Editor’s Letter

The Federal Reserve is in its third phase of quantitative easing. When will inflation accelerate? In the meantime, it is worth understanding as much as we can about Treasury Inflation-Protected Securities (TIPS). In this issue of The Journal of Fixed Income, we begin with an article by Olesya Grishchenko and Jing-Zhi Huang on estimating the inflation risk premium. They find that it is time varying and, on average, considerably lower than suggested by various structural models. The unconditional 10-year inflation risk premium ranges from –9 basis points to 4 basis points over the 2000–2008 period. In the next article, Dave Chung, Colin Kim, and Allen Zhang find that the performance of the TIPS program, in terms of the relative cost over issuing equivalent nominal securities from inception to June 2012, has accumulated a relative saving of $7.06 billion.

In the following article, Cheikh Gueye and Amadou Sy find a negative relationship between U.S. interest rates and emerging market bond spreads. The relationship appears to be unstable and depends on factors such as investors’ appetite for risk and the interaction with emerging markets’ economic fundamentals.

In the next article, Lara Cathcart, Lina El-Jahel, and Leonard Evans investigate the correlation structure of the credit default swap market and equity returns and find that industry affiliation and rating classification are relevant determinants. Then, Hans Byström explores asset correlation estimation among firms with foreign exchange exposure. The empirical findings indicate that the typical asset correlation estimates ignoring exchange rate risk are significantly biased.

Finally, Jon Fulkerson, Bradford Jordan, and Timothy Riley examine the gross inflows and outflows of U.S. bond funds. Their evidence of return chasing by investors is that the highest decile of returns average 1% higher net inflow per month while the lowest decile funds lose nearly 0.6% in assets per month. Furthermore, these flows seem to predict returns. That is, an inflow-weighted portfolio generates alphas of 0.8% per year.

We hope you enjoy this issue of The Journal of Fixed Income. We greatly appreciate your continued support of the journal.

Stanley J. Kon

Editor

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