The TIPS (Treasury Inflation Protection Securities) , like Canada's Real Interest Bond, has a constant coupon declared at issuance -- but over the life of the bond, the principal is upward/downward adjusted as per the inflation numbers. An interesting point of comparison between numbers is the following:
On the run TIPS bonds -- a 5 year issue has a coupon of 2% while a 10 year issue has a coupon of 2 5/8 %. On the run Treasury Notes -- a 5 year issue has a coupon of 4% while 10 year issue has a coupon of 4.25%. Why does the TIPS offer a difference of 62.5 bp as opposed to 25 bp offered by the Treasury Notes?
One conjecture is that perhaps 5 years from now, the bond market is pricing in a reduction in inflation (thus decreased adjustment in the principal component) and thus decreased demand -- resulting in an increased inflation premium to hold onto the 6Bn., dollars worth TIPS issued. If indeed China is expected to increasingly export its inflation, then over the next two-three auctions the 10 yr TIPS must trade at a smaller coupon. Concurrently, the demand for the off-the-run TIPS must increase and the present holders should lockin a nice capital gains!