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Understanding Inflation-Indexed Bond Markets

  • Shiller, Robert J.
  • Campbell, John Y.
  • Viceira, Luis Manuel

This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation- indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.

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File URL: http://dash.harvard.edu/bitstream/handle/1/10885503/Campbell_Understanding.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 10885503.

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Date of creation: 2009
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Publication status: Published in Brookings Papers on Economic Activity
Handle: RePEc:hrv:faseco:10885503
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