Inflation-Linked Analytics: TIPS, Breakeven & Swaps

Inflation is simultaneously one of the most important macro variables and one of the least well understood corners of the fixed income market. Inflation-linked bonds, breakeven rates and inflation swaps are the instruments that make inflation a tradeable asset, and pricing them correctly requires a coherent framework that links nominal and real curves through the Fisher equation.

This course builds that framework from scratch. You price TIPS with the deflation floor, bootstrap the real discount curve, compute breakeven inflation and the inflation risk premium, and then move into inflation swaps — zero-coupon, year-on-year, and the convexity adjustment that separates the two. Every step is implemented in Python with real market data so the mechanics are concrete, not abstract.

The course closes with the Jarrow-Yildirim three-factor model, which prices nominal and real bonds consistently within a single stochastic framework and provides closed-form pricing for inflation caps and floors. Whether you are managing a real-money inflation mandate, structuring index-linked bonds, or building macro factor models that incorporate breakeven rates, this course gives you the quantitative toolkit to work with precision.

You start by building the inflation analytics foundation: pricing a TIPS bond correctly — applying the CPI index ratio to the principal, handling the deflation floor, and computing the real cash flows — then bootstrapping a real discount curve from a set of TIPS prices using the same sequential root-finding approach used for nominal curve bootstrapping.

With real and nominal curves in hand, you compute breakeven inflation across tenors, decompose the inflation risk premium from survey expectations, and verify the Fisher equation numerically. You then value a zero-coupon inflation swap and a year-on-year inflation swap strip, computing the YYIS convexity adjustment that arises because YoY payments involve the ratio of CPI observations rather than the level.

The final component implements the Jarrow-Yildirim three-factor model — with separate stochastic dynamics for the nominal rate, real rate and CPI index — and uses it to price inflation caplets. You calibrate the JY model parameters to match market breakeven curves and use the model to analyse the inflation cap skew, completing a toolkit that covers the full range of inflation-linked instruments.