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Inflation-indexed bonds: the dog that didn't bark

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  • Ralph C. Kimball
  • Richard W. Kopcke

Abstract

The introduction by the U.S. Treasury of inflation-indexed notes was one of the most widely publicized innovations in the U.S. capital markets in recent years. Since their introduction in January 1997, $57 billion in 5-, 10-, and 30-year Treasury Inflation-Protected Securities (TIPS) has been issued, and the Treasury has recently announced that TIPS will also be offered as small- denomination savings bonds. Because both the coupon and the principal of TIPS vary with the consumer price index, the Treasury believes these notes will appeal to risk-adverse investors seeking protection from inflation. Proponents of TIPS have argued that their issuance should also reduce the cost of borrowing to the Treasury and permit a clear measure of investors' forecasts of inflation. Despite their promise, it is doubtful whether inflation-indexed bonds have been a great success either in the United States or in other industrialized countries that have issued them. The authors analyze the characteristics of TIPS that might explain their limited acceptance. Their model indicates that TIPS should appeal primarily to risk-investors in high tax brackets who are pessimistic concerning inflation. Despite their unique design, however, TIPS are not unique in offering investors inflation-protected returns.

Suggested Citation

  • Ralph C. Kimball & Richard W. Kopcke, 1999. "Inflation-indexed bonds: the dog that didn't bark," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-24.
    • Handle: RePEc:fip:fedbne:y:1999:i:jan:p:3-24
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    References listed on IDEAS

    as
    1. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 155-208, National Bureau of Economic Research, Inc.
    2. Baer, Werner & Beckerman, Paul, 1980. "The trouble with index-linking: Reflections on the recent Brazilian Experience," World Development, Elsevier, vol. 8(9), pages 677-703, September.
    3. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Data," Harvard Institute of Economic Research Working Papers 1758, Harvard - Institute of Economic Research.
    4. Fischer, Stanley, 1983. "Indexing and inflation," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 519-541, November.
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    Cited by:

    1. Robert Elsasser & Brian P. Sack, 2002. "Treasury inflation-indexed debt: a review of the U.S. experience," Finance and Economics Discussion Series 2002-32, Board of Governors of the Federal Reserve System (U.S.).
    2. 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.
    3. Michelle L. Barnes & Zvi Bodie & Robert K. Triest & J. Christina Wang, 2009. "TIPS scorecard: are TIPS accomplishing what they were supposed to accomplish?: can they be improved?," Public Policy Discussion Paper 09-8, Federal Reserve Bank of Boston.
    4. Scott E. Hein & Jeffrey M. Mercer, 2003. "Are TIPS really tax disadvantaged? Rethinking the tax treatment of U.S. Treasury Inflation Indexed Securities," FRB Atlanta Working Paper 2003-9, Federal Reserve Bank of Atlanta.
    5. William R. Emmons, 2000. "The information content of Treasury inflation-indexed securities," Review, Federal Reserve Bank of St. Louis, vol. 82(Nov), pages 25-38.
    6. Peters, David W., 2007. "The behavior of government of Canada real return bond returns," International Review of Financial Analysis, Elsevier, vol. 16(2), pages 152-171.
    7. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Occasional Papers 0705, Banco de España.

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