Floaters and inflation-linked bonds

Floating-rate notes (floaters) and inflation-linked bonds (linkers) do not have a fully known cash-flow schedule. The next coupons, and for linkers the remaining principal, depend on future values of a base indicator: a money-market rate, a policy rate, or inflation.

TrackRecords does not freeze those unknowns at today’s coupon. It rebuilds the cash-flow calendar under a scenario, then uses that calendar everywhere else: yield, duration, contribution, cash-flow forecasts, limits and risk.

What a scenario does

A scenario is a path of the base indicators over future months or quarters. When you pick a scenario, TrackRecords:

1. keeps already fixed coupons as they are
2. fills unknown coupons and indexed principal from the scenario (plus the issue’s premium or formula)
3. recalculates dirty price metrics, yield, duration and projected payments on that updated calendar

Those calendars are the input to YTM, duration, DV01 and z-spread, not a vendor field.

The same bond can be valued under several scenarios without changing the holdings.

Scenario types

You can use:

• a custom scenario: your own forecast of overnight rates, policy rates, inflation and yield-curve points. Paths can be entered in the terminal or imported from a file (absolute levels, period-to-period changes, or relative changes)
• a flat scenario: unknown coupons and principal stay at the last known level as of the calculation date
• an implied scenario (default): market-implied paths of the base indicators, recovered from liquid government floaters and inflation-linked bonds

The implied scenario is the one that answers “what path does the market already price in today?”

Implied scenario: approach

For bonds whose coupon or principal depends on a floating base, TrackRecords recovers implied forwards from a basket of liquid government floaters and linkers. High-grade corporates can be added when the base is a policy rate rather than an overnight index. The basket is reviewed quarterly.

In outline:

• take the dirty price of each reference bond on the calculation date
• discount known (already fixed) cash flows along a government yield curve
• the residual versus dirty price is the implied path of the unknown base rate (or of inflation, for linkers)
• for corporates used as policy-rate references, a credit spread from a high-grade bond index is added to the government curve, so the implied policy rate is not mixed with credit
• the implied rate for an arbitrary maturity is interpolated between the two nearest reference bonds
• if there is no shorter reference bond, the implied rate starts from the actual rate on the calculation date
• puts and calls are ignored when choosing those neighbouring tenors, so the interpolation follows maturity rather than option-adjusted life

Implied inflation is the constant inflation rate that makes the inflation-adjusted, discounted cash flows of a linker equal its dirty price.

The result is a market-consistent path of overnight rates, policy rates and inflation that can be applied to any floater or linker that references those bases, not only to the bonds in the reference basket.

What you can do with this in the platform

• Bond calculator. Switch implied / flat / custom scenario; unknown coupons, yield and duration update immediately.
• Portfolio cash-flow forecast. Project coupons and redemptions for the whole book, including floaters and linkers, under the selected scenario.
• Return and risk scenarios. Shift rates and spreads and see how the book behaves when floating coupons and indexed principal move with them.
• Limits and mandate control. Floater share, duration and cash-flow tests use the same projected calendar.
• API. The same cash-flow engine is available for transaction-based and snapshot portfolios.

Custom scenarios can include the rates and curves you actually run the book on. Those series sit in the same securities database as prices and cash flows; see Data sources.