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4 years ago

TIPS yields reveal hidden risks, distorting inflation expectations.

SSRN Electronic Journal
Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices
Stefania D’Amico, Don H. Kim, Min Wei

Paper Summary

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Treasury Inflation-Protected Securities (TIPS) have yields higher than risk-free real bonds due to lower liquidity, especially during financial crises. This difference is mainly because TIPS are less easily traded than regular Treasury bonds. Factors like indexation lag and deflation protection in TIPS have a smaller impact on this yield difference. Ignoring this spread can distort TIPS breakeven inflation, a measure of expected inflation.