Negative Yield on the 5-Year Inflation Indexed Treasury

Discussion in 'Trading' started by MAVERICK007, Mar 1, 2008.

  1. Let's do some simple math with the given parameters: Maturity date is 4/15/2012, coupon is 2% and price is 108-14/32. With 4.125 years to maturity you will only collect 8.25 points from the coupon and since 8.25 points is just under the 8.4375 point premium on the note, the quoted yield is slightly negative.
  2. I believe that illustrates a "dirty little secret" of the TIPS. In a deflationary or negative-real-rate environment, they lose value. Coupon-bearing securities would & should remain firm or increase in value.
  3. One


    I believe this makes perfect sense when buyers are concerned with inflation: the negative nominal yield simply means that buyers are interested in inflation protection over the next five years. In this case the tip will cover all inflation minus a small amount because of the negative nominal portion (ignoring tax consequences).