Treasury Inflation-Indexed Debt: A Review of the U.S. Experience

17 Pages Posted: 25 Aug 2005

See all articles by Brian P. Sack

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Robert Elsasser

Federal Reserve Banks - Federal Reserve Bank of New York

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Abstract

This article describes the evolution of Treasury inflation-indexed debt securities (TIIS) since their introduction in 1997. Over most of this period, TIIS yields have been surprisingly high relative to those on comparable nominal Treasury securities, with the spread between the nominal and indexed yields falling well below survey measures of long-run inflation expectations. The authors argue that the low relative valuation of TIIS may have reflected investor difficulty adjusting to a new asset class, supply trends, and the lower liquidity of indexed debt. In addition, investors may have had a benign outlook for inflation and may not have demanded much, if any, of an inflation risk premium to hold nominal securities. As a result, inflation-indexed debt has not yet lived up to one of its main purposes: to reduce the Treasury's expected financing costs. More recently, though, TIIS market liquidity and the breadth of investor participation have increased considerably, and the valuation of these securities appears to have improved.

Keywords: treasury securities, inflation-indexed debt, TIIS, TIPS

JEL Classification: G10, E60

Suggested Citation

Sack, Brian P. and Elsasser, Robert, Treasury Inflation-Indexed Debt: A Review of the U.S. Experience. Economic Policy Review, Vol. 10, No. 1, May 2004, Available at SSRN: https://ssrn.com/abstract=788044

Brian P. Sack (Contact Author)

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section ( email )

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Robert Elsasser

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

New York, NY 10045
United States