Using Treasury STRIPS to Bootstrap a Par Yield Curve

Summary

The document raises a fixed-income curve construction question: whether prices of U.S. Treasury STRIPS can be used directly to bootstrap a par yield curve, as an alternative to fitting a curve from coupon-bearing Treasury securities. The motivation is practical: the author reports difficulty fitting piecewise cubic splines to coupon-bearing yields and sees STRIPS prices as a possible source of discount information.

It flags liquidity as a key limitation, noting that STRIPS are less liquid than coupon securities, and asks how large the liquidity gap is. However, the document contains no responses, calculations, market data, or conclusion about whether STRIPS bootstrapping is common or acceptable. It therefore frames a useful curve construction and input-quality problem, but does not establish a recommended method. Any implementation would need to assess liquidity and market-price reliability; the text provides no evidence for quantifying those effects or comparing the resulting curves.

Key ideas

• The document asks whether Treasury STRIPS prices can support bootstrapping a par yield curve.
• It contrasts STRIPS with coupon-bearing Treasury securities as curve inputs.
• The author identifies lower STRIPS liquidity as a potential drawback.
• The document supplies no answer or liquidity figures, so it does not resolve the method choice.

Tags

# UST bootstrapping (coupon bearing or strips)


# UST bootstrapping (coupon bearing or strips)












how common is it to use the US STRIP market directly to bootstrap a par yield curve? I am having quite a few problems using cubic (peicewise) splines on coupon bearing yield curve, but I see a fair few prices on bbg for STRIPs so wanted to know if this is an equivalent/acceptable method.

i do understand obviously it is not as liquid as coupon bearing market and that itself can have some implications, but what is the magnitude of difference in liquidity? are we talking 100m vs 1tn or 50bn vs 75bn type numbers?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.