Nevertheless, if one is willing to assume that the sum of these premiums is relatively stable over time, marked changes in the TIIS spread should reflect changes in market participants' expectations of inflation.
It is not surprising that there was a sharp change in the TIIS spread following the FOMC's revelations concerning the lower bound of its implicit inflation objective.
From an investor's point of view, the possibility of investing in securities providing a real interest rate seems valuable: investment value is protected from erosion due to inflation and because of diversification purposes (low correlation between TIIS and nominal securities).
Emmons (2000) and Shelton (2000) have pointed out that TIIS yields, due to marketability and liquidity issues, might not reflect a "true" real interest rate.
More recently, the liquidity and breadth of investor participation in the TIIS
market have increased notably, and the valuation of these securities appears to have improved.
Why might the return on TIIS
be so perplexingly high compared to securities that pay a nominal yield?
Our analysis suggests that participants in the TIIS
market respond to the announcements for seven economic data series in a statistically significant manner: business inventories, the employment cost index, the preliminary GDP estimate, initial jobless claims, new home sales, nonfarm payroll employment, and the preliminary estimate of nonfarm labor productivity.
By construction, the real return from holding a TIIS
contract is known with certainty.
The forward rates are derived from the yields of 10-year Treasury securities--the TIIS
and nominal securities.
were available in the United States, estimates of the ex ante real interest rate often were obtained by rewriting the Fisher equation:
Although its pattern resembles that of the 10-year TIIS
rate, the option-adjusted rate is higher and, in addition has fallen more since the end of 2001: 182 basis points (bp) versus 147 bp.
First, the spread between the 10-year Treasury rate and the 10-year TIIS
yield, a fairly direct measure of the expected inflation rate for the next 10 years, has not changed much since the start of the year.