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Features and risks of Treasury Inflation Protection Securities

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  • Pu Shen

Abstract

In 1997, the U.S. Treasury began the quarterly issuance of inflation indexed bonds, called Treasury Inflation Protection Securities (TIPS). So far, the Treasury has issued both 5-year and 10-year indexed bonds and will begin to issue 30-year indexed bonds and inflation indexed savings bonds in 1998. TIPS differ from conventional Treasury bonds in both their payment flows and risks. With virtually no inflation risk, they are the safest assets currently available in the U.S. market. Combined with conventional Treasury bonds, they allow investors to separate inflation risk from real interest rate risk and thus manage risk more efficiently.> To help investors understand and take full advantage of these new securities, Shen discusses the features and risks of the Treasury inflation indexed bonds. She explains why these bonds can benefit many investors and shows how the tax code prevents these bonds from being entirely inflation-risk free. Finally, she shows that historically the market risk of an indexed bond has been small compared to that of a conventional bond with similar maturity.

Suggested Citation

  • Pu Shen, 1998. "Features and risks of Treasury Inflation Protection Securities," Economic Review, Federal Reserve Bank of Kansas City, vol. 83(Q I), pages 23-38.
    • Handle: RePEc:fip:fedker:y:1998:i:qi:p:23-38:n:v.83no.1
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    File URL: https://www.kansascityfed.org/documents/1427/1998-Features%20and%20Risks%20of%20Treasury%20Inflation%20Protection%20Securities.pdf
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    Citations

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    Cited by:

    1. Auckenthaler, Julia & Kupfer, Alexander & Sendlhofer, Rupert, 2015. "The impact of liquidity on inflation-linked bonds: A hypothetical indexed bonds approach," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 139-154.
    2. Harsh Parikh & Rama K. Malladi & Frank J. Fabozzi, 2020. "Preparing for higher inflation: Portfolio solutions using U.S. equities," Review of Financial Economics, John Wiley & Sons, vol. 38(3), pages 542-554, July.
    3. Hunter, Delroy M. & Simon, David P., 2005. "Are TIPS the "real" deal?: A conditional assessment of their role in a nominal portfolio," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 347-368, February.
    4. Mr. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 2009/090, International Monetary Fund.

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