NCPA - National Center for Policy Analysis

Inflation-Indexed Bonds Arrive

January 30, 1997

Economists of varying schools of thought have recommended offering them for years, and now they have arrived: Treasury bonds indexed to the nation's rate of inflation. Experts say they may work a variety of wonders.

  • They might assist the Federal Reserve in detecting future inflation.
  • And they could provide a lower-risk way for cities and states to finance new infrastructure.
  • Since investors will probably accept a lower yield in return for insurance against unexpectedly high inflation, indexing may reduce the Treasury's borrowing costs.
  • Some economists estimate the savings at about one-half a percentage point.

Indexed bonds could be used by "defined benefit" pension plans to hedge against inflation, thereby permitting them to offer indexed bonds. Moreover, indexed home mortgages would effectively link financing costs to housing prices, because both would tend to rise and fall with inflation.

Source: Peter Passell, "Those Inflation-Indexed Bonds Are Like L'il Abner's Schmoos," New York Times, January 30, 1997.


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