TIPS - WSJ: "Take TIPS off Your List"

[RMO87]

I was reading the article in this weekend's WSJ by Brett Arends. It makes one consider selling TIPS, as they are "guaranteed to lose money," as the effective interest rates have decreased to record lows. A chief investment officer quoted recommends, if you have a position in TIPS, to keep maturity at the short end, ideally no more than five years. I notice that VIPSX is currently at a 9.3 year average maturity.

I currently have a 35% TIPS / 65% short-term investment grade bond mix in my retirement funds. I will turn 40 this year.

Would it be prudent to exit my position in TIPS and go, say, Interediate Investment-grade bond fund or something similar?

I look forward to hearing what other bogleheads have to say on the subject,

Thanks,
Ryan

[livesoft]

Discussed here: viewtopic.php?f=10&t=110170

I haven't owned any TIPS in a while.

[leonidas]

Sold last of my tips last week. Now mostly total bond and short term corporates.

[Rob5TCP]

I am down to 25% of my tips left. I still have all of my I Bonds - so those will stay with me.
But, TIPS no longer fit in my allocation.

[leonidas]

After I got rid of my tips last week I opened a TD account and am starting to buy savings bonds. But it will take 6 years to replace my tips with ibonds. Hope that we get some positive yields on tips over the next few years.

[fatmike91]

What is the yield on the TIPS? Negative 1%?

I just don't get it. Why would anyone buy them, and if you own them why wouldn't you sell? Makes no sense to me.



/

[Epsilon Delta]

What is the yield on the TIPS? Negative 1%?

I just don't get it. Why would anyone buy them, and if you own them why wouldn't you sell? Makes no sense to me.

If you want something that's guaranteed to keep up with CPI and you've bought your I bonds then TIPS are your best bet. What do you suggest instead?

[Noobvestor]

What is the yield on the TIPS? Negative 1%?

I just don't get it. Why would anyone buy them, and if you own them why wouldn't you sell? Makes no sense to me.



/

What's the real expected yield on short-term corporates, without the backing of the US govt or inflation protection? Negative 0.4%? Why would anyone buy them? Makes no sense to me.

[graveday]

I suppose it's a long term prospect. Interest rates are very low and inflation is a work in progress. Sooner or later inflation rate will increase and you may wish you had held on to your TIPS.

I don't think about it too much since I just hold the Vanguard fund.

[Karamatsu]

Why would anyone buy them, and if you own them why wouldn't you sell?

What people usually say is that TIPS protect against "unexpected inflation," so the yields somewhat paradoxically indicate that the market expects unexpected inflation. But that's probably not quite the full story since "expected inflation" is supposed to be captured by nominal rates, and nominal rates are being artificially suppressed to support economic recovery. So what I suspect it really means is that the market as a whole is positioned for the end of efforts to keep nominal rates low, expecting a rebound of inflation that may be difficult to get back under control. The negative yields indicate how much they're willing to pay for the insurance and/or speculate on that outcome.

Here in Japan we have the similarly bizarre situation of a government and central bank both publicly saying they want a 2% target inflation rate, yet the 10Y bond still yields 0.80%. Either those rates are being pressured artificially or institutions are willing to lose money for patriotic reasons.

We live in interesting times.

Personally I've kept my TIPS allocation as is, but I'll have to think twice about that if real rates are still negative when they start to mature.

[telemark]

TIPS have been part of my allocation for several years now, and in that period they've consistently outperformed TBM. Someday, I don't know when, they will underperform. When that happens I'll rebalance into them.

Past performance does not guarantee future results, of course, but frankly, Mr. Arends' predictions haven't been all that great either.

[DickBenson]

Personally I've kept my TIPS allocation as is, but I'll have to think twice about that if real rates are still negative when they start to mature.

Not sure what you mean by this. The real rate of a TIP bond will approach its coupon rate (a positive number) as the bond starts to mature.

Dick

[aua868s]

I have used I-bonds in my portfolio for Taxable account. Have to explore more on the TIPS part.

[Call_Me_Op]

The "keeping maturities short" recommendation can apply to all bonds - not just TIPS. When you buy a 10 year nominal treasury, you lock-in a negative yield with respect to expected inflation. TIPS at least limit how negative the yield will be (with respect to actual inflation).

[Bustoff]

What is the yield on the TIPS? Negative 1%?

I just don't get it. Why would anyone buy them, and if you own them why wouldn't you sell? Makes no sense to me.

Vanguard Inflation-Protected Secs Inv: $24,443.72; Vanguard Total Bond Market Index Adm: $20,586.3
The orange line is Vanguard Total Bond Market.

[johnep]

I have reduced my TIPS from 10% of AA to 0% in 2012. Sold some and the rest matured. Reinvested in variety of bond types as I have a diversified bond portfolio. I also increased my equity AA somewhat due to depressed rates in bonds. I may consider purchasing TIPS again if the 10 yr can give a reasonable positive return (1% or greater).

[dbr]

What is the yield on the TIPS? Negative 1%?

I just don't get it. Why would anyone buy them, and if you own them why wouldn't you sell? Makes no sense to me.



/

I hope this comment is not based on not understanding the difference between real and nominal yields.

The real yields on almost all bonds are negative now, some much more than that.

Also, by taking more risk in duration and credit quality one can stretch for yield, at a risk. Long bonds, TIPS or nominal, have positive real yields. Long bonds are also a great risk.

[Jordana]

I own TIP and WIP and these funds in my portfolio went up 23% in the past 2 years. I was somewhat wary of buying them and they are 4% of my entire portfolio. I am already changing my longer term corporate bonds to short term ones. I think changing this TIP/WIP allocation would be market timing. I feel that they are a defensive position.

[hlfo718]

A lot of investors are freaking out about rising rates and inflation. The problem is we don't know when and how much so if you have TIPS that are providing real yield of 1 - 3%, why sell?

I think many of these writers never invested in TIPS so when they see a negative yield they assume all TIPS are bad.

[dbcoop]

What is the yield on the TIPS? Negative 1%?

I just don't get it. Why would anyone buy them, and if you own them why wouldn't you sell? Makes no sense to me.

Vanguard Inflation-Protected Secs Inv: $24,443.72; Vanguard Total Bond Market Index Adm: $20,586.3
The orange line is Vanguard Total Bond Market.

I too, second this analysis. Thinking a minimum of 10yrs ahead.

[Easy Rhino]

I don't get it either, any conservative bond is probably going to lose money on an inflation-adjusted basis if inflation or interest rates go up. So that leaves you with high yield or international bonds, which are much riskier.

[bobcat2]

Zvi Bodie has asked me to post his thoughts on the WSJ article about TIPS by Brett Arends.

The headline of the Brett Arends column is misleading. It is true that real interest rates are likely to rise after the Fed stops its massive purchases of bonds to stimulate the economy. If and when that happens, investors holding long-term bonds (including TIPS) will suffer capital losses. Logical conclusion: investors should shift now from long-term to short-term bonds. But this applies to all bonds, not just TIPS. For investors who want to keep the inflation protection provided by TIPS and avoid the risk of a capital loss, the logical conclusion is to swap their long-term TIPS for short-term TIPS. That is what Carl Friedrich is telling Arends. The headline should have been:

"Looking for Inflation Protection? Buy Short-Term TIPS and Be Wary of Long-Term TIPS."

Paul Solman had a blogpost on this topic recently, that is far more sensible than Arends':
Link to Running Scared: Getting Out of 'World's Safest Investment' - http://www.pbs.org/newshour/businessdesk/2012/12/running-scared-getting-out-of.html

BobK

[Aptenodytes]

I get the sense that there's a lot of fetishism around the number zero. A shift from 1% to -.5% is exactly the same as a shift from 4% to 2.5%, but I don't recall nearly the same hair-pulling when TIPS were falling at the same rate, but in positive territory.

It is fine to reevaluate your strategy when there's a big shift in yields, but it doesn't make sense to invest the number zero with mystical qualities.

[graveday]

I get the sense that there's a lot of fetishism around the number zero. A shift from 1% to -.5% is exactly the same as a shift from 4% to 2.5%, but I don't recall nearly the same hair-pulling when TIPS were falling at the same rate, but in positive territory.

It is fine to reevaluate your strategy when there's a big shift in yields, but it doesn't make sense to invest the number zero with mystical qualities.

Well said, and clarifies a point that has confused me. It has been said that interests rates in negative territory indicate a willingness to pay for security, but as you point out it is a loss either way regardless of sign. Sad though.

[kenyan]

Pretty sure the market expects TIPS to return pretty close to nominal bonds. I don't see any reason to adjust my TIPS/nominal ratio based upon real yields less than zero.

Shortening duration, sure, I could see that, but the bond duration-timers have been wrong for a long time now. Maybe they've finally got it right, as intermediates are finally trailing short-terms YTD (by about 1%).

[Karamatsu]

Not sure what you mean by this. The real rate of a TIP bond will approach its coupon rate (a positive number) as the bond starts to mature.

If when my TIPS bonds mature rates are still negative then it seems like we will be in uncharted territory as far as the US economy, finances, and political situation go, and the doom-and-gloom comparisons to Japan over the past few years will have been closer to the mark than I ever imagined possible. If that occurred, and we got a prolonged period of deflation, I'd probably have to think twice about my AA and how to achieve my goals. Even Mr. Bogle admits there's a point where you have to consider Plan B.

But as it stands I think the negative yields aren't a big deal. They just make good scare copy for the media. So as you say, asymptotically you earn a little bit less than inflation rate, but not a lot less. The most recent (24 January) 10Y TIPS went for 107.50 with a 0.125% coupon, so people paid a $7.50 premium. Not a big deal, and given consensus estimates for inflation of around 2.0% you would indeed have a positive return.

Ultimately it's just hard to get excited about 0.125% in exchange for ten years of tying up money I worked so hard to accumulate.

[fatmike91]

What is the yield on the TIPS? Negative 1%?

I just don't get it. Why would anyone buy them, and if you own them why wouldn't you sell? Makes no sense to me.

Vanguard Inflation-Protected Secs Inv: $24,443.72; Vanguard Total Bond Market Index Adm: $20,586.3
The orange line is Vanguard Total Bond Market.

Past performance has been great. I'm not suggesting it hasn't been. But, the coupon has gone up so much that the yield is negative. I can't wrap my head around that. Is a negative bond yield any different than a fund taking 1.5% per year in expenses. Pretty much the same thing, right? How many folks who own TIPS would tolerate that from a fund?



/

[dbr]

Past performance has been great. I'm not suggesting it hasn't been. But, the coupon has gone up so much that the yield is negative. I can't wrap my head around that. Is a negative bond yield any different than a fund taking 1.5% per year in expenses. Pretty much the same thing, right? How many folks who own TIPS would tolerate that from a fund?



/

It is not in any way like a fund with an expense of 1.5%. What you are missing is that quoted yield for TIPS is the real yield. The nominal yield is this plus the amount of inflation. Taking inflation at perhaps 2% the nominal yield of a -.5% TIPS (current yield of 10 year TIPS) would be 1.5%. In the other direction the current yield of total bond market fund of 1.6% nominal would be -.4% real, after inflation at 2% (or whatever the current number is). You can take any other investment paying a nominal yield of less than inflation and that has a negative real yield. The current real yield of money market funds paying around zero is -2% (or whatever inflation is). Real yields for bonds can easily be negative and are from time to time.

[#Cruncher]

The real rate of a TIP bond will approach its coupon rate (a positive number) as the bond starts to mature.

This is not so. As any bond nears the maturity date (I assume this is what you mean by "starts to mature"), its price approaches par (100 for a regular bond; 100 X the inflation factor for a TIPS). But this doesn't mean that its yield approaches the coupon rate. A TIPS could have a negative real yield up to the day it matures regardless of what its coupon is.

[LH]

TIPS have done great over the past years.

Look at a chart with US TSM, europe, emerging, australiaasia, US REITS, TIPS, US AGG bonds, US small cap

http://finance.yahoo.com/echarts?s=VTI# ... undefined;

you can move the slider bar around for different periods, set at 5years in the link...

TIPS is near the top. So you got the gain, now one is going to TIME out of it, and miss the loss?

What if stocks tank 50 percent again real terms? inflation spikes. Stocks stay down for 20 years? You wont miss a loss there, you will catch the loss.


I would keep the TIPS you have, to add more TIPS in, use ibonds.

Really, I did use ibonds last year, and this year, said to heck with it, and just bought a bit more TIPS (not much, just what allocation called for) instead of ibonds. If I have to do it again, will buy ibonds. You avoid the negative real return that has somehow appeared in TIPS : )

ibonds cant go negative. You cant balance as well with ibonds, stocks tank, if you sell ibonds (not allowed for one year), you are taxed, and miss out on 3 months interest...... So you need both TIPS and ibonds practically.

gets complex, and outside of range of allowable discussion on this site. But environment is what it is, basically TIPS are for return of principle, or most of principle at least in todays environment, in real terms. (ibonds putatively will give you your money back in real terms, sans the inflation tax, as tax is based on nominal not real, when you take them out of the ibonds, but thats true of all tax shelter except roth, hsa, heh maybe others).

You are guarding/attempting to guard against stock loss/loss of principle with TIPS, as well as nominal bonds getting creamed with a spike in unexpected inflation and concurrent interest rate rise, for x percent of interest rate rise, bonds drop by X(duration of bond). (cpi-u, chained cpi, etc) there is no risk free.

http://finance.yahoo.com/echarts?s=VTI# ... undefined;

in fact, for my personal portfolio, they are the top earning since I started my allocation in feb 2007 (treating it as a single investment in feb 2007, which is not true of course, and I doubt in reality they are top earner for me, buying low can be really helpful)

[jon-nyc]

I buy the 30yrs at auction every year, and they have positive real yield. I'll buy again later this month.

I'm basically constructing a synthetic inflation-linked annuity using a TIPs ladder. My plan is to keep buying the 30 year until 2026. Some years the yield will be better than others.

[kenyan]

I buy the 30yrs at auction every year, and they have positive real yield. I'll buy again later this month.

I'm basically constructing a synthetic inflation-linked annuity using a TIPs ladder. My plan is to keep buying the 30 year until 2026. Some years the yield will be better than others.

Ignoring the noise? Madness, I say, madness!

[dbr]

I buy the 30yrs at auction every year, and they have positive real yield. I'll buy again later this month.

I'm basically constructing a synthetic inflation-linked annuity using a TIPs ladder. My plan is to keep buying the 30 year until 2026. Some years the yield will be better than others.

This is still not an annuity because you haven't pooled longevity risk. You have no insurance proposition. You, have, of course, retained ownership of the assets as compensation.

[jon-nyc]

Right. It's obviously not a real annuity, its an approximation of the payment stream. Of course mine will end 30 years after I quit buying the TIPs, regardless of lifespan. But then if I die tomorrow the assets are in the estate.

[Karamatsu]

A TIPS could have a negative real yield up to the day it matures regardless of what its coupon is.

Yes, it could, and given the complexities of their valuation there are a lot of different ways that could happen, but if you take the simplest possible case, constant inflation rate over the life of the bond, then if I remember right, for the recent 10Y the to get a negative return at maturity you'd need ten full years with annual inflation below 0.60%. Since inflation, as measured by CPI, averaged about 2.1% in 2012 this seems unlikely. Meanwhile if we got annual inflation over 2.6% the TIPS return would beat current nominal rates.

And remember, even in deflation, the maximum loss on a TIPS is capped since you will always get back the face value. $7.50 is a small price to pay for inflation insurance. I just wish the coupon rate were higher.

[camper]

Well I bought the fund today in my roth with new money because my IPS told me so.

[KyleAAA]

Sounds like market timing to me. I don't currently own TIPS, but if I did I wouldn't sell. Why would somebody buy TIPS with a guaranteed real loss? Well, what are the alternatives? A guaranteed 1% loss is better than a possible 10% loss to some investors, perhaps.

[telemark]

As for that "guaranteed real loss", Arends said the exact same thing in the spring of 2010. For VIPSX, Google Finance shows me a three-year annualized return of 7.86%. If I had dumped TIPS on his advice I'd be asking him some pointed questions on just who is issuing that guarantee.

[graveday]

As for that "guaranteed real loss", Arends said the exact same thing in the spring of 2010. For VIPSX, Google Finance shows me a three-year annualized return of 7.86%. If I had dumped TIPS on his advice I'd be asking him some pointed questions on just who is issuing that guarantee.

Love it. You don't mean the points on your telemark poles?

[hazlitt777]

I was reading the article in this weekend's WSJ by Brett Arends. It makes one consider selling TIPS, as they are "guaranteed to lose money," as the effective interest rates have decreased to record lows. A chief investment officer quoted recommends, if you have a position in TIPS, to keep maturity at the short end, ideally no more than five years. I notice that VIPSX is currently at a 9.3 year average maturity.

I currently have a 35% TIPS / 65% short-term investment grade bond mix in my retirement funds. I will turn 40 this year.

Would it be prudent to exit my position in TIPS and go, say, Interediate Investment-grade bond fund or something similar?

I look forward to hearing what other bogleheads have to say on the subject,

Thanks,
Ryan

Ryan,
I've never owned TIPS and am glad of it. Taking a position in gold to protect yourself from inflation is the approach I have decided to take.

[RMO87]

Wow, I just found out that Vanguard has a short-term TIPS fund. Must be fairly new, as today was the first I had heard of it. Might this be the logical fund to exchange into?

Ryan

[LH]

Right. It's obviously not a real annuity, its an approximation of the payment stream. Of course mine will end 30 years after I quit buying the TIPs, regardless of lifespan. But then if I die tomorrow the assets are in the estate.

He also has not pooled all the different private company risks that can occur over 30 years, fraud, regular old bankruptcy, etc. etc. of a 30 year annuity provided by a private company that provides the "guarantee" usually implicitly taken to be an actual "guarantee" in the risk free sense. (He does have TIPS cpi-u or outright method cpi change risk. )

Definition of 'Annuity'
A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.
Investopedia Says
Investopedia explains 'Annuity'
Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives

Read more: http://www.investopedia.com/terms/a/ann ... z2KCQA9uV8

the google definition (no link was there)

an·nu·i·ty
/əˈn(y)o͞oitē/
Noun

1 A fixed sum of money paid to someone each year, typically for the rest of their life.
2 A form of insurance or investment entitling the investor to a series of annual sums.

Its a semantic question on one level, his "annuity" seems to satisfy definition 1. As he is going to keep making a 30 year ladder himself with the best low risk asset available TIPS. although he is paying it to himself. I am not sure if per se, an annuity has to pooled risk? maybe it does. He is just cutting out the private company risk, in exchange for risk he will fail to do it, become senile say, and then live 31 years, etc. Or maybe just cash it all in, and goto vegas, poof no income stream. though of course, one could also "I WANT IT NOW" commercial route, and cash in ones annuity stream, and blow that in vegas too.

but he certainly gives up the pooled risk advantage of a SPIA, but the money is his/his estates too.

[LH]

The other way to look at this issue:

If you can time the market, why has someone not done all this in/out of tips, and duration changing stuff=you win! In a mutual fund successfully????

its so clear, sounds so good. Why not have a professional just do it on a medium to large scale?

Answer: you cannot expectationally time the market with success, especially the bond market.

This time is not different.

I personally wanted to vomit while buying the TIPS fund : ) Luckily it was not much going in.

[hafius500]

Sorry, if this has been posted before:

GMO on the diminishing diversification benefits and returns of commodities and TIPS:

GMO Letter 4 Q 2012, Inker - We Have Met The Enemey, and He Is Us

So, by the time we’ve got the institutions involved, we’ve taken an asset (long commodity futures) that had a long history of providing a decent risk premium over cash with low correlations to other investments and both increased its correlations with other asset classes and driven its long-term expected return down to the point where it may well be zero or negative ........
Our conclusions on TIPS are not as stark as with commodities – it looks like their historic returns relative to treasuries overestimate what they are likely to do going forward, but the process of “disappearing return premium” is not as far along. That being said, things seem to have started changing for TIPS, and we think investors should be aware of how the future of TIPS may be fairly substantially less exciting than their past has been.........
As we go forward from here, it seems perfectly plausible, although certainly not assured, that the breakeven rates will rise above market expectations of inflation, and TIPS will be priced to give a lower return than traditional treasury bonds....
TIPS and commodities have been lovely diversifiers historically, and this has led them to be included in more and more portfolios over time. Their effectiveness as diversifiers may well be less in the future and their returns quite likely to be lower....

[tc101]

I've got some 2% TIPS that mature in Jan 2016

UST INFL IDX 2%01/16INFL INDEX DUE 01/15/16

I know most people think TIPS are way over valued now, and I agree, but Is there any reason to sell these now rather than just waiting until they mature in 2016 and collect the interest until then?

[dbr]

I've got some 2% TIPS that mature in Jan 2016

UST INFL IDX 2%01/16INFL INDEX DUE 01/15/16

I know most people think TIPS are way over valued now, and I agree, but Is there any reason to sell these now rather than just waiting until they mature in 2016 and collect the interest until then?

The reason would depend completely on where you plan to invest the money from the sale. You can't ask only one side of this question.

[tc101]

The reason would depend completely on where you plan to invest the money from the sale. You can't ask only one side of this question.

I would be investing it in the short term investment grade fund in an IRA. The TIPS are currently in the IRA.

[dbr]

The reason would depend completely on where you plan to invest the money from the sale. You can't ask only one side of this question.

I would be investing it in the short term investment grade fund in an IRA. The TIPS are currently in the IRA.

So your reason would be to give up maybe about -1.6% real yield with inflation insurance with certain repayment in 2016 for about -1% real yield in a fund that is at a short amount of interest rate risk and has inflation risk and with whatever the cost will be to market the bond.

I can't see why one would bother to do this in the larger scheme of things, or even in any scheme of things. Dancing can be fun, but maybe not so much on the head of a pin.

[tc101]

Thanks. That is what I was thinking, but while reading the conversation on selling TIPS I got confused.