with Credit Suisse to build benchmarks for tracking U.S. inflation outlook

By Susanna Moon

Chicago, July 15 - Dow Jones Indexes announced the launch of long-term inflation indexes to measure the market's expectation of the future rate of U.S. inflation.

The indexes are intended to be the underlying basis of financial products, such as exchange-traded funds, swaps and structured products, according to a Dow Jones press release.

The index methodology was developed in the New York office of Credit Suisse Group AG, the release noted.

Dow Jones Indexes, which is 90% owned by CME Group and 10% by Dow Jones & Co., will calculate, maintain, market and license the indexes.

The Dow Jones Long-Term Inflation index is the main index and tracks the difference in returns of long-term Treasury Inflation Protected Securities and the long-term Ultra Treasury Bond futures contract listed at the Chicago Board of Trade.

The Dow Jones Long-Term Treasury index reflects the performance of a theoretical investment in futures contracts for the longest-maturing U.S. Treasury bonds. The index combines the performance of an Ultra Treasury Bond futures contract with a theoretical investment in a money market instrument paying the Federal Funds rate.

The indexes are calculated in dollars during U.S. trading days and are published at the end of each trading day based on the 3 p.m. ET close of the U.S. Treasury bond market.

The indexes are reviewed monthly at the close on the last business day of the month.

Since Feb. 26, the Dow Jones Inflation index posted total return of negative 6.16%. The performances of the Dow Jones Long-Term TIPS index and the Dow Jones Long-Term Treasury index were 8.2% and 9.59%, respectively, as of July 9.

To compute the long-term inflation index, the return of the Long-Term Treasury index is adjusted to equalize the duration of long-term TIPS and long-term U.S. Treasury bonds underlying the futures contract. In the February to June period, that factor was about 1.5, which is why the inflation index had a negative return, according to the release.

The indexes were first published on June 28. All estimated daily historical closing prices prior to that date are based on back-testing, or on calculations of how the index might have performed in the past if it had existed. Back-tested performance information is purely hypothetical.

The indexes are designed to mirror long-term inflation expectations "while avoiding undue complexity," according to Tim Blake, head of the North American interest rate products group at Credit Suisse.

"These indexes track very liquid instruments in a unique way to produce a transparent measure of inflation expectations," Michael A. Petronella, president, CME Group Index Services, said in the release.

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