The TIPS Yield Curve and Inflation Compensation
Refet S. Gurkaynak
Bilkent University - Department of Economics
Brian P. Sack
Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section
Jonathan H. Wright
Johns Hopkins University - Department of Economics
FEDS Working Paper No. 2008-05
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 these measures are affected by an inflation risk premium that varies considerably at high frequency. In addition, we also find evidence that inflation compensation was held down in the early years of the sample by a premium associated with the illiquidity of TIPS at the time. We hope that the TIPS yield curve and inflation compensation data, which are posted here and will be updated periodically, will provide a useful tool to applied economists.
Number of Pages in PDF File: 42
Keywords: Yield curve, treasury market, inflation compensation, risk premia
JEL Classification: G28
Date posted: January 15, 2009
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