Inflation: Notes and Literature
Inflation linked securities (ILS) have a fascinating history (the first inflation linked bonds were issued by the Commonwealth of Massachusetts). If the velocity of money picks up, we may see inflation again. In the meantime, the inflation markets are informative and provide some interesting lessons and ideas to apply in other markets. An always interesting question: If you wish to hedge inflation what is the best method/instrument to use? Some empirical estimates suggest an allocation to ILS but it is difficult to estimate the inflation risk premium and real interest rates accurately. Measurements of the performance of TIPS, for some time periods, is partially due to a compression of the liquidity premium. Another problem occurred in 2008 when TIPS decoupled from other Treasuries—prices dropped and spreads widened.