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Discussion Paper
The Persistent Compression of the Breakeven Inflation Curve
Breakeven inflation, defined as the difference in the yield of a nominal Treasury security and a Treasury Inflation-Protected Security (TIPS) of the same maturity, is closely watched by market participants and policymakers alike. Breakeven inflation rates provide a signal about the expected path of inflation as perceived by market participants although they are also affected by risk and liquidity premia. In this post, we scrutinize the dynamics of breakeven inflation, highlighting some intriguing behavior which has persisted for a number of years and even through the pandemic. In particular, ...
Report
Decomposing real and nominal yield curves
We present an affine term structure model for the joint pricing of Treasury Inflation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS? relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specification with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected inflation provides a better prediction of actual inflation than ...
Working Paper
Demand versus Supply: Which is More Important for Inflation?
I use Phillips curve type regressions to assess the relative contributions of demand and supply forces to U.S. inflation during the pandemic era from February 2020 onward and the decade following the end of the Great Recession. In the first specification (Model 1), demand and supply forces are measured using the vacancy-unemployment ratio and the New York Fed’s Global Supply Chain Pressure Index, respectively. In the second specification (Model 2), demand and supply forces are measured using the demand-driven and supply-driven components of PCE inflation from Shapiro (2025). The results ...
Working Paper
Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices
Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the recent financial crisis. This spread reflects predominantly the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the ...