Excluding on-the-run issues, we note that the turnover rate for all off-the-run Treasury
coupon securities was approximately 22 percent--much closer to, although still above, the turnover rate for TIIS.
We measure inflation expectations by the difference in ten-year constant maturity yields between nominal off-the-run Treasury securities and inflation-indexed Treasury securities, calculated from smoothed zero-coupon yield curves.
[pi]: Expected rate of inflation, measured by the difference in 10-year constant maturity yields between nominal off-the-run Treasury securities and inflation-indexed Treasury securities, calculated from smoothed zero-coupon yield curves; source: Board of Governors of the Federal Reserve.
Figure 4 assumes that both the corporate bond and the TIIS yields contain an illiquidity premium of 20 basis points, although, in practice, it may be larger for a corporate bond than for an off-the-run Treasury security like a TIIS.
The last assumption implies that the investor is indifferent between buying a more liquid security, such as an on-the-run conventional Treasury, and buying a less-liquid off-the-run Treasury like a TIIS, whose yield includes an illiquidity premium.
Market participants characterize the liquidity of the most recently issued benchmark and reference notes as comparable to that of off-the-run Treasury
Fannie Mae reports that its benchmark securities have liquidity comparable to off-the-run Treasury securities, with bid-ask spreads of 0.5 to 2.0 basis points (Fannie Mae 1999a).
(14.) The premium afforded to liquid on-the-run securities may explain why some market participants started using off-the-run Treasury yields for pricing corporate securities and as market barometers (Wall Street Journal 1999a).
Here one can ask if the current holdings are justified from the vantage point of monetary control versus the obvious fiscal gains associated with holding a greater proportion of off-the-run Treasury securities, given the Federal Reserve's role as fiscal agent of the Treasury.
* The investment guidelines for the Social Security trust fund could be changed to permit a somewhat greater range of investments, which would free up room for private market participants to gain greater access to the on-the-run and off-the-run Treasury markets.