Question
The U.S. Treasury issues some bonds as Treasury Inflation-Indexed Securities, or TIIS, which are bonds adjusted for inflation; hence the yields can be roughly interpreted
The U.S. Treasury issues some bonds as Treasury Inflation-Indexed Securities, or TIIS, which are bonds adjusted for inflation; hence the yields can be roughly interpreted as real interest rates. Go to the St. Louis Federal Reserve FRED database and find data on the following TIIS bonds and their nominal counterparts. Then answer the questions below. 5 year U.S. treasury (DGS5) and 5-year TIIS (DFII5) 7 year U.S. treasury (DGS7) and 7-year TIIS (DFII7) 10 year U.S. treasury (DGS10) and 10-year TIIS (DFII10) 20 year U.S. treasury (DGS20) and 20-year TIIS (DFII20) 30 year U.S. treasury (DGS30) and 30-year TIIS (DFII30)
a . Using the most recent data available, is the 5, 7, 10, and even the 20-year, 30-year TIIS yields (real interest rates)positive or negative? What does a negative real interest rate mean?
b. Using the most recent data available, calculate the difference between the yields for each of the pairs of bonds (DGS5 DFII5, etc.) listed above. What does this difference represent? ((Hint: according to Fisher Equation, expected rate of inflation = nominal interest rate (DGS) - real interest rate (DFII), that is, e = i - r, )
c. Based on your answer to part (b), which shows the magnitude of the variation in differences among the pairs, what do you think about the trend of the inflation expectation, the inflation will grow at the largest magnitude in 5 years, 7 years,.... 30 years?
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