Assessing Yields on Index-Linked Bonds

Bond analysts frequently compare the yields on index-linked bonds with those on conventional bonds of the same maturity to determine the market s expectation with regard to inflation rates. Of course, many fac- 

As an illustration, say the August 1999 redemption yield on the 5 percent Treasury maturing in 2009 was 5.17 percent and the money yield on the 

2 percent TIPS with the same maturity, assuming a constant inflation rate of 

3 percent, was 2.23 percent. Plugging these values into equations (12.9) and (12.10), the implied break-even inflation rate is computed as follows. 

On the same date, also according to Bloomberg, conventional Treasury securities maturing in 2014 had yields to maturity ranging from 6.03 to 6.54 percent. The lowest conventional yield reflects expected inflation of approximately 4.27 percent over the ten years to maturity 

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