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
. (3) Many retires have invested in these securities in an attempt to insure themselves against the risk of being wiped out if future rates of inflation should turn out to be unexpectedly high.
issued by the government.
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
. In particular, TIPS activity is probably driven more by institutional trading demands that are best met when the market is less volatile and trading costs are lower (that is, after the 8:30 a.m.
and annuities, among other products, that are now available only in developed markets, may eventually be introduced in the country.
This article reviews the experiences of a few countries that have issued inflation-indexed securities
and draws some common lessons about promoting market liquidity.
The only market-based measure of inflation expectations is the spread between Treasury inflation-indexed securities
(TIIS) and the corresponding non-indexed Treasury issue.
Another unique group of securities issued by the United States Treasury are Treasury Inflation-Indexed Securities
, often called Treasury Inflation-Protected Securities, or TIPS.
In financial markets, the yield spread between ordinary, 10-year Treasury securities and TIIS (Treasury inflation-indexed securities
) is 2.4%, which is near its level for the past year and consistent with the various economic projections.
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.
Treasury began issuing inflation-indexed securities
in early 1997.