Understanding Inflation-Indexed Bond Markets

John Y. Campbell (), Robert J. Shiller () and Luis M. Viceira ()
Additional contact information
Robert J. Shiller: Cowles Foundation, Yale University, http://cowles.econ.yale.edu/faculty/shiller.htm

No 1696, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.

Keywords: Expectations hypothesis; Liquidity; Term premia; TIPS (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-his, nep-mac and nep-mon
Date: 2009-05
View list of references View citations in EconPapers

Downloads: (external link)
http://cowles.econ.yale.edu/P/cd/d16b/d1696.pdf (application/pdf)

Related works:
Working Paper: Understanding Inflation-Indexed Bond Markets (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cwl:cwldpp:1696

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation, Yale University
Address: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Contact information at EDIRC.
Series data maintained by Glena Ames ().