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Working Paper
A monetary policy rule based on nominal and inflation-indexed Treasury yields
The yields on nominal and inflation-indexed Treasury debt securities can be used to derive a proxy for the inflation expectations of market participants. This paper investigates whether such a measure has provided a useful guide for monetary policy decisions by the Federal Reserve. The results indicate that since 1999, U.S. monetary policy decisions can be effectively characterized by a simple policy rule in which changes in the federal funds rate respond to the forward rate of inflation compensation.
Journal Article
TIPS liquidity, breakeven inflation, and inflation expectations
Estimating market expectations for inflation from the yield difference between nominal Treasury bonds and Treasury inflation-protected securities-a difference known as breakeven inflation-is complicated by the liquidity differential between these two types of securities. Currently, the extent to which liquidity plays a role in determining breakeven inflation remains contentious. Information from the market for inflation swaps provides a range for the possible liquidity premium in TIPS, which in turn suggests a range for estimates of inflation expectations that is well below the widely ...
Journal Article
The name is bond--indexed bond
Will the Treasury Department's new inflation-indexed bond prove to be the bond "with the Midas touch"?
Working Paper
Quantitative implications of indexed bonds in small open economies
This paper analyzes the macroeconomic implications of real-indexed bonds, indexed to the terms of trade or GDP, using a general equilibrium model of a small open economy with financial frictions. Although indexed bonds provide a hedge to income fluctuations and can thereby mitigate the effects of financial frictions, they introduce interest rate fluctuations. Because of this tradeoff, there exists a nonmonotonic relation between the "degree of indexation" (i.e., the percentage of the shock reflected in the return) and the benefits that these bonds introduce. When the nonindexed bond market ...
Working Paper
The TIPS yield curve and inflation compensation
For over ten years, the U.S. Treasury has issued index-linked debt. Federal Reserve Board staff have fitted a yield curve to these indexed securities at the daily frequency from the start of 1999 to the present. This paper describes the methodology that is used and makes the estimates public. Comparison with the corresponding nominal yield curve allows measures of inflation compensation (or breakeven inflation rates) to be computed. We discuss the interpretation of inflation compensation and its relationship to inflation expectations and uncertainty, offering some empirical evidence that ...
Journal Article
Has the Treasury benefited from issuing TIPS?
While the market for Treasury inflation-protected securities (TIPS) has developed considerably over the past decade, the debate over whether their issuance benefits the U.S. Treasury remains contentious. Information from inflation swap rates in conjunction with a joint model of yields for nominal non-inflation-protected Treasury bonds and TIPS provides evidence that, even under conservative assumptions, the TIPS inflation risk premium has been large enough in recent years to offset the liquidity disadvantage of the series. This suggests that overall the Treasury has benefited from issuing ...
Report
Inflation risk in the U.S. yield curve: the usefulness of indexed bonds
The inflation-indexed bonds the U.S. Treasury plans to issue will reduce the expected borrowing cost if the yield curve reflects a risk premium for inflation. In the United Kingdom, indexed bonds are also used to extract inflationary expectations and thus to guide monetary policy. The bonds will produce a more reliable measure of such expectations if the inflation risk premium is taken into account. We estimate such a risk premium for the United States by means of a two-factor affine-yield model of the term structure. The model allows both the inflation risk premium and real term premium to ...
Journal Article
Expected inflation and TIPS
When inflation-indexed Treasury securities were first introduced, economists hoped that they could be used to measure expected inflation easily. The only difference between securities that were indexed to inflation and those that were not was thought to be the extra compensation regular securities had to pay for what the market thought inflation would be. By now it is pretty clear that inflation-indexed Treasuries differ from regular securities in other ways that show up in the yields. This Commentary suggests what these are and discusses a method of correcting for them.
Discussion Paper
TIPS scorecard: are TIPS accomplishing what they were supposed to accomplish?: can they be improved?
In September 1997, the U.S. Treasury developed the TIPS market in order to achieve three important policy objectives: (1) to provide consumers with a class of assets that allows for hedging against real interest rate risk, (2) to provide holders of nominal contracts a means of hedging against inflation risk, and (3) to provide everyone with a reliable indicator of the term structure of expected inflation. This paper evaluates progress toward the achievement of these objectives and analyzes prospective ways to better meet these objectives in the future, by, for example, extending the maturity ...
Working Paper
A model-independent maximum range for the liquidity correction of TIPS yields
We derive a model-independent maximum range for the admissible liquidity risk premium in real Treasury bonds?also known as Treasury Inflation Protected Securities (TIPS). The range is constructed using additional information in the inflation swap market and a set of simple theoretical assumptions. As an application, we construct a lower bound to estimates of the inflation risk premium the Treasury receives from TIPS by deducting their maximum liquidity premium. This conservative measure of the benefit to the Treasury of issuing TIPS is positive on average at the ten-year maturity for our ...