COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1696 Understanding Inflation-Indexed Bond Markets John Y. Campbell, Robert J. Shiller and Luis M. Viceira May 2009 This paper explores the history of inflation-indexed bond markets in the US and the UK.
It documents a massive decline in long-term real interest rates from the 1990's until
2008, followed by a sudden spike in these rates during the financial crisis of 2008.
Breakeven inflation rates, calculated from inflation-indexed and nominal government bond
yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper
asks to what extent short-term real interest rates, bond risks, and liquidity explain the
trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed
yields and high short-term volatility of inflation-indexed bond returns do not invalidate
the basic case for these bonds, that they provide a safe asset for long-term investors.
Governments should expect inflation-indexed bonds to be a relatively cheap form of debt
financing going forward, even though they have offered high returns over the past decade. |
