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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.html
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    References listed on IDEAS

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    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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