Inflation-Linked Bonds

2019 ◽  
pp. 345-362
Author(s):  
John Lettieri ◽  
Gerald O’donnell ◽  
Seow Eng Ong ◽  
Desmond Tsang
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Critical Factor ◽  
Inflation Expectations ◽  
Investment Strategies ◽  
Fixed Income ◽  
Inflation Risk ◽  
Expected Inflation

Inflation is a critical factor that can influence investment strategies and returns. The relation between realized inflation and expected inflation are driving factors for both interest rates and the performance of fixed income products. Adding inflation-linked bonds to existing portfolios can help to minimize the risk associated with future inflation. Although nominal bonds offer protection from current inflation expectations, which is sometimes measured by the break-even inflation rate, inflation-linked bonds offer a guaranteed real return with inherent protection from unexpected inflation. The relative performance of inflation-linked bonds versus nominal bonds is primarily dependent on changes in both inflation and the real interest rate. This chapter focuses on the fundamentals of inflation-linked bonds including issuers, pricing, and measuring inflation expectations. It examines how such bonds reduce inflation risk and discusses the type of market environments that favor investments in inflation-linked bonds relative to nominal bonds.

scholarly journals A New Approach to Gauging Inflation Expectations

2009 ◽  
pp. 1-4
Author(s):  
Joseph G. Haubrich
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
New Method ◽  
Inflation Expectations ◽  
Real Interest Rates ◽  
Inflation Risk ◽  
New Approach ◽  
Expected Inflation ◽  
Inflation Risk Premium

This Economic Commentary explains a relatively new method of uncovering inflation expectations, real interest rates, and an inflation-risk premium. It provides estimates of expected inflation from one month to 30 years, an estimate of the inflation-risk premium, and a measure of real interest rates, particularly a short (one-month) rate, which is not readily available from the TIPS market. Calculations using the method suggest that longer-term inflation expectations remain near historic lows. Furthermore, the inflation-risk premium is also low, which in the model means that inflation is not expected to deviate far from expectations.

Possible Misinterpretations of Equivalent Annual Incomes in Inflationary Times

1987 ◽  
Vol 4 (4) ◽  
pp. 210-211
Author(s):  
W. David Klemperer
Keyword(s):  
Interest Rate ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Present Value ◽  
Expected Inflation

Abstract Equivalent annual incomes (EATs) are often computed to compare investments with similar size but different lives. One common form of EAT fails to readily illustrate that before-tax present values of new projects should not change with inflationary expectations, given the same real interest rate. This type of EAI also fails to reflect reduction in after-tax present value of new projects as expected inflation rises. An EAI formulation is suggested that eliminates these problems and assures correct project rankings regardless of the inflation rate. North. J. Appl. For. 4:210-211, December 1987.

scholarly journals Interest Rates and Inflation Revisited

2019 ◽  
Vol 9 (2) ◽  
pp. 197-209
Author(s):  
Eugene F Fama
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Inflation Rate ◽  
Treasury Bill ◽  
Expected Inflation ◽  
Editorial Decision

Abstract The continuously compounded (CC) interest rate on a one-month Treasury bill observed at the end of month t–1 is the sum of a CC expected real return and a CC expected inflation rate, Rt–1 = Et–1(rt) + Et–1(It). Two approaches are used to split Rt–1 between its two components. In the first, models for rt produce estimates of Et–1(rt), which are used to infer Et–1(It) as Rt–1 – Et–1(rt). The second approach models It to produce estimates of Et–1(It) and infer Et–1(rt) as Rt–1 – Et–1(It). By design, the estimates of Et–1(rt) and Et–1(It) from both approaches have the properties implied by rational bill prices. Received October 10, 2018; Editorial decision December 31, 2018 By Editor Jeffrey Pontiff

scholarly journals LESSONS FROM ARGENTINA’S CURRENCY BOARD SYSTEM FOR INDONESIA

2003 ◽  
Vol 5 (3) ◽  
pp. 122-157
Author(s):  
Agus Fadjar Setiawan
Keyword(s):  
Economic Growth ◽  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Nominal Exchange Rate ◽  
Currency Board ◽  
The Real ◽  
The Us ◽  
Board System

The purpose of this study is to attempt to draw lessons from Argentina’s Currency Board System (CBS) for Indonesia. Moreover, this study reviews Argentina’s economic performance before and after the implementation of the CBS, through an examination of some macroeconomic indicators namely real GDP growth, interest rates, money and inflation, as well as fiscal condition. The first three indicators are compared to the US, as the reserve-currency country, and Indonesia. The last indicator is compared to Indonesia only.In summary, the study found that after the adoption of the CBS the economic growth of Argentina substantially improved. The real interest rate tended to converge with the US interest rate, and the inflation rate that is linked to money growth was brought down to a low level close to the US inflation rate. However, this study also produced some more important findings. First, the long-run sustainability of Argentina’s economic growth with its CBS is questionable. Second, the real interest rate convergence was broken due to high default risk and deflationary expectations in Argentina. Third, low inflation later on turned to deflation as a consequence of the overvalued nominal exchange rate. Fourth, lack of sound fiscal policy and weak fiscal performance undermined the CBS regime. Finally, the study suggests that the absence of a lender of last resort is an institutional weakness of the CBS.

Impacts of Real Depreciation and Appreciation on Aggregate Output in Taiwan

2018 ◽  
Vol 65 (1) ◽  
pp. 123-130
Author(s):  
Yu Hsing
Keyword(s):  
Interest Rate ◽  
Gross Domestic Product ◽  
Stock Price ◽  
Real Interest Rate ◽  
Jel Classification ◽  
Oil Price ◽  
Real Gross Domestic Product ◽  
Real Gdp ◽  
Expected Inflation ◽  
Deficit Spending

Extending the IS-MP-AS model, this article finds that real depreciation helped to raise real gross domestic product (GDP) during 1999.Q1-2010.Q2 whereas real appreciation helped to increase real GDP during 2010.Q3-2016.Q4. In addition, a lower world real interest rate, a higher stock price, a higher real oil price or a lower expected inflation would increase real GDP. More deficit spending as a percent of GDP does not affect real GDP.JEL Classification: F41, E62

scholarly journals Inflation Expectations in Turkey: Determinants and Roles in Missing Inflation Targets

2018 ◽  
Vol 7 (3) ◽  
pp. 73-90 ◽  
Author(s):  
Umit Bulut
Keyword(s):  
Exchange Rate ◽  
Inflation Targeting ◽  
Inflation Rate ◽  
Oil Price ◽  
Output Gap ◽  
Inflation Expectations ◽  
Inflation Target ◽  
Distributed Lag ◽  
Expected Inflation ◽  
Target Output

Abstract This paper aims at specifying the determinants of 12-month ahead and 24-month ahead inflation expectations in Turkey by using monthly data from April 2006 to December 2016. Put differently, this paper tries to shed light on how inflation expectations respond to changes in past inflation rate, inflation target, output gap, USD/TL exchange rate, oil price, and EMBI in Turkey. To this end, the paper first conducts unit root tests in order to detect the order of integration of the variables. Then, the paper employs the autoregressive distributed lag approach to examine whether there is a cointegration relationship among variables and to estimate long-run parameters. According to the findings, 12-month ahead expected inflation rate is positively related to past inflation rate, inflation target, output gap, USD/TL exchange rate, and oil price and is negatively related to EMBI. Besides, 24-month ahead expected inflation rate is positively related to past inflation rate and USD/TL exchange rate and is negatively related to inflation target and EMBI. Upon its findings, the paper makes some inferences about the success of inflation targeting strategy in Turkey.

scholarly journals Forecasting, Reporting, And Coping With Systematic Risk

2011 ◽  
Vol 3 (2) ◽  
pp. 24
Author(s):  
Gail E. Farrelly ◽  
Marion G. Sobol
Keyword(s):  
Risk Factors ◽  
Interest Rate ◽  
Interest Rates ◽  
Inflation Rate ◽  
Systematic Risk ◽  
Fortune 500 ◽  
Corporate Executives ◽  
Systematic Risk Factors ◽  
And Coping

A sample of 123 corporate executives, from the Fortune 500 Industrial Corporations list, evaluate nine common systematic risk factors such as rate of inflation, long-term interest rates, level of money supply, price of crude oil, etc. Executives indicate their views on the significance of these risk factors as well as their ability to cope with, and report on, these factors. Future interest rate changes and inflation rate changes are considered to be the most significant risks. There is a high negative correlation between the significance of particular risks and the ability to cope with these risks.

scholarly journals The Relative Tax Gap Hypothesis: An Exploratory Analysis and Application to U.S. Financial Markets

2020 ◽  
Vol 23 (1) ◽  
pp. 35-52
Author(s):  
Richard J. Cebula
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Tax Evasion ◽  
Income Tax ◽  
Real Interest Rate ◽  
Strong Support ◽  
Current Data ◽  
Data Availability ◽  
Ex Ante ◽  
Tax Gap

This study empirically investigates the “relative tax gap hypothesis,” which posits that the greater the size of the relative tax gap, the greater the degree to which the U.S. Treasury must borrow from domestic and/or other credit markets and hence the higher the ex ante real interest rate yield on the Bellwether 30 year U.S. Treasury bond. The study uses the most current data available for computing what is referred to here as the “relative tax gap,” which is the ratio of the aggregate tax gap (the loss in federal income tax revenue resulting from personal income tax evasion) to the GDP level. For each year of the study period, the nominal value of the tax gap is scaled by the nominal GDP level and expressed as a percentage. The study period runs from 1982 through 2016, reflecting data availability for all of the variables. The estimation results provide strong support for the hypothesis. In addition, in separate estimations, evidence is provided that the relative tax gap also acts to elevate the ex ante real interest rate yield on Moody’s Baa-rated long-term corporate bonds. It logically follows, then, that to the extent that a greater relative tax gap leads to higher ex ante real interest rates, it may contribute to the crowding out of corporate investment in new plant equipment associated heretofore with government budget deficits per se.

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