Typography

I learnt some interesting facts about inflation-linked investment products. To begin with Sober Look had an intriguing chart showing an inversion in the TIPS yield curve. Michael Ashton at Epiphany had an interesting explanation for this. Basically, short-dated TIPS begin to trade like gasoline futures . Like zero-coupon inflation swaps, TIPS are indexed to headline inflation, not core inflation. The most volatile component of headline inflation are gas prices, although in general large changes in gasoline prices will mean-revert to core inflation. We've had a large fall in gas prices, so near TIPS have fallen in value. More distant TIPS price in an expectation of gasoline reverting to core, and therefore are less sensitive to the fall in gas prices. Michael explains here why inflation swaps are a better indication of true inflation than TIPS. I learn here that the 5Y 5Y forward inflation curve is the market price for an inflation swap that starts in 5years and ends in 10 years...

Econbrowser has a post on inflation expectations as measured via TIPS spreads. This links back to an earlier comment I made on Glasner's blog , in which inflation swaps are posited as an alternative to TIPS spreads. Here is the comment from Econbrowser: "One might worry about characteristics in the TIPS market distorting the estimates of the real yields."  and  "The real yield curve starts at five years, so one can’t be sure what the real yield curve suggests for the horizon less than five years. "  Why not use zero coupon inflation swap prices? They (supposedly) don't suffer from some of the same distortions as TIPS (liquidity premia), and you can get shorter terms.  For instance, here is the 2 year inflation swap.  http://www.bloomberg.com/apps/quote?ticker=USSWIT2:IND Just subtract the 2 year swap rate from the nominal 2 year rate and you have the 2 year real rate.  See the Cleveland Fed's explanation of their methodology for measuring inflation exp...

Commented on David Glasner's Once Again The Stock Market Shows its Love for Inflation : The only problem here is the one that we talked about in a previous post (Unpleasant Fisherian Arithmetic) concerning the liquidity premium that assets carry. The reason for the rising TIPS spread could be (though not necessarily must be) that the liquidity premium on treasuries is shrinking relative to that of TIPS, and therefore TIPS are rising in price relative to Treasuries. This makes it hard to pass judgment on the hypothetical rate of return on capital.  Anyways, you have already commented on this problem in your paper: “One possible cause of distortion in the yield on TIPS bonds and in the TIPS spread during the autumn 2008 financial crisis is that the yield on conventional Treasuries was depressed because of a liquidity premium. Even though the ex ante real interest rate was likely negative, because TIPS bonds were perceived as much less liquid than conventional Treasuries, TIPS bonds c...