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Seasonal indexation bias in US Treasury Inflation-indexed Securities

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  • Michael Gapen

Abstract

The purpose of this paper is to alert users of US Treasury Inflation-indexed Securities (TIPS) that the procedure of indexing real principal and interest payments to the lagged momentum of the seasonally unadjusted CPI gives rise to a seasonal indexation bias. This bias limits the ability of such securities to guarantee maintenance of real value on a current basis and, when predictable, causes expected indexation bias that affects the reported yield in a measurable way. Therefore, seasonal indexation bias limits the extent to which TIPS can be used to infer changes in the risk-free real rate of interest, which is an important anchor for portfolio valuation models. A methodology to calibrate the size and direction of the seasonal component is employed so that reported real yields can be adjusted. The seasonal adjustments suggest that the reporting bias in real yields is most pronounced as time to maturity shortens. Furthermore, the seasonal indexation bias will not have a constant annual pattern and will differ according to issue and maturity dates.

Suggested Citation

  • Michael Gapen, 2003. "Seasonal indexation bias in US Treasury Inflation-indexed Securities," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 509-516.
    • Handle: RePEc:taf:apfiec:v:13:y:2003:i:7:p:509-516
    DOI: 10.1080/0960310022000016631
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    Citations

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    Cited by:

    1. Ejsing, Jacob & Garcí­a, Juan Angel & Werner, Thomas, 2007. "The term structure of euro area break-even inflation rates: the impact of seasonality," Working Paper Series 830, European Central Bank.
    2. Francisco Jareno, 2008. "Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3159-3171.
    3. 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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