TIPS liquidity, breakeven inflation, and inflation expectations

Jens Christensen and James M. Gillan

FRBSF Economic Letter, 2011, issue june20

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) (search for similar items in EconPapers)
Date: 2011
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