What’s so Inconvenient About TIPS?

Athanasios Geromichalos, Lucas Herrenbrueck, Changhyun Lee and Sukjoon Lee
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Sukjoon Lee: Department of Economics, University of California Davis

No 364, Working Papers from University of California, Davis, Department of Economics

Abstract: We build on recent developments in the theory of money and liquidity to provide a qualitative and quantitative explanation for the well-known TIPS illiquidity vis-`a-vis noninflation- protected Treasuries. Our model does not assume exogenous differences between the markets where the two assets are traded or the investors who hold them; instead, an asset’s liquidity is endogenous and depends on the trading and market entry decisions of investors. The model offers a powerful amplification mechanism that operates upon only one difference between TIPS and Treasuries: the far greater supply of the latter. We also quantify how much the Treasury leaves on the table by issuing securities that are not as highly valued by the market as nominal Treasuries. However, the model does not necessarily imply that the Treasury should phase out TIPS, as some have suggested, only that it should seek to reduce segmentation and ensure that TIPS trade alongside nominal Treasuries in consolidated secondary markets.

Keywords: Monetary-search models; OTC markets; Endogenous liquidity; Treasury securities; Treasury Inflation-Protected Securities (TIPS) (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 G12 (search for similar items in EconPapers)
Pages: 37
Date: 2024-12-02
New Economics Papers: this item is included in nep-dge and nep-fmk
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