Bustoff wrote:The SEC yield for VIPSX is –1.09%. Does that negative yield mean I lose 1.09% on my investment? In other words, if I put money into VIPSX tomorrow, and a year later there was no change in the price, would I owe 1.09%?
Allow me to restate your question in a way that represents what I think you're really getting at:
If I put money into VIPSX tomorrow, and a year later there had been no CPI inflation adjustment and if TIPS yields were unchanged, would I owe 1.09%?
No, you would not owe
anything. However, you would incur a loss of about 1.09%. And this loss would be manifested in the fund having a lower net asset value (NAV) per share.
It's easier to understand this, I believe, if you first understood what would happen to a single TIPS bond under the same circumstances. For example consider the 5 year 0.125% TIPS first issued last April 30 and which will mature April 15, 2017. The results of the issue's auction were that buyers had to pay $106.16 for each $100 of principal. This corresponded to a yield of -1.08%. (See the auction results PDF file
Assume you had purchased $100 principal of this bond at the auction. Also assume over the next year the CPI stayed the same so there was no inflation adjustment to principal or interest. Also assume that the yield remained at -1.08%. This would mean that the price one year later would be $104.89. (1) During the year you would have received $0.125 in interest. But with the price falling $1.27 from $106.16 to $104.89., overall you'd have lost $1.145 or about 1.08% of the $106.16 purchase price. Thus the way one "pays" the negative 1.08% yield is thru the net effect of interest payments received and a reduction in price.
The NAV of a bond mutual fund is the overall value of the bonds it holds. So what happens to this one TIPS would happen to a TIPS fund NAV if the CPI were unchanged and the interest rate stayed the same on all of its holdings.
1) I used the bond calculator at http://www.ficalc.com
to calculate this price using a settlement date of 4/30/2013.