Search Results
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.
Journal Article
Inflation-indexed bonds: how do they work?
In January 1997, the United States Treasury, after years of debate, issued its first inflation-indexed bonds. These securities differ from conventional bonds in that principal and interest payments are linked to a price index. Thus, the purchasing power of an investor's savings is protected from inflation. This article provides a simple description of the Treasury's new offering and discusses why indexed bonds may be useful to investors, the Treasury, and policymakers
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 ...
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 ...
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 ...
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 ...
Report
The microstructure of the TIPS market
We characterize the microstructure of the market for Treasury inflation-protected securities (TIPS) using novel tick data from the interdealer market. We find a marked difference in trading activity between on-the-run and off-the-run securities, as in the nominal Treasury securities market. We find little difference in bid-ask spreads or quoted depth between on-the-run and off-the-run securities, in contrast to the nominal market, but we do find a sharp difference in the incidence of posted quotes. Intraday activity differs strikingly from the nominal market, with activity peaking in the ...
Journal Article
Treasury inflation-indexed debt: a review of the U.S. experience
This article describes the evolution of Treasury inflation-indexed debt securities (TIIS) since their introduction in 1997. Over most of this period, TIIS yields have been surprisingly high relative to those on comparable nominal Treasury securities, with the spread between the nominal and indexed yields falling well below survey measures of long-run inflation expectations. The authors argue that the low relative valuation of TIIS may have reflected investor difficulty adjusting to a new asset class, supply trends, and the lower liquidity of indexed debt. In addition, investors may have had a ...
Working Paper
Treasury inflation-indexed debt: a review of the U.S. experience
This paper reviews the U.S. experience with inflation-indexed debt. To date, Treasury inflation-indexed securities have not been highly valued by investors, with the spread between the yields on nominal and inflation-indexed securities falling consistently below most measures of long-run inflation expectations. A number of factors might have contributed to the low relative valuation of TIIS, including the difficulty for investors of adjusting to a new asset class, the concentration of participation in the market, the lower liquidity of TIIS relative to nominal Treasury securities, and the ...