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What’s so Inconvenient About TIPS?

Author

Listed:
  • Athanasios Geromichalos
  • Lucas Herrenbrueck
  • Changhyun Lee
  • Sukjoon Lee

    (Department of Economics, University of California Davis)

Abstract

We build on recent developments in the theory of money and liquidity to provide a qualitative and quantitative explanation for the well-known TIPS illiquidity vis-`a-vis noninflation- protected Treasuries. Our model does not assume exogenous differences between the markets where the two assets are traded or the investors who hold them; instead, an asset’s liquidity is endogenous and depends on the trading and market entry decisions of investors. The model offers a powerful amplification mechanism that operates upon only one difference between TIPS and Treasuries: the far greater supply of the latter. We also quantify how much the Treasury leaves on the table by issuing securities that are not as highly valued by the market as nominal Treasuries. However, the model does not necessarily imply that the Treasury should phase out TIPS, as some have suggested, only that it should seek to reduce segmentation and ensure that TIPS trade alongside nominal Treasuries in consolidated secondary markets.

Suggested Citation

  • Athanasios Geromichalos & Lucas Herrenbrueck & Changhyun Lee & Sukjoon Lee, 2024. "What’s so Inconvenient About TIPS?," Working Papers 364, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:364
    as

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    File URL: https://repec.dss.ucdavis.edu/files/legpw41wfggp7k9ipfr3nix4n8iw/TIPS_November_24.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary-search models; OTC markets; Endogenous liquidity; Treasury securities; Treasury Inflation-Protected Securities (TIPS);
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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