Most Popular ArticlesAugust 4, 2009
TIPS volatility has increased in the last two years
The graph below shows the annualized standard deviation of 10-year real and nominal daily prices.
TIPS prices have become far more volatile in the last several years, matching almost exactly the volatility of nominal bonds. Price volatility is due to volatility in the underlying yields of bonds and to the bonds’ durations. (Duration is a measure of the sensitivity of bond prices to changes in yields.) The authors explain that the duration of TIPS has increased as real yields have declined, but this explains very little of the increase in TIPS volatility; TIPS volatility is due to the increased volatility of real yields.
The volatility of the breakeven inflation rate has spiked
The graph below shows the volatility (annualized standard deviation) of the breakeven inflation rate (10-year nominal rate minus 10-year TIPS rate):
The spike in breakeven volatility reflects inflation expectations that became dramatically more uncertain.
This graph also shows the one-year correlation between nominal and real bond prices. Since 2002, these markets have been tightly coupled, although that relationship broke down in 2008.Display article as PDF for printing.
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