Measuring the Inflation Risk Premium on U.S. Treasury Securities: Does the Federal Government Have a Risk Premium?

Abstract

One of the common reasons given for issuing inflation-indexed government securities is to avoid paying a risk premium on nominal, non-indexed securities to compensate investors for uncertain inflation. Paradoxically, a number of countries began issuing inflation indexed bonds during a period of low, stable inflation. We theorize that the issuers also have a risk premium on the nominal bonds, of the opposite sign. This accounts for the negative risk premiums observed by several researchers on US Treasury securities.

Keywords: TIPS, Inflation-indexed bonds, Treasury bonds

JEL Classification: G12