Seasonal indexation bias in US Treasury Inflation-indexed Securities

Michael Gapen

Applied Financial Economics, 2003, vol. 13, issue 7, 509-516

Abstract: The purpose of this paper is to alert users of US Treasury Inflation-indexed Securities (TIPS) that the procedure of indexing real principal and interest payments to the lagged momentum of the seasonally unadjusted CPI gives rise to a seasonal indexation bias. This bias limits the ability of such securities to guarantee maintenance of real value on a current basis and, when predictable, causes expected indexation bias that affects the reported yield in a measurable way. Therefore, seasonal indexation bias limits the extent to which TIPS can be used to infer changes in the risk-free real rate of interest, which is an important anchor for portfolio valuation models. A methodology to calibrate the size and direction of the seasonal component is employed so that reported real yields can be adjusted. The seasonal adjustments suggest that the reporting bias in real yields is most pronounced as time to maturity shortens. Furthermore, the seasonal indexation bias will not have a constant annual pattern and will differ according to issue and maturity dates.

Date: 2003
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DOI: 10.1080/0960310022000016631

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