Inflation risk in the U.S. yield curve: the usefulness of indexed bonds

Frank F. Gong and Eli Remolona

No 9637, Research Paper from Federal Reserve Bank of New York

Abstract: The inflation-indexed bonds the U.S. Treasury plans to issue will reduce the expected borrowing cost if the yield curve reflects a risk premium for inflation. In the United Kingdom, indexed bonds are also used to extract inflationary expectations and thus to guide monetary policy. The bonds will produce a more reliable measure of such expectations if the inflation risk premium is taken into account. We estimate such a risk premium for the United States by means of a two-factor affine-yield model of the term structure. The model allows both the inflation risk premium and real term premium to vary over time. Using monthly data on CPI inflation and on bond yields for two-year to ten-year maturities, we find both premia to have been significant for the sample period January 1984 to July 1996. We estimate that indexed bonds would have saved an average of one-fifth of the expected borrowing cost of 10-year notes.

Keywords: Bonds; Inflation (Finance); Interest rates; Indexation (Economics); Inflation-indexed bonds (search for similar items in EconPapers)
Date: 1996
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/rese ... rch_papers/9637.html (text/html)
https://www.newyorkfed.org/medialibrary/media/rese ... arch_papers/9637.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednrp:9637

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Research Paper from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().