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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35932  
Subject: Re: Interest rate on TIPS Date: 4/29/2004 9:40 AM
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"Could someone comment on the relationship between the yield on TIPS and standard treasury bonds. I am suprised that the yield on TIPS is so volatile. Is the yield on TIPS less volatile then the differential between inflation and the treasury yield?"

Not quite sure what you are seeing that is surprising you with TIPS yields.


The fixed rate component of TIPS yield more or less fluctuates daily by about the same change in basis points as an equivalent maturity Treasury. (If you look at this as a % change it will be higher, because the fixed rate component is less than the total yield on a Treasury, but in terms of the trading value of the bonds, the affect should be the same).

In general, the yield on TIPS varies in comparison to Treasuries in two ways: perceived future inflation (in the imagination of traders) and "real" yield (return above inflation, as represented by the fixed rate compnent of TIPS). If traders expectations of inflation change but not the "real" yield, you would should see more volatility in regular Treasuries than in the fixed-component of TIPS (e.g., if real yield on 10-years stayed at 2%, but inflation expectations went from 2.5% to 3%, the fixed component of TIPS would remain at 2%, but the yield on Treasuries would go from 4.5% to 5%). If the changes in yield are due to changes in "real" yield, then the volatility should be the same.
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