The Study of TIPS (Treasury Inflation-Protected Securities) and the Mispricing of TIPS Relative to Nominal Treasury Bonds

Abstract

The paper examines the pricing of Treasury Inflation-Protected Securities (TIPS) in contrast to standard U.S. Treasury bills and highlights some unusual in nature price discrepancies that are not consistent with standard finance. This study examines inflation expectations, market liquidity, and interest rate fluctuations, and concludes that TIPS are generally cheaper than Treasury bonds, despite providing protection against inflation. The observed price differential might indicate that the U.S. Treasury would incur higher costs in issuing TIPS than in selling normal issue bonds. Primary factors, namely the availability of bonds for purchase, the behavior of hedge funds, and narrow market liquidity, result in these price variations, indicating that the market is not efficient. The findings indicate that the Treasury can be more cost-effective by concentrating primarily on issuing standard bonds which in turn affects how investors and economic planners view the need for assets that shelter one from inflation.