Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle

81 Pages Posted: 7 Sep 2010 Last revised: 24 Aug 2012

See all articles by Matthias Fleckenstein

Matthias Fleckenstein

University of Delaware

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: September 6, 2010

Abstract

We show that the price of a Treasury bond and an inflation-swapped TIPS issue exactly replicating the cash flows of the Treasury bond can differ by more than \$20 per \$100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS–Treasury mispricing has exceeded \$56 billion, representing nearly 8\% of the total amount of TIPS outstanding. We find direct evidence that the mispricing narrows as additional capital flows into the markets. This provides strong support for the slow-moving-capital explanation of the persistence of arbitrage

Keywords: Fixed Income, Arbitrage, TIPS

JEL Classification: G12

Suggested Citation

Fleckenstein, Matthias and Longstaff, Francis A. and Lustig, Hanno N., Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle (September 6, 2010). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1672982 or http://dx.doi.org/10.2139/ssrn.1672982

Matthias Fleckenstein

University of Delaware ( email )

419 Purnell Hall
Newark, DE 19716
United States
3028314936 (Phone)

HOME PAGE: http://www.mfleckenstein.com

Francis A. Longstaff (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

Hanno N. Lustig

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,335
Abstract Views
8,427
Rank
27,553
PlumX Metrics