Can’t the TIPS liquidity problem be resolved with interest-rate swaps?
At one point, we had spent six months talking to representatives of Cargill, Inc.. the large grain trading firm in Minnetonka, Minnesota, about working with us. The individual in charge of their financial services division was very interested; but then, referred us to their “resident genius,” an Englishman. The Englishman tossed aside our proposal, saying that the TIPS liquidity problem could be resolved with an interest-rate-swap. At the time, we had no response; but subsequently, we watched while the TIPS market becoming more illiquid in the ensuing years. Later, upon meeting the Merrill Lynch TIPS analyst, he also said the liquidity problem could be resolved with interest-rate swaps. “If that is the case,” we asked, “then why is no one doing interest-rate swaps? We can tell by the illiquidity of the TIPS market, that no one is doing the swaps.” He checked his computer quickly, and then said: “You’re right. No one is doing interest-rate swaps on the TIPS.” “Why not?” we asked. After
