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

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.

Arbitrage in International Sovereign Debt Markets? Evidence from the Inflation‐Protected Securities of Six Countries

“…Our paper also relates to the extensive literature, which extracts inflation expectations from inflation linked debt, for example, Christensen, Lopez, and Rudebusch (2010), D'Amico, Kim, and Wei (2016), Hördahl and Tristani (2012), Adrian and Wu (2010). These papers argue that the difference in yields on nominal and inflation‐protected debt are influenced both by expected inflation and risk factors, for example, liquidity risk.…”

Dynamic Asset Allocation with Liabilities

“…Investing in inflation-indexed bonds might not be possible or desirable for a number of reasons. First, inflation indexed bonds are less liquid than nominal bonds (D'Amico et al, 2014;Gürkaynak et al, 2010;Pflueger and Viceira, 2011). Second, despite the sharp growth of the linker market, 10 a number of countries do not issue inflation-indexed bonds.…”

Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics

“…Linked bonds have accordingly become the core of inflation hedging literature and make up the bulk of inflation hedged portfolios today (Bodie Z. , 1988). Yet, this one and only solution remains unsatisfactory for many investors: linked bonds are available in limited supply and accordingly suffer from low returns and less than optimal liquidity and depth compared to their nominal equivalents (D'Amico, Kim, & Wei, 2008). This is partly due to the fact that more than thirty years after their introduction in the United Kingdom, the issuance of private linked bonds has remained largely marginal and therefore confined to a few sovereign or quasi-sovereign issuers (Garcia & Van Rixtel, 2007).…”