Journal Article

TIPS liquidity, breakeven inflation, and inflation expectations

Abstract: Estimating market expectations for inflation from the yield difference between nominal Treasury bonds and Treasury inflation-protected securities-a difference known as breakeven inflation-is complicated by the liquidity differential between these two types of securities. Currently, the extent to which liquidity plays a role in determining breakeven inflation remains contentious. Information from the market for inflation swaps provides a range for the possible liquidity premium in TIPS, which in turn suggests a range for estimates of inflation expectations that is well below the widely followed Survey of Professional Forecasters inflation forecast.

Keywords: Inflation-indexed bonds; Inflation (Finance);

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: FRBSF Economic Letter

Publication Date: 2011

Order Number: 19