EconPapers    
Economics at your fingertips  
 

Why Does the Treasury Issue Tips? The Tips-Treasury Bond Puzzle

Matthias Fleckenstein, Francis Longstaff and Hanno Lustig ()

No 16358, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that the price of a Treasury bond and an inflation-swapped TIPS issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS-Treasury mispricing has exceeded $56 billion, representing nearly eight percent of the total amount of TIPS outstanding. TIPS-Treasury mispricing is strongly related to supply factors such as Treasury debt issuance and the availability of collateral in the financial markets, and is correlated with other types of fixed-income arbitrages, These results pose a major puzzle to classical asset pricing theory. In addition, they raise the issue of why the Treasury issues TIPS, since in so doing it both gives up a valuable fiscal hedging option and leaves large amounts of money on the table.

JEL-codes: E6 G12 G14 (search for similar items in EconPapers)
Date: 2010-09
Note: AP ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22) Track citations by RSS feed

Published as The TIPS—Treasury Bond Puzzle* The Journal of Finance Accepted manuscript online: 30 JAN 2013, Matthias Fleckenstein, Francis A. Longstaff and Hanno Lustig DOI: 10.1111/jofi.12032

Downloads: (external link)
http://www.nber.org/papers/w16358.pdf (application/pdf)

Related works:
Working Paper: Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle (2011) Downloads
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:nbr:nberwo:16358

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w16358

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-09-10
Handle: RePEc:nbr:nberwo:16358