Deutsche Bank and PowerShares team up to launch inflation/deflation ETNs

Dec 12th, 2011 | By | Category: Alternatives / Multi-Asset

With the central banks of the US and UK proving more than willing to fire up the printing presses, and calls for the European Central Bank to follow suit, more and more investors have become worried about the prospects of rising inflation.

Equally, there are many who see the developed Western world facing a period of prolonged stagnation and deflation.

Deutsche Bank and PowerShares team up to launch inflation/deflation ETNs

With the US and UK firing up the printing presses, Deutsche Bank and PowerShares team up to launch inflation/deflation ETNs.

To help investors navigate through these conditions, Deutsche Bank and PowerShares have teamed up to launch a pair of ETNs whose performance is based on changes of inflation and deflation expectations.

The PowerShares DB US Inflation ETN and PowerShares DB US Deflation ETN are the first exchange-traded products to provide investors with direct exposure to US inflation or deflation expectations.

The Inflation and Deflation ETNs are based on the DBIQ Duration-Adjusted Inflation Index and the DBIQ Duration-Adjusted Deflation Index, respectively, which are intended to capture movements, whether up or down, in US inflation expectations or deflation expectations.

The ETNs are linked to the month-over-month returns, whether positive or negative, on these indices and aim to track changes in the market’s expectations of future inflation implied by the difference in yields between Treasury Inflation-Protected Securities (TIPS) and US Treasury bonds with approximately equivalent terms to maturity.

A combination of offsetting short and long notional positions in TIPS and Treasury Bond Futures is one way in which this expectation of future inflation may be measured.

If the market’s expectation of future inflation increases, TIPS are likely to outperform US Treasury bonds with approximately equivalent terms to maturity.

Conversely, if the market’s expectation of future inflation decreases, TIPS are likely to underperform US Treasury bonds with approximately equivalent terms to maturity.

Therefore, to gain exposure to the market’s expectation that future inflation will increase, the Inflation ETNs take a notional long position in TIPS and a notional short position in US Treasury bonds with approximately equivalent terms to maturity.

To gain exposure to the market’s expectation that future inflation will decrease, the Deflation ETNs take a notional short position in TIPS and a notional long position in US Treasury bonds with approximately equivalent terms to maturity.

While these ETNs offer investors a unique and innovative way to play inflation/deflation expectations, investors should be aware that they are senior unsecured obligations issued by Deutsche Bank AG.

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