IDEAS home Printed from https://ideas.repec.org/p/fip/fedfwp/99506.html
   My bibliography  Save this paper

German Inflation-Linked Bonds: Overpriced, Yet Undervalued

Author

Listed:
  • Jens H. E. Christensen
  • Sarah Mouabbi
  • Caroline M. Paulson

Abstract

We document that German inflation-linked government bond yields contain a convenience or safety premium averaging 0.33 percent. Yet, the German Federal Finance Agency decided to cease all future issuance of these bonds in November 2023. We examine the market response to this announcement and find that neither the safety premia nor the trading conditions of these bonds have been negatively impacted. Hence, this bond market remains a rich source of information on real rates in the euro area in addition to offering investors a safe inflation-protected asset.

Suggested Citation

  • Jens H. E. Christensen & Sarah Mouabbi & Caroline M. Paulson, 2025. "German Inflation-Linked Bonds: Overpriced, Yet Undervalued," Working Paper Series 2025-03, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:99506
    DOI: 10.24148/wp2025-03
    as

    Download full text from publisher

    File URL: https://www.frbsf.org/wp-content/uploads/wp2025-03.pdf
    File Function: Full text - article PDF
    Download Restriction: no
    File URL: https://libkey.io/10.24148/wp2025-03?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2012. "Correcting Estimation Bias in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(3), pages 454-467, April.
    2. 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.
    3. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2014. "Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 32(1), pages 136-151, January.
    4. Christensen, Jens H.E. & Spiegel, Mark M., 2022. "Monetary reforms and inflation expectations in Japan: Evidence from inflation-indexed bonds," Journal of Econometrics, Elsevier, vol. 231(2), pages 410-431.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jens H. E. Christensen & Sarah Mouabbi, 2024. "The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds," Working Paper Series 2024-08, Federal Reserve Bank of San Francisco.
    2. Christensen, Jens H. E. & Zhang, Xin, 2024. "Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy," Working Paper Series 434, Sveriges Riksbank (Central Bank of Sweden).
    3. Andreasen, Martin M. & Christensen, Jens H.E. & Rudebusch, Glenn D., 2019. "Term Structure Analysis with Big Data: One-Step Estimation Using Bond Prices," Journal of Econometrics, Elsevier, vol. 212(1), pages 26-46.
    4. Christensen, Jens H.E. & Spiegel, Mark M., 2022. "Monetary reforms and inflation expectations in Japan: Evidence from inflation-indexed bonds," Journal of Econometrics, Elsevier, vol. 231(2), pages 410-431.
    5. Remy Beauregard & Jens H. E. Christensen & Eric Fischer & Simon Zhu, 2021. "Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico," Working Paper Series 2021-08, Federal Reserve Bank of San Francisco.
    6. Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2015. "A probability-based stress test of Federal Reserve assets and income," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 26-43.
    7. Michael D. Bauer & Glenn D. Rudebusch, 2020. "Interest Rates under Falling Stars," American Economic Review, American Economic Association, vol. 110(5), pages 1316-1354, May.
    8. Jens H. E. Christensen & Glenn D. Rudebusch, 2012. "The Response of Interest Rates to US and UK Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 385-414, November.
    9. Beauregard, Remy & Christensen, Jens H.E. & Fischer, Eric & Zhu, Simon, 2024. "Inflation expectations and risk premia in emerging bond markets: Evidence from Mexico," Journal of International Economics, Elsevier, vol. 151(C).
    10. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2014. "Can Spanned Term Structure Factors Drive Stochastic Yield Volatility?," Working Paper Series 2014-3, Federal Reserve Bank of San Francisco.
    11. Bauer, Michael D. & Neely, Christopher J., 2014. "International channels of the Fed's unconventional monetary policy," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 24-46.
    12. Lloyd, S. P., 2017. "Unconventional Monetary Policy and the Interest Rate Channel: Signalling and Portfolio Rebalancing," Cambridge Working Papers in Economics 1735, Faculty of Economics, University of Cambridge.
    13. Jens H. E. Christensen & Glenn D. Rudebusch, 2016. "Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 75-125, Emerald Group Publishing Limited.
    14. Marc Peter Radke & Manuel Rupprecht, 2021. "Household Wealth: Low-Yielding and Poorly Structured?," JRFM, MDPI, vol. 14(3), pages 1-40, March.
    15. Rodolfo G. Campos & Jesús Fernández-Villaverde & Galo Nuño & Peter Paz, 2024. "Navigating by Falling Stars: Monetary Policy with Fiscally Driven Natural Rates," NBER Working Papers 32219, National Bureau of Economic Research, Inc.
    16. Liu, Yan & Wu, Jing Cynthia, 2021. "Reconstructing the yield curve," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1395-1425.
    17. Iryna Kaminska & Gabriele Zinna, 2020. "Official Demand for U.S. Debt: Implications for U.S. Real Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 323-364, March.
    18. Abbritti, Mirko & Carcel, Hector & Gil-Alana, Luis & Moreno, Antonio, 2023. "Term premium in a fractionally cointegrated yield curve," Journal of Banking & Finance, Elsevier, vol. 149(C).
    19. Hans Dewachter & Leonardo Iania & Jean-Charles Wijnandts, 2016. "The response of euro area sovereign spreads to the ECB unconventional monetary policies," Working Paper Research 309, National Bank of Belgium.
    20. Andreasen, Martin M. & Christensen, Bent Jesper, 2015. "The SR approach: A new estimation procedure for non-linear and non-Gaussian dynamic term structure models," Journal of Econometrics, Elsevier, vol. 184(2), pages 420-451.

    More about this item

    Keywords

    affine arbitrage-free term structure model; financial market frictions; premium; rstar; safety premium;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:99506. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Federal Reserve Bank of San Francisco Research Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbsfus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.