The TIPS-Treasury Bond Puzzle

@inproceedings{Fleckenstein2018TheTB,
  title={The TIPS-Treasury Bond Puzzle},
  author={Matthias Fleckenstein and Francis A. Longstaff and Hanno Lustig},
  year={2018}
}
We show that the price of a Treasury bond and an inflation-swapped Treasury Inflation-Protected Securities (TIPS) issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS-Treasury mispricing has exceeded $56 billion, representing nearly 8% of the total amount of TIPS outstanding. We find direct evidence that the mispricing narrows as additional capital flows into the… CONTINUE READING

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