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 ...
The name is bond--indexed bond
Will the Treasury Department's new inflation-indexed bond prove to be the bond "with the Midas touch"?
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 ...
Did you know that the Fed holds TIPS?
The case for TIPS: an examination of the costs and benefits
Remarks at the Federal Reserve Bank of New York Inflation-Indexed Securities and Inflation Risk Management Conference.
The "growing pains" of TIPS issuance
This paper provides updated calculations of the relative cost to the U.S. Treasury of previously issued TIPS by comparing the payment stream on each security to that of hypothetical nominal counterpart. While the costs of the program (so measured) are large, totaling $5 to $8 billion to date, I show that they owe largely to market illiquidity in the early years of the program. Indeed, absent these market growing pains, the program would have yielded a substantial net savings to the government as investors were apparently willing to pay a substantial premium to insure against inflation risk.
Why are TIIS yields so high? The case of the missing inflation-risk premium
Treasury inflation-indexed securities are just like nominal Treasuries, except that their coupon and principal payments are indexed to inflation. The yield spread between the two types of securities should serve as a daily measurement of the market's perception of expected inflation, modified to reflect the cost of inflationary risk. But TIIS yields are about 60 basis points higher than expected. This Commentary examines several factors other than inflation that might raise TIIS yields relative to nominal Treasuries.
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 ...
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.
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.