Information Content of Maturing TIIS

Abstract

During their last coupon period, Treasury Inflation-Indexed Securities (TIIS) are transformed from inflation-protection securities into Treasury bills due to the lag effect in indexing inflation. A study of the first issue of TIIS that matured on July 15, 2002, indicates that TIIS prices in the final six months convey useful information about the market's assessment of inflation risk. TIIS prices reveal that the market was concerned more about disinflation than inflation during the first quarter of 2002. This special period of transformation also permits a controlled experiment of the market's ability to aggregate information about inflation; TIIS prices efficiently reflect inflation information at the time inflation takes place.