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Treasury inflation-indexed debt: a review of the U.S. experience

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  • Robert Elsasser
  • Brian P. Sack

Abstract

This article describes the evolution of Treasury inflation-indexed debt securities (TIIS) since their introduction in 1997. Over most of this period, TIIS yields have been surprisingly high relative to those on comparable nominal Treasury securities, with the spread between the nominal and indexed yields falling well below survey measures of long-run inflation expectations. The authors argue that the low relative valuation of TIIS may have reflected investor difficulty adjusting to a new asset class, supply trends, and the lower liquidity of indexed debt. In addition, investors may have had a benign outlook for inflation and may not have demanded much, if any, of an inflation risk premium to hold nominal securities. As a result, inflation-indexed debt has not yet lived up to one of its main purposes: to reduce the Treasury's expected financing costs. More recently, though, TIIS market liquidity and the breadth of investor participation have increased considerably, and the valuation of these securities appears to have improved.

Suggested Citation

  • Robert Elsasser & Brian P. Sack, 2004. "Treasury inflation-indexed debt: a review of the U.S. experience," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 47-63.
  • Handle: RePEc:fip:fednep:y:2004:i:may:p:47-63:n:v.10no.1
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    Cited by:

    1. Gilbert Cette & Marielle de Jong, 2013. "Breakeven inflation rates and their puzzling correlation relationships," Applied Economics, Taylor & Francis Journals, vol. 45(18), pages 2579-2585, June.
    2. Tobias Adrian & Hao Wu, 2009. "The term structure of inflation expectations," Staff Reports 362, Federal Reserve Bank of New York.
    3. Gurkaynak, Refet S. & Sack, Brian & Wright, Jonathan H., 2007. "The U.S. Treasury yield curve: 1961 to the present," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2291-2304, November.
    4. Herwartz Helmut & Roestel Jan, 2009. "Monetary Independence under Floating Exchange Rates: Evidence Based on International Breakeven Inflation Rates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(4), pages 1-25, September.
    5. Abrahams, Michael & Adrian, Tobias & Crump, Richard K. & Moench, Emanuel & Yu, Rui, 2016. "Decomposing real and nominal yield curves," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 182-200.
    6. 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.
    7. Refet S. Gürkaynak & Brian Sack & Jonathan H. Wright, 2010. "The TIPS Yield Curve and Inflation Compensation," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 70-92, January.
    8. Linda S. Goldberg & Michael W. Klein, 2005. "Establishing Credibility: Evolving Perceptions of the European Central Bank," NBER Working Papers 11792, National Bureau of Economic Research, Inc.
    9. Jens H. E. Christensen & James M. Gillan, 2011. "A model-independent maximum range for the liquidity correction of TIPS yields," Working Paper Series 2011-16, Federal Reserve Bank of San Francisco.
    10. Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
    11. Serge Jeanneau & Camilo E Tovar, 2008. "Latin America’s local currency bond markets: an overview," BIS Papers chapters, in: Bank for International Settlements (ed.), New financing trends in Latin America: a bumpy road towards stability, volume 36, pages 46-64, Bank for International Settlements.
    12. Ian Christensen & Frédéric Dion & Christopher Reid, 2004. "Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate," Staff Working Papers 04-43, Bank of Canada.
    13. Flávio de Freitas Val & Claudio Henrique da Silveira Barbedo & Marcelo Verdini Maia, 2011. "Inflation expectation and implicit inflation: does market research provide accurate measures?," Brazilian Business Review, Fucape Business School, vol. 8(3), pages 83-100, July.
    14. Daniel L. Thornton, 2007. "The lower and upper bounds of the Federal Open Market Committee's long-run inflation objective," Review, Federal Reserve Bank of St. Louis, vol. 89(May), pages 183-194.
    15. Kosuke Aoki & Takeshi Kimura, 2008. "Central Bank's Two-Way Communication with the Public and Inflation Dynamics," CEP Discussion Papers dp0899, Centre for Economic Performance, LSE.
    16. Jens H. E. Christensen & Glenn D. Rudebusch, 2019. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt," The Review of Economics and Statistics, MIT Press, vol. 101(5), pages 933-949, December.
    17. Cartea, Álvaro & Saúl, Jonatan & Toro, Juan, 2012. "Optimal portfolio choice in real terms: Measuring the benefits of TIPS," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 721-740.
    18. Gilbert Cette & Marielle de Jong, 2013. "Market-implied inflation and growth rates adversely affected by the Brent," Journal of Asset Management, Palgrave Macmillan, vol. 14(3), pages 133-139, June.
    19. Matthias Bank & Alexander Kupfer & Rupert Sendlhofer, 2014. "Performance-Sensitive Government Bonds," Credit and Capital Markets, Credit and Capital Markets, vol. 47(1), pages 79-101.
    20. Ana María Aguilar-Argaez & Rocio Elizondo & Jessica Roldán-Peña, 2016. "Break-Even-Inflation's Decomposition in Mexico," Working Papers 2016-22, Banco de México.
    21. Antonio Díaz & Francisco Jareño & Eliseo Navarro, 2020. "Yield curves from different bond data sets," Review of Derivatives Research, Springer, vol. 23(2), pages 191-226, July.
    22. Serge Jeanneau & Camilo E Tovar, 2006. "Domestic bond markets in Latin America: achievements and challenges," BIS Quarterly Review, Bank for International Settlements, June.
    23. Martin M. Andreasen & Jens H.E. Christensen & Simon Riddell, 2017. "The TIPS Liquidity Premium," CREATES Research Papers 2017-27, Department of Economics and Business Economics, Aarhus University.

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