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TIPS liquidity, breakeven inflation, and inflation expectations

Author

Listed:
  • Jens H. E. Christensen
  • James M. Gillan

Abstract

Estimating market expectations for inflation from the yield difference between nominal Treasury bonds and Treasury inflation-protected securities-a difference known as breakeven inflation-is complicated by the liquidity differential between these two types of securities. Currently, the extent to which liquidity plays a role in determining breakeven inflation remains contentious. Information from the market for inflation swaps provides a range for the possible liquidity premium in TIPS, which in turn suggests a range for estimates of inflation expectations that is well below the widely followed Survey of Professional Forecasters inflation forecast.

Suggested Citation

  • Jens H. E. Christensen & James M. Gillan, 2011. "TIPS liquidity, breakeven inflation, and inflation expectations," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue june20.
    • Handle: RePEc:fip:fedfel:y:2011:i:june20:n:2011-19
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    File URL: http://www.frbsf.org/publications/economics/letter/2011/el2011-19.pdf
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    References listed on IDEAS

    as
    1. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, September.
    2. Jens H.E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2012. "Extracting Deflation Probability Forecasts from Treasury Yields," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 21-60, December.
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    Cited by:

    1. Haensly, Paul J., 2016. "Is a pure TIPS strategy truly risk free?," Review of Financial Economics, Elsevier, vol. 28(C), pages 1-20.

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