WSJ misquoted Negative-Yielding 1/07i in 2004

A subpage of The U.S. Real Term Structure
by J. Huston McCulloch
Department of Economics, Ohio State University

In February 2004, the real yield on the shortest-term TIPS, the 1/07i, fell below zero to -8 basis points. In March, its yield fell even further, to -31 basis points. The last time the real yield on a maturity indexed bond fell negative was March-June 2002, when the maturing 1/02i had a negative computed real yield to maturity, as discussed on a separate subpage.

In the earlier case, however, the note in question had only a few months left to maturity, so that its negative computed real rate had very little economic significance. Even then, a large component of the negative computed real rate was just the consequence of the 2.5 month lag in indexation interacting with transitory inflationary shocks earlier in the year.

The present instance, on the other hand, is quite significant, since it is the first time that an indexed note with such a long maturity (almost 3 years) has had a negative real yield. At these maturities, the effect of the indexation lag is negligible, so that computed and true real yields are essentially the same.

Levis Kochin has called it to my attention that the Wall Street Journal's quotations on this bond unfortunately became frozen at 109:25/26 at some time before 2/27, and remained there until mid-March. Apparently the software of their data provider was for some reason unable to update prices of bonds with negative real yields.

The term structure data and graphs on this website for 2/27/04 therefore use the meaningful New York Times quote, in place of the erroneous Wall St. Journal quote. In mid-March the problem was corrected so that the 3/31/04 quotes et seq. are all taken from the Journal.