Do TIPS measure inflation expectation?

[blazespinnaker]

Tips were at 4 year highs

http://www.treas.gov/offices/domesti...al_yield.shtml

10/23/06 2.65% 2.57% 2.53% 2.50%

But there has been some steep declines in the last few days.

I wonder how much the TIPS is open to manipulation ... maybe we need a inflation futures market?

[Finster]

Re: Do TIPS measure inflation expectation?

Do TIPS measure inflation expectation?

No, they measure CPI expectation.

[blazespinnaker]

Re: Do TIPS measure inflation expectation?

No, they measure CPI expectation.

No, they measure what people are willing to pay for TIPS.

The idea that they measure CPI expectation is very arguable.

[Finster]

Re: Do TIPS measure inflation expectation?

The idea that they measure CPI expectation is very arguable.

Far less arguable than the idea that they measure inflation expectation.

No, they measure what people are willing to pay for TIPS.

El wrong-o. You erroneously presume a mutually exclusive choice here. Of course they measure what people are willing to pay for TIPS, but that doesn't mean they don't measure CPI expectation.

The reason is simple. TIPS and ordinary Treasuries co-exist in a huge, extremely liquid market. The purchaser of TIPS has the purchase of ordinary Treasuries as an alternative option. The same applies to sellers in the secondary market. The difference between holding TIPS and ordinary Treasuries can be expressed mathematically as a function of just a few variables, including the course of the expected CPI over the term of the respective securities, and rest assured that there are powerful computers and billions of dollars at work and at the ready to exploit any discrepancy between market pricing and the expected course of the CPI.

All it takes therefore, to extract information about the market's expectations for the CPI is some mathematical manipulation. In fact, this was one of the reasons advanced for the introduction of TIPS. Of course TIPS pricing involves other issues like the effect of taxes, volume of issuance, etceteras, but in this age of computers one can readily factor out the noise and isolate the CPI information.

[blazespinnaker]

Re: Do TIPS measure inflation expectation?

You erroneously presume a mutually exclusive choice here.

I just had to quote that.

[Finster]

Re: Do TIPS measure inflation expectation?

I just had to quote that.

;)