Inflation expectations can be determined from the yield spread between inflation-indexed bonds and non-inflation-indexed bonds. For example, US inflation expectations for the next 5 years can be determined from the yield spread between 5-year Treasury Inflation-Protected Securities (TIPS) and 5-year Treasury bonds (charts: 5-Year Breakeven Inflation Rate).
- Do people pay a premium for the inflation protection feature of inflation-indexed bonds?
- If so, wouldn't this lower the yield for inflation-indexed bonds, thus widening the yield spread between inflation-indexed bonds and non-inflation-indexed bonds?
- Does this mean that the yield spread consistently overestimates expected inflation?
