Is There an On-the-Run Premium in TIPS?

Jens H. E. Christensen, Jose Lopez and Patrick J. Shultz ()
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Jens H. E. Christensen: Federal Reserve Bank of San Francisco, 101 Market Street MS 1130, San Francisco, CA 94105, USA
Patrick J. Shultz: Wharton School of the University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104, USA

Quarterly Journal of Finance (QJF), 2020, vol. 10, issue 02, 1-42

Abstract: In the U.S. Treasury market, the most recently issued, or so-called “on-the-run,” security typically trades at a price above those of more seasoned but otherwise comparable securities. This difference is known as the on-the-run premium. In this paper, yield spreads between pairs of Treasury Inflation-Protected Securities (TIPS) with both matching and nearly-matching maturities but of separate vintages are analyzed. Adjusting for differences in conventional liquidity premiums, values of embedded deflation options, and coupon rates, the results show a small, insignificant premium on recently issued TIPS, which leads us to conclude that there is no on-the-run premium in the TIPS market.

Keywords: Term structure models; liquidity risk; financial market frictions; deflation protection (search for similar items in EconPapers)
Date: 2020
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Working Paper: Is There an On-the-Run Premium in TIPS? (2017)
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DOI: 10.1142/S201013922050007X

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