Understanding and Using Inflation Bonds
Introduced in 1997, the U.S. Treasury Inflation-protected Securities market has grown to over $150 billion at the end of August 2002, which is about 6.0 percent of the market for publicly held U.S. Treasury Securities. Increased interest in inflation bonds is due both to their recent high returns compared with stocks and regular bonds and, more fundamentally, recognition of their status as a new asset class. Unique features of inflation bonds include their ability to provide low or negative return correlation with other assets, long duration with respect to real interest rates, and low yield volatility. These features make inflation bonds well suited to saving for the future, portfolio diversification, and ensuring a retirement or endowment income stream. As new inflation-bond-based products are developed, the market for inflation bonds will continue to grow.