The $1.3 trillion U.S. market for inflation-linked debt, the brainchild of former Treasury Secretary Larry Summers, has saved taxpayers billions of dollars. Now, as the program turns 21, it may need a tuneup.

In an assessment released this month, the current stewards of the nation’s finances saw both pros and cons to Treasury Inflation Protected Securities — known as TIPS — which were introduced in January 1997. On the plus side, the debt has saved about $49 billion relative to sales of regular notes and bonds. Yet Treasury Secretary Steven Mnuchin’s team expressed disappointment that the obligations have not attracted a more diversified group of investors.

Summers calls the securities “a clear success.” But some Wall Street strategists predict changes ahead.

The Treasury has a history of adapting its issuance lineup, including shrinking TIPS sales. Aligning its offerings with investor needs is more important than ever as the U.S. faces mounting budget deficits. There’s a risk, however, that any decision to curb TIPS issuance comes just as inflation finally starts to take off, leaving bond investors with a diminished tool kit for hedging.

“I thought it was a good idea to diversify the Treasury’s funding base, to provide people with the option of inflation insurance and for establishing a market indicator for measuring inflation expectations,” Summers, now a Harvard University professor, said in an interview. “All three of those things have been borne out over time.”

The Treasury’s analysis of TIPS, released ahead of this month’s quarterly debt offerings, came at a critical time for the nation’s fiscal overseers: The Federal Reserve has begun to let Treasurys roll off its $4.5 trillion balance sheet, and U.S. budget deficits are expected to climb. That means the $14.3 trillion government bond market is ready to grow.

In a sign that TIPS haven’t attracted significant new buyers to the nation’s debt, investment funds — including mutual and hedge funds, asset managers and investment advisers — have bought most of both TIPS and nominal Treasurys since 2012, department data show.

“It’s no secret that liquidity in TIPS is an issue,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “Treasury seems to be saying that sponsorship in TIPS is clearly an issue, with not the kind of breadth of participation from counterparties they would have expected, which leaves it open to changes by Treasury as they see fit.”


McCormick writes for Bloomberg.