Is the

nominal yield cointegrated with the rate of inflation (real rate Proxy), but not with the real rate Proxy (rate of inflation)?

The

nominal yield strength of PC (8) ([[Sigma].sub.PC] = 67.9 MPa, 9.85 ksi) is indicated by the thin horizontal line.

We also expect the yield curve for real interest rates to be flatter than the

nominal yield curve.

[NEW.sub.t] = the average

nominal yield on new home mortgages at S&Ls in year t, expressed as a percent per annum;

A term structure of real interest rates is then obtained from the difference between the

nominal yield for a particular horizon and ATSIX inflation expectations over the same horizon.

The

nominal yield and PASK were up 18.7 percent and 5.1 percent respectively.

Picture a world in which the

nominal yield on 10-year US Treasuries is hovering around 5%.

They're buying 5-year index-linked bonds with a

nominal yield of minus 0.6%, anticipating a full 2.8% per year fillip from Washington when compared with the annual yield now offered by conventional 5-year bonds.

(2) But the calculation is based on comparing two TIPS yields, not a TIPS yield with a

nominal yield, and so the technical factors that Campbell, Shiller, and Viceira cite as pushing down TIPS prices in the fall of 2008 should not distort this calculation, unless they affected one TIPS issue more than the other.

The Muni Advantage Table illustrates the math: Muni Advantage Taxable Municipal Bond Bond A

Nominal Yield 5.00% 3.75% B Of which is taxed 100% 15% A x B For a taxable yield of 5.00% 0.56% C Of which 35% is 1.75% 0.20% A - C Which, deducted from

nominal yield, leaves 3.25% 3.55% For a municipal advantage of 0.30%

In principle, subtracting the real yield on TIPS from the

nominal yield of Treasury notes of the same maturity should give policymakers and economists a market-based measure of expected inflation.

Chart 1 shows the history of the yields on nominal and inflation-indexed ten-year Treasury securities, where an off-the-run

nominal yield is used to limit the difference in the liquidity of the nominal and indexed securities.