Why Are TIIS Yields So High? The Case of the Missing Inflation-Risk Premium

1. How do Treasury inflation-indexed securities (TIIS) differ from conventional Treasury securities?

2. What are the three components of the market equilibrium yield for a nominal Treasury security?

3. How would yields on TIIS compare to those on comparable conventional Treasury securities during periods of positive expected inflation? Explain why bond market supply and demand behavior would produce this result.
4. If TIIS yields are higher than expected, what does this imply about the market prices of these securities? Why?

5. What explanation does the author offer as most likely to account for the TIIS yield puzzle?

6. What implications does the TIIS yield puzzle hold for policymakers?

Source: "Why Are TIIS Yields So High? The Case of the Missing Inflation-Risk Premium." Ben Craig, Federal reserve Bank of Cleveland Economic Commentary, March 15, 2003, pp. 1-4.