For instance, in the case of the French indexed bonds, the lag length is limited to three months, equivalent to that of the US TIPS and the Canadian indexed government bond, but slightly below that of the UK where an eight-month lag is  4  To give a magnitude order, a real rate of 4% and an expected inflation rate of 2% would generate a compound bias of 8 basis point, which is in practice fairly small. 5  This phenomenon is known as the convexity bias. It grows with maturity, as compounding increases, and may vary across time, as volatility in the yield is also likely to change over time. There is no reason to think that the convexity adjustment is the same for the conventional forward curve and for the indexed forward curve. BIS Review 37/2004  3  required. As a consequence, because the real yield is distorted, the information content of the breakeven inflation rate will also be affected. According to some empirical research6, this bias is also estimated to be fairly small, at around 5 basis points. Liquidity bias: Finally, to conclude with this non exhaustive review of technical biases, one should also mention that, in general, indexed bonds are relatively less liquid than conventional government bonds. Holding periods seem to be longer for the former and this is also reflected in the relatively low trading volumes of inflation-indexed bonds.
Christian Noyer: The role of inflation - indexed bonds in the process of setting monetary policy: a central banker’s perspective Speech by Mr Christian Noyer, Governor of the Bank of France, at the Morgan Stanley seminar on indexed bonds, Paris, 9 June 2004. *  *  *  Ladies and Gentlemen, [Dear Friends], It is a great pleasure for me to address you here in the context of the first “Séminaire de Paris” on inflation-linked securities organised by Morgan Stanley. Today, I will focus more specifically on “The role of inflation - indexed bonds in the process of setting monetary policy” from a central banker’s perspective, based on my own experience as the former Vice-President of the ECB and the current Governor of the Banque de France. Throughout my presentation, I will occasionally refer to the monetary policy strategy framework implemented by the Eurosystem in which asset prices, in particular inflation-indexed government bonds, can play a role in the context of our economic analysis. Having said this, I will neither elaborate further on the ECB’s framework nor comment on the last Governing Council’s monetary policy decision. Price indexation of financial contracts is not a new phenomenon. According to Robert Shiller1, the world’s first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds, the so-called “depreciation notes”, were issued to US Soldiers as deferred compensation for their services. They were mainly designed to deal with severe wartime inflation.