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Exploring the TIPS‑Treasury Valuation Puzzle

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Abstract

Since the late 1990s, the U.S. Treasury has issued debt in two main forms: nominal bonds, which provide fixed-cash scheduled payments, and Treasury Inflation Protected Securities—or TIPS—which provide the holder with inflation-protected payments that rise with U.S. inflation. At the heart of their relative valuation lie market participants’ expectations of future inflation, an object of interest for academics, policymakers, and investors alike. After briefly reviewing the theoretical and empirical links between TIPS and Treasury yields, this post, based on a recent research paper, explores whether market perceptions of U.S. sovereign credit risk can help explain the relative valuation of these financial instruments.

Suggested Citation

  • Guillaume Roussellet, 2024. "Exploring the TIPS‑Treasury Valuation Puzzle," Liberty Street Economics 20240701, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:98470
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    More about this item

    Keywords

    Treasury; Treasury Inflation-Protected Securities (TIPS); breakeven inflation; default risk; loss given default; loss-given default (LGD);
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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