Tips: Some comments about the term structure of real yields

Inflation indexed securities comprise a new and developing market that provides purchasing power certainty for a bondholder and slrnilarly constant real or inflation adjusted cost of finance for a borrower. This study documents on the characteristics of US Treasury Inflation Indexed Securities (TIPS) since their inception in 1997. Correlations of TIPS' returns with other asset classes, TIPS' real and effective nominal duration as well as the term structure of nominal yields, real yields and expected inflation are estimated until December 2004. Particular attention is devoted to unusual patterns in real yields of the 2002 July TIPS. Effects of imperfect indexation, expected inflation and timing of the inflation uplift on an inflation indexed bond can create differences between quoted real yields and real true yields when a bond approaches maturity. Finally, this study reports that the relation between real yields with expected inflation has changed through time.