The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.
The potential advantages from the introduction of Treasury inflation-protected securities (TIPS) in 1997 have not been fully realized, mainly because TIPS are less liquid than nominal Treasury securities. The lack of liquidity is thought to adversely affect TIPS prices relative to prices of nominal securities, offsetting the benefits that come from TIPS having no inflation risk. Despite the importance of TIPS liquidity and the market’s large size, there is virtually no quantitative evidence on the securities’ liquidity. This article sheds light on this phenomenon using novel tick data from the interdealer market. The authors identify several features of the TIPS market also present in the nominal securities market, but some unique features as well. As in the nominal market, there is a marked difference in trading activity between the most recently issued (“on-the-run”) and previously issued (“off-the-run”) securities, as trading drops sharply when securities go off the run. In contrast to the nominal market, there is little difference in bid-ask spreads or quoted depth between these securities, but there is a difference in the incidence of posted quotes. These results suggest that trading activity and quote incidence may be better cross-sectional measures of liquidity in the TIPS market than bid-ask spreads or quoted depth. Intraday patterns of trading activity are broadly similar in both markets, but TIPS activity peaks somewhat later, likely reflecting differences in the use and ownership of these securities. Announcement effects also differ between markets, with TIPS auction results and CPI releases eliciting particularly strong increases in trading activity, likely indicating these announcements’ special importance to TIPS valuation.