Discussion Paper

Exploring the TIPS‑Treasury Valuation Puzzle

Abstract: Since the late 1990s, the U.S. Treasury has issued debt in two main forms: nominal bonds, which provide fixed-cash scheduled payments, and Treasury Inflation Protected Securities—or TIPS—which provide the holder with inflation-protected payments that rise with U.S. inflation. At the heart of their relative valuation lie market participants’ expectations of future inflation, an object of interest for academics, policymakers, and investors alike. After briefly reviewing the theoretical and empirical links between TIPS and Treasury yields, this post, based on a recent research paper, explores whether market perceptions of U.S. sovereign credit risk can help explain the relative valuation of these financial instruments.

Keywords: Treasury; Treasury Inflation-Protected Securities (TIPS); breakeven inflation; default risk; loss given default; loss-given default (LGD);

JEL Classification: E4; E6; G12;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2024-07-01

Number: 20240701