Understanding Inflation-Indexed Bond Markets

This paper documents,a massive decline in long-term real interest rates from the 1990’s until 2008, followed by a sudden spike in these rates during the …nancial crisis of 2008. Breakeven in‡ation rates, calculated from in‡ation-indexed and nominal government bond yields, stabilized until 2008, when they showed dramatic declines. The paper asks to what extent movements in short-term real interest rates, bond risks, and liquidity and other institutional factors explain these developments.,The paper argues that low in‡ation-indexed yields and high short-term volatility of in‡ation- indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. 1,Introduction In recent years government,in‡ation-indexed bonds have become,available in a number