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Inflation Risk in the U.S. Yield Curve : The Usefulness of Indexed Bonds, Research Paper 9637

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Inflation Risk in the U.S. Yield Curve : The Usefulness of Indexed Bonds, Research Paper 9637

DATE: November 1996

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ABSTRACT: The inflation-indexed bonds the U.S. Treasury plans to issue will reduce the expected borrowing cost if the yield curve reflects a risk premium for inflation. In the United Kingdom, indexed bonds are also used to extract inflationary expectations and thus to guide monetary policy. The bonds will produce a more reliable measure of such expectations if the inflation risk premium is taken into account. We estimate such a risk premium for the United States by means of a two-factor affine-yield model of the term structure. The model allows both the inflation risk premium and real term premium to vary over time. Using monthly data on CPI inflation and on bond yields for two-year to ten-year maturities, we find both premia to have been significant for the sample period January 1984 to July 1996. We estimate that indexed bonds would have saved an average of one-fifth of the expected borrowing cost of 10-year notes.

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Gong, Frank F. and Remolona, Eli M. "Inflation Risk in the U.S. Yield Curve : The Usefulness of Indexed Bonds, Research Paper 9637," Research Papers (Federal Reserve Bank of New York) (November 1996). https://fraser.stlouisfed.org/title/6570/item/615552, accessed on March 29, 2023.

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THEMES: CLASSIFICATION:
  • jel: E31
  • jel: E43
  • jel: E62
  • jel: G12
  • lcc: HG136 .R45 no.9637
IDENTIFIERS:
  • oclc: 36527266
  • fip:fednrp:9637:
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