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The TIPS-Treasury Bond Puzzle

Author

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  • MATTHIAS FLECKENSTEIN
  • FRANCIS A. LONGSTAFF
  • HANNO LUSTIG

Abstract

type="main"> We show that the price of a Treasury bond and an inflation-swapped Treasury Inflation-Protected Securities (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 arbitrage persistence.

Suggested Citation

  • Matthias Fleckenstein & Francis A. Longstaff & Hanno Lustig, 2014. "The TIPS-Treasury Bond Puzzle," Journal of Finance, American Finance Association, vol. 69(5), pages 2151-2197, October.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:5:p:2151-2197
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    File URL: http://hdl.handle.net/10.1111/jofi.12032
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