Can somebody clarify my thinking on this, please?
We can buy 5 year TIPS and receive 3.74%. We can receive 1.36% from the fixed side of the swap and pay inflation index, which offsets the inflation accrual in the 5 year TIPs. Then we pay the 2.56% rate on the 5 year straight bond. The net is 2.54%. OK, so I just regurgitated most of what’s in the table.
My question is this: Can we infer that the real yield on the 5 year straight UST bond is 2.56% MINUS the fixed leg of the swap at 1.36%, giving a real yield of 1.20%? Therefore, we’re currently receiving 3.74% on the TIPS MINUS real yield of 1.20% for 2.54? And then, what do I do with the 25-35 basis points?
I believe my thinking is not straight on this at all, so can anybody help me out?
Thanks!