Tuesday, April 26, 2011

TIPS

Many people presume that Treasury Inflation Protected Securities (TIPS) are fixed income securities with protection against inflation. This article suggests that buyers of TIPS get less insurance than they might suppose.

When it sells TIPS, the US Treasury is selling a bond plus and insurance policy (or put option). One question to ask is why would an insurer want to be short a put option unless it believes that the option was priced in its favor?

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