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. Following the Great Recession of 2008-2009, the 5, 7, 10, and even the 20-year TIIS yields became negative for a period of time. How is this possible?
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?
c. Based on your answer to part (b), are there significant variations among the differences in the bond-pair yields? Interpret the magnitude of the variation in differences among the pairs.