The Microstructure of the TIPS Market

19 Pages Posted: 24 Dec 2011

See all articles by Michael J. Fleming

Michael J. Fleming

Federal Reserve Bank of New York

Neel Krishnan

affiliation not provided to SSRN

Date Written: December 2011

Abstract

The potential advantages from the introduction of Treasury inflation-protected securities (TIPS) in 1997 have not been fully realized, mainly because TIPS are less liquid than nominal Treasury securities. The lack of liquidity is thought to adversely affect TIPS prices relative to prices of nominal securities, offsetting the benefits that come from TIPS having no inflation risk. Despite the importance of TIPS liquidity and the market’s large size, there is virtually no quantitative evidence on the securities’ liquidity. This article sheds light on this phenomenon using novel tick data from the interdealer market. The authors identify several features of the TIPS market also present in the nominal securities market, but some unique features as well. As in the nominal market, there is a marked difference in trading activity between the most recently issued (“on-the-run”) and previously issued (“off-the-run”) securities, as trading drops sharply when securities go off the run. In contrast to the nominal market, there is little difference in bid-ask spreads or quoted depth between these securities, but there is a difference in the incidence of posted quotes. These results suggest that trading activity and quote incidence may be better cross-sectional measures of liquidity in the TIPS market than bid-ask spreads or quoted depth. Intraday patterns of trading activity are broadly similar in both markets, but TIPS activity peaks somewhat later, likely reflecting differences in the use and ownership of these securities. Announcement effects also differ between markets, with TIPS auction results and CPI releases eliciting particularly strong increases in trading activity, likely indicating these announcements’ special importance to TIPS valuation.

Keywords: Treasury inflation-protected securities, announcements

JEL Classification: G12, G14

Suggested Citation

Fleming, Michael J. and Krishnan, Neel, The Microstructure of the TIPS Market (December 2011). Economic Policy Review, 2012. Available at SSRN: https://ssrn.com/abstract=1976375 or http://dx.doi.org/10.2139/ssrn.1976375

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6372 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

Neel Krishnan

affiliation not provided to SSRN ( email )

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