The Treasury is considering creating a new inflation-protected offering that would be a purely inflation-based security, according to fixed-income professionals.
The interest payments and principal of TIPS can already be broken up into separate zero-coupon securities with their own identifying numbers. The Treasury is proposing that TIPS principal be further broken up into a nominal zero bond and a pure inflation security. Holders of the new product would gain if the Consumer Price Index increases but might end up losing their shirts if deflation occurs.
The Treasury is considering a new stripping program now because the additional options would help demand for TIPS, according to Wrightson ICAP. However, it is unclear whether investors will be interested in such a new product. "Right now very few strippings of TIPS have been done. There's not a market for it," said Gerald Lucas, chief Treasury and agency strategist at Banc of America Securities. "Even if someone wants a pure inflation security, you're still left trying to sell off real coupon strips and there's still not a developed market for that." However, Lucas mentioned pension funds as an example of a possible source of demand for the principal portion of the stripped TIPS.
"It's very questionable if there's going to be demand; people want something concrete rather than something that's always going to be changing because of inflation," according to one STRIPS trader.
Treasury officials were set to meet with representatives from the primary dealers to discuss the new product last week as BW went to press. Brookly McLaughlin, spokeswoman for the Treasury, declined to provide more information.
