What Do TIPS Say about Real Interest Rates and Required Returns?

J. Benson Durham

Financial Analysts Journal, 2023, vol. 79, issue 2, 21-44

Abstract: An arbitrage-free model decomposes yields on Treasury Inflation-Protected Securities (TIPS) into expected real rates, real frictionless term premiums, and liquidity premiums. Estimation eschews non-market information, incorporates a novel observable liquidity factor, and addresses factor persistence and sample biases, including real-time estimation. Results include a modest secular decline in equilibrium real rates and a much larger drop in frictionless required excess real returns, on net, from July 1999 to September 2022. Real term premiums appear to be pro-cyclical, which implies that the default risk-free asset is a hedge, and some evidence suggests that TIPS liquidity premiums are counter-cyclical.

Date: 2023
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DOI: 10.1080/0015198X.2023.2169027

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