Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices

88 Pages Posted: 10 Apr 2014

See all articles by Stefania D'Amico

Stefania D'Amico

Board of Governors of the Federal Reserve System

Don H. Kim

Federal Reserve Board - Division of Monetary Affairs

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Multiple version iconThere are 3 versions of this paper

Date Written: February 19, 2016

Abstract

Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the recent financial crisis. This spread reflects predominantly the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the informational content of TIPS breakeven inflation, a widely-used proxy for expected inflation.

Keywords: TIPS, breakeven inflation, deflation floor, expected inflation, indexation Lag, inflation risk premium, liquidity premiums

JEL Classification: G12, G01, E43, E44

Suggested Citation

D'Amico, Stefania and Kim, Don H. and Wei, Min, Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices (February 19, 2016). FEDS Working Paper No. 2014-24. Available at SSRN: https://ssrn.com/abstract=2422861 or http://dx.doi.org/10.2139/ssrn.2422861

Stefania D'Amico

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Don H. Kim

Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Min Wei (Contact Author)

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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