Asset Allocation: Directly investing in inflation

CFA Level III Portfolio Management
#1

Hi everyone,

Could someone please explain the portion highlighted in bold below?

Some risk factors may be investable with spread positions, which take long and short positions in assets, or by using derivatives. For example, to isolate inflation risk, an investor would go long Treasuries (which reflect compensation for consensus-expected inflation) and short inflation-linked bonds (which will adjust and compensate for actual future inflation)

My understanding is that:

Long Treasures would have risk-free component + inflation expectations

Inflation Linked Bonds would have risk-free component + Actual Inflation Rate

If I understand correctly, the objective is to get exposure to the Actual Inflation Rate. So if you long one and short the other, don’t you get rid of inflation?

Thank you.

#2

actual vs expected, think about it

#3

Thanks for the hint. Has it got to do with this:

Long Treasures = risk free component + inflation expectations

Inflation linked bonds = risk free component + inflation expectations +/- Changes in inflation

But to gain exposure to the change in inflation, then shouldn’t I be LONG inflation linked bonds and SHORT treasuries? Which is opposite to what the text is suggesting.

#4

okay, where did you get the bold statement from?

it’s about investor’s expectation. if the investor is expecting that actual inflation to be lower than market expectation, the strategy in the statement makes sense.

though I don’t think this is part of the curriculum.

#5

I got it from schwesser LOS 16.f