Another way to see what the Fed's zero interest-rate policy (ZIRP) is doing to people who rely on interest earnings for their income is to examine the yield on Treasury inflation-indexed securities
In recent years, inflation-indexed securities
have become popular for use in portfolios.
The later-morning peak in activity in the indexed market may reflect differences in use and ownership between nominal and inflation-indexed securities
and annuities, among other products, that are now available only in developed markets, may eventually be introduced in the country.
The Harbor Commodity Real Return Strategy Fund seeks to provide maximum real return (total return minus the cost of inflation), consistent with prudent investment management, by investing in commodity-linked derivative instruments backed by a portfolio of inflation-indexed securities
and other fixed income instruments.
The only market-based measure of inflation expectations is the spread between Treasury inflation-indexed securities
(TIIS) and the corresponding non-indexed Treasury issue.
The premium they calculated was 50 to 100 basis points, which led them to their prediction that inflation-indexed securities
would overstate expected inflation by that much.
Today, the popularity of Treasury Inflation-Indexed Securities
(TIIS) is on the rise due to the increased demand for fixed-income securities by investors, the increased supply of TIIS, and the increased possibility of higher fluctuation of price levels.
Treasury began issuing inflation-indexed securities
in early 1997.
The other shows that the implied real return on Treasury inflation-indexed securities
has fallen over the past few years even though projected budget deficits have increased.
Issuance of inflation-indexed securities
has been rationalized in a number of ways.
This also poses new challenges, because some things considered to be true turn out to be false, or at least questionable, in the presence of inflation-indexed securities
, when everything is benchmarked in real terms.