The Predictive Power of Treasury Securities: Estimating Changes in Market Expectations of Future Inflation

16 Pages Posted: 24 Nov 2008

See all articles by Carolin D. Schellhorn

Carolin D. Schellhorn

Saint Joseph's University - Department of Finance

Rajneesh Sharma

St. Joseph's University - Department of Finance

Date Written: October 2008

Abstract

Many courses in financial economics cover the estimation of forward rates implied in Treasury spot rates. A less well-known extension of this discussion shows how yields on TIPS and similar-maturity conventional Treasury securities may be used to extract the market's inflation expectation. We illustrate the use of this methodology with data for the beginning of 2007 and 2008. One interesting opportunity to apply this method arose in January 2008 around the time of two substantial federal funds target rate cuts by the Federal Reserve. Near-term and longer-term inflation expectations appear to have responded differently to the first and second interest rate cuts, which were only ten days apart. After reporting our results, we discuss caveats that should be taken into account when applying this method.

JEL Classification: G10

Suggested Citation

Schellhorn, Carolin D. and Sharma, Rajneesh, The Predictive Power of Treasury Securities: Estimating Changes in Market Expectations of Future Inflation (October 2008). Available at SSRN: https://ssrn.com/abstract=1305374 or http://dx.doi.org/10.2139/ssrn.1305374

Carolin D. Schellhorn (Contact Author)

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States
610-660-1657 (Phone)
610-660-1986 (Fax)

Rajneesh Sharma

St. Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States

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