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Understanding Inflation-Indexed Bond Markets

John Campbell (), Robert Shiller and Luis Viceira ()

No 15014, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation- indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.

JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-his and nep-mac
Date: 2009-05
Note: AP IFM ME
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Published as John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 79-138.

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Working Paper: Understanding Inflation-Indexed Bond Markets (2009) Downloads
Working Paper: Understanding Inflation-Indexed Bond Markets (2009) Downloads
Working Paper: Understanding Inflation-Indexed Bond Markets (2009) Downloads
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