Liquidity is the big factor. The inlation risk factor will play a role, but it is small.Shakespeare wrote:I believe James has linked a number of papers on Prefblog that deal with changes in real rates. Nominal rates are only one factor, and not the main one.Something causes considerable fluctuation in RRB fund values,
My suspicion is that psychological factors (risk aversion) play a major part.
Added: see http://www.prefblog.com/?p=6630 for example on a paper.
Note that if risk aversion is a major factor, pricing will fluctuate due to exogenous (and likely unforcastable) events.Quote in Prefblog wrote:The simplest explanation is that deviations of the BEIR [Break Even Inflation Rate] from survey measures of inflation expectations are the result of some phenomenon other than changes in uncertainty regarding inflation.
The big players need to be able to trade $100-million at a shot, particularly in times of stress. They need to be able to repo them instantly. Can't do that with RRBs.
It was the liquidity premium that sunk the Cleveland Fed's inflation forecasting model.
In all my writing about credit spreads and default risk, I stress that the bulk of corporate spreads to Canadas is due to liquidity concerns, not default. The intersting thing is that a retail investor can, if he so desires, hold governments while earning a little liquidity premium by holding RRBs.