Understanding Inflation-Indexed Bond Markets

47 Pages Posted: 1 Jun 2009 Last revised: 12 Jul 2010

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2009

Abstract

This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation- indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.

Suggested Citation

Campbell, John Y. and Shiller, Robert J. and Viceira, Luis M., Understanding Inflation-Indexed Bond Markets (May 2009). NBER Working Paper No. w15014. Available at SSRN: https://ssrn.com/abstract=1412046

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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Robert J. Shiller

Yale University - Cowles Foundation ( email )

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Yale University - International Center for Finance ( email )

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Luis M. Viceira

Harvard Business School - Finance Unit ( email )

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617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

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