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Is There an On-the-Run Premium in TIPS?

Author

Listed:
  • Jens H. E. Christensen

    (Federal Reserve Bank of San Francisco, 101 Market Street MS 1130, San Francisco, CA 94105, USA)

  • Jose A. Lopez

    (Federal Reserve Bank of San Francisco, 101 Market Street MS 1130, San Francisco, CA 94105, USA)

  • Patrick J. Shultz

    (Wharton School of the University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104, USA)

Abstract

In the U.S. Treasury market, the most recently issued, or so-called “on-the-run,” security typically trades at a price above those of more seasoned but otherwise comparable securities. This difference is known as the on-the-run premium. In this paper, yield spreads between pairs of Treasury Inflation-Protected Securities (TIPS) with both matching and nearly-matching maturities but of separate vintages are analyzed. Adjusting for differences in conventional liquidity premiums, values of embedded deflation options, and coupon rates, the results show a small, insignificant premium on recently issued TIPS, which leads us to conclude that there is no on-the-run premium in the TIPS market.

Suggested Citation

  • Jens H. E. Christensen & Jose A. Lopez & Patrick J. Shultz, 2020. "Is There an On-the-Run Premium in TIPS?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-42, June.
    • Handle: RePEc:wsi:qjfxxx:v:10:y:2020:i:02:n:s201013922050007x
    DOI: 10.1142/S201013922050007X
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    Cited by:

    1. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.
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    3. Magnani, Jacopo & Wang, Yabin, 2020. "Bond Lending and the Law of One Price in China's Treasury Markets," MPRA Paper 105027, University Library of Munich, Germany.
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    5. Fabienne Schneider, 2024. "On-the-run Premia, Settlement Fails, and Central Bank Access," Working Papers 24.05, Swiss National Bank, Study Center Gerzensee.

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    More about this item

    Keywords

    Term structure models; liquidity risk; financial market frictions; deflation protection;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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