TIPS Shifting: ST TIPS vs. ST Inv Grade vs. ST Treasury

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Sammy_M
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TIPS Shifting: ST TIPS vs. ST Inv Grade vs. ST Treasury

Post by Sammy_M »

Of my fixed income, 70% is in TIPS and wgt avg maturity is around 13 years. I accumulated most of my TIPS when yields were >3% last year. Now they're in the 1-2% range.

I plan to follow a TIPS shifting strategy similar to that advocated by Larry Swedroe. Based on present yields, I'm overweight Long Term TIPS and need to make a shift.

I use Fidelity for most of my fixed income investing and am trying to decide what investment vehicle to shift to. A few options under consideration:

1. PIMCO 1-5 Yr TIPS ETF (STPZ, 0.20 ER) - $11 trans fee. A relatively new vehicle.

2. iShares 1-3 Yr Credit (CSJ, 0.20 ER) - $11 trans fee. I'm not against taking some credit risk, but would only do so on the short end.

3. Fidelity Spartan Short-Term Treasury (FSBAX, 0.20 ER) - $0 trans fee. Vanguard funds aren't practical in the Fidelity account due to the $75 trans fee.

Any suggestions?
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Re: TIPS Shifting: ST TIPS vs. ST Inv Grade vs. ST Treasury

Post by Tramper Al »

Sammy_M wrote:Of my fixed income, 70% is in TIPS and wgt avg maturity is around 13 years. I accumulated most of my TIPS when yields were >3% last year. Now they're in the 1-2% range.

I plan to follow a TIPS shifting strategy similar to that advocated by Larry Swedroe. Based on present yields, I'm overweight Long Term TIPS and need to make a shift.

I use Fidelity for most of my fixed income investing and am trying to decide what investment vehicle to shift to. A few options under consideration:

1. PIMCO 1-5 Yr TIPS ETF (STPZ, 0.20 ER) - $11 trans fee. A relatively new vehicle.

2. iShares 1-3 Yr Credit (CSJ, 0.20 ER) - $11 trans fee. I'm not against taking some credit risk, but would only do so on the short end.

3. Fidelity Spartan Short-Term Treasury (FSBAX, 0.20 ER) - $0 trans fee. Vanguard funds aren't practical in the Fidelity account due to the $75 trans fee.

Any suggestions?
I try not to be a market timer, so I won't be much help there. Oops, I mean a TIPS shifter! What was I thinking?

Sammy, are you selling individual TIPS at Fidelity to accomplish this shift? I only ask because I have come to believe that the spreads and poor executions on TIPS at Fidelity are a bit of a hurdle. And of course their TIPS fund is not good.

Personally, I'd go with your Spartan ST Treasury fund on this. I own this one, though with a different ticker. Your FSBAX is supposed to have an ER of 0.10, I believe. Advantage class, good for you.
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Re: TIPS Shifting: ST TIPS vs. ST Inv Grade vs. ST Treasury

Post by Sammy_M »

Tramper Al wrote: Personally, I'd go with your Spartan ST Treasury fund on this. I own this one, though with a different ticker. Your FSBAX is supposed to have an ER of 0.10, I believe. Advantage class, good for you.
I wish! I actually just grabbed the wrong ticker. Should be FSBIX.

Yes, I am using Fidelity to buy individual TIPS but have been using limit orders. I was just picking a point in the middle, but will probably use the 3X closer to the mid approach advocated by grok.

Thanks!
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Post by tarnation »

Question: My understanding is long TIPS are the only ones that are close to historical averages now, the medium and short ones being below. So why sell the ones that have "OK" yields (relative to average) and buy low yield ones?
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Post by Sammy_M »

tarnation wrote:Question: My understanding is long TIPS are the only ones that are close to historical averages now, the medium and short ones being below. So why sell the ones that have "OK" yields (relative to average) and buy low yield ones?
Yes, indeed a good question. ST TIPS and ST Treasuries are both offering pitiful yields now. Hence my consideration of ST Inv Grade.

I bought a lot of TIPS low and now they are high. Intuition tells me to sell some, or at least decrease exposure to real rate changes. Maybe that's erroneous thinking though.

Are other 'shifters' holding steady?
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Post by musbane »

Good question indeed. I, too shifted all of my bond holdings to (m0stly )long TIPS back when they were @ about 3% real (thank you, thank you Larry and others)
A few weeks ago I sold about half of them when they dropped to 2% and bought the new short term PIMCO fund - which has somehow gone up almost 2% since then. But the more I think about it, the more concerned I am as to what to do now.

the PIMCO fund is more volitile than I expected and doesn't have a lot invested in it (yet?) although it has a teenie bid/ask spread.
I'm disinclined to take on corporate risk on my 'safe allocaton.
I'd like to continue to be covered against inflation(I'm another early retiree)
So, I guess I"ll be watching this thread carefully.
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Post by tarnation »

Sammy_M wrote:
tarnation wrote:Question: My understanding is long TIPS are the only ones that are close to historical averages now, the medium and short ones being below. So why sell the ones that have "OK" yields (relative to average) and buy low yield ones?
Yes, indeed a good question. ST TIPS and ST Treasuries are both offering pitiful yields now. Hence my consideration of ST Inv Grade.

I bought a lot of TIPS low and now they are high. Intuition tells me to sell some, or at least decrease exposure to real rate changes. Maybe that's erroneous thinking though.

Are other 'shifters' holding steady?
oh ok, you are shifting out of TIPS completely to something ST.

I'm not sure I'm a bona fide shifter, I've bought some 20 yrs, but I'm not really planning to sell except for maybe VIPSX, the yield on it has dropped so low.
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Post by Speedy »

I bought quite a lot of individual ten and twenty year TIPs during the crisis last year when yields were in the range of 3%. My original intention was to use the Swedroe shifting maturity strategy. However, I have decided to hold for now because:

1. The bid/ask spread for retail investors is quite high and greatly reduces the return on a trading strategy.

2. Deflation over the last year has had a negative effect on the value of the holdings. This may correct at some point.

3. The alternative investments (short Treasuries or TIPs) are not attractive now.

4. Not making a prediction, but it would not surprise me to see TIPs yields drop further.

If I were to go with a shifting maturity strategy I would consider using TIPs funds or ETFs to address the bid/ask spread issue.

Regards,
Bill
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Post by tc101 »

I bought the Vanguard TIPS fund when everyone was talking about it last year. It has gone up about 12% since I bought it. I am thinking about selling part of it and moving it into the ST investment grade bond fund. I will read what others here have to say for a few days before I decide.

I know it is market timing, but although everyone here gives lip service to the idea that we should not practice market timing, there are also lots of good ideas about timing. The idea about buying TIPS last year is a good example. If enough experts here say it is a good time to buy something, I will usually buy at least a little.

If enough experts here say it is a good idea to sell Vanguard TIPS fund and buy ST investment grade fund, I will probably do it with some of the profits in the TIPS fund.
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Post by dave.d »

I'm willing in principle to shift, but can't convince myself that a 1.5% guaranteed real yield for 10 years is such a bad deal, what with the Fed's printing presses running overtime and all. I bought a little STPZ, but I worry the yield is so pathetic, it could blow over in a strong breeze (e.g., if the Fed decides it has to raise short-term rates to protect the dollar). The short TIPS obviously will not respond as much to changes in real rates, but the short end of the TIPS yield curve is quite a bit further from historical averages right now than the long end -- enough that it looks to me like the % losses on term risk in TIPS could be similar now at all maturities, if/when we get a reversion to historical rates.

For short-term nominal bonds, I continue to prefer VFSTX to short treasuries, as the yield spread is still way wide (250 basis points?) by historical standards. Of course, that's where I was in summer '08, and it certainly added to my pain that fall (although I stuck with it, and feel better now).
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Post by Sammy_M »

Thanks to all those who weighed in. Just to close the loop, I decided to go with the Spartan ST Treasury fund mainly due to simplicity/cost and am now down to about 50% of fixed income in TIPS with an avg maturity of around 14 years. If I could have gotten into Vanguard ST Inv Grade without a transaction cost, I would have.
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Post by Prokofiev »

tarnation wrote:Question: My understanding is long TIPS are the only ones that are close to historical averages now, the medium and short ones being below. So why sell the ones that have "OK" yields (relative to average) and buy low yield ones?
I sold more 20yr TIPS this morning at real rates of 1.91%. That is not close to the historic average. It is much closer to the all-time low. See link below:

http://research.stlouisfed.org/fred2/se ... I20?cid=82

The graph only shows the past 5 years, but prior to that real rates on TIPS were substantially higher. What % of the time have TIPS yields been lower than today? Probably less than 5%. Doesn't mean they can't go lower, but I'm DCAing out of my position below 2%.
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Re: TIPS Shifting: ST TIPS vs. ST Inv Grade vs. ST Treasury

Post by Doc »

Sammy_M wrote:Of my fixed income, 70% is in TIPS and wgt avg maturity is around 13 years. I accumulated most of my TIPS when yields were >3% last year. Now they're in the 1-2% range.

I plan to follow a TIPS shifting strategy similar to that advocated by Larry Swedroe. Based on present yields, I'm overweight Long Term TIPS and need to make a shift.

I use Fidelity for most of my fixed income investing and am trying to decide what investment vehicle to shift to. A few options under consideration:

1. PIMCO 1-5 Yr TIPS ETF (STPZ, 0.20 ER) - $11 trans fee. A relatively new vehicle.

2. iShares 1-3 Yr Credit (CSJ, 0.20 ER) - $11 trans fee. I'm not against taking some credit risk, but would only do so on the short end.

3. Fidelity Spartan Short-Term Treasury (FSBAX, 0.20 ER) - $0 trans fee. Vanguard funds aren't practical in the Fidelity account due to the $75 trans fee.

Any suggestions?
1) Why bother with a short duration TIPS fund. The good thing about TIPS is that they allow you to go way out on the yield curve without tanking on inflation risk. This is what you have done with your TIPS portfolio.

2) I was going to use CSJ as an alternative to short Treasuries until the credit crunch hit. Now there is a persistent high premium to the fund. If it remains you are OK but if it disappears before you sell your return just got even worst. If you were going to hold long term it may not matter but you want to use it as part of a trading strategy and short term price changes matter.

3) Hobson's choice. The only one left standing. Actually may give you the best return anyway.

So what if you get a low return with these choices. The reason you are doing it is to get the capital gain for from the sale of the long term notes isn't it?
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Post by Doc »

Sammy_M wrote:Thanks to all those who weighed in. Just to close the loop, I decided to go with the Spartan ST Treasury fund mainly due to simplicity/cost and am now down to about 50% of fixed income in TIPS with an avg maturity of around 14 years. If I could have gotten into Vanguard ST Inv Grade without a transaction cost, I would have.
In the future, Sammy, please don't close the loop while I'm typing. :)
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Post by tfb »

Just hold. I don't think the long term yields are low enough to justify selling yet.
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Post by Sammy_M »

tfb wrote:Just hold. I don't think the long term yields are low enough to justify selling yet.
TFB,
I wrote my TIPS action plan within my investment policy statement. I view not 'shifting' when the plan calls for it, as very similar to not rebalancing when the plan calls for it. I don't want to start telling myself - "this time is different." I know you developed a TIPS action plan as well. Are you more flexible about following it? Or is it that you are already aligned with your plan?
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Post by tfb »

Sammy_M wrote:Are you more flexible about following it? Or is it that you are already aligned with your plan?
Yes I'm more flexible. Since we are talking about market timing, ahem, valuation informed investing, I think you have to take into consideration the yield curve and the breakeven inflation rate. Maybe the original shifting strategy had an implicit assumption for a flatter yield curve and a higher breakeven inflation rate. Note Larry himself is not following his original plan as written in his books when he said long term TIPS were a steal at ~2.2% real a few months ago on his BNet blog.

I'm holding my long term TIPS. I'm adding coupon payments and new money to short term CDs which give the same yield as short term corporates, but with better credit quality.
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Post by Sammy_M »

tfb wrote:
Sammy_M wrote:Are you more flexible about following it? Or is it that you are already aligned with your plan?
Yes I'm more flexible. Since we are talking about market timing, ahem, valuation informed investing, I think you have to take into consideration the yield curve and the breakeven inflation rate. Maybe the original shifting strategy had an implicit assumption for a flatter yield curve and a higher breakeven inflation rate. Note Larry himself is not following his original plan as written in his books when he said long term TIPS were a steal at ~2.2% real a few months ago on his BNet blog.

I'm holding my long term TIPS. I'm adding coupon payments and new money to short term CDs which give the same yield as short term corporates, but with better credit quality.
Here is that Swedroe article. Makes sense. I'm at the upper portion of the hold range for % TIPS and am actually longer out on maturity than the decision table prescribes -- primarily for the reasons you cite. I emotionally want to hold more and longer term TIPS, but I really want to take emotion out of it. Therefore, I may try to incorporate b/e inflation within the decision table to make it a more mechanical process, less prone to second guessing. In terms of yield curve, I believe Larry has suggested a rule of thumb of looking for a certain number of basis points for each addl year out on the curve. Anyone else here remember what that was?

p.s. I read your recent post on ST Fixed Income vs. CDs and brokered CDs appear to be a great 4th option. I used Spartan ST Treasury for now due to simplicity and cost, but I am going to start educating myself on brokered CDs and may use those instead.
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Post by dbr »

If I recall correctly it was 20bp per year of additional duration. Someone please correct if this is not what Larry had recommended.

It would also be an interesting discussion to see a critique of that concept.
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Post by tfb »

Sammy_M wrote:p.s. I read your recent post on ST Fixed Income vs. CDs and brokered CDs appear to be a great 4th option. I used Spartan ST Treasury for now due to simplicity and cost, but I am going to start educating myself on brokered CDs and may use those instead.
If you don't have the limitation of "must use Fidelity" you will get more if you buy CDs directly from the issuers. If you do want to or have to stay with Fidelity like in my case, here's a bookmarklet I use for screening CDs at Fidelity.

Code: Select all

javascript:(function(){var%20links=new%20Array('http://fixedincome.fidelity.com/fi/FICorpNotesDisplay?name=CD&refpr=obrfind15',%20'http://fixedincome.fidelity.com/fi/FIIndividualBondsSearch?prodmajor=CD&minmaturity=10%2F2010&maxmaturity=10%2F2015&minmoody=&maxmoody=&minsandp=&maxsandp=&callind=NO&sinkind=&bondtierind=&minyield=&maxyield=&mincoupon=&maxcoupon=&minprice=&maxprice=100&displayFormat=TABLE&sortby=MA',%20'http://fixedincome.fidelity.com/fi/FIIndividualBondsSearch?prodmajor=CD&minmaturity=10%2F2010&maxmaturity=10%2F2015&minmoody=A3&maxmoody=&minsandp=&maxsandp=&callind=NO&sinkind=&bondtierind=&minyield=2&maxyield=&mincoupon=&maxcoupon=&minprice=&maxprice=&displayFormat=TABLE&sortby=MA');%20for%20(var%20i%20=%200;%20i%20<%20links.length;%20i++)%20{window.open(links[i]);}})();
It doesn't return many secondary CDs today because the bond market is closed.
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Post by Sammy_M »

tfb,
Like you, I have a SE401k with them (and just rolled in an IRA as well), so am in the 'must use Fidelity' camp. Thanks for the bookmarklet.

dbr,
Maybe it was 20bp for nominals and half that for TIPS? Moving from 1/2016 to 1/2026 TIPS would require the 2026's to be yielding near 3%, yet they're yielding just under 2% now.
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Post by tfb »

Sammy_M wrote:tfb,
Like you, I have a SE401k with them (and just rolled in an IRA as well), so am in the 'must use Fidelity' camp. Thanks for the bookmarklet.
OK. I was able to pick up some good secondary CDs. 2-year 2.3%, 3-year 2.9%. These are almost as good as the best rates available elsewhere. Good rates don't come up everyday. Hence the bookmarklet. Expect a blog post soon.
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Post by dbr »

Sammy_M wrote:tfb,
Like you, I have a SE401k with them (and just rolled in an IRA as well), so am in the 'must use Fidelity' camp. Thanks for the bookmarklet.

dbr,
Maybe it was 20bp for nominals and half that for TIPS? Moving from 1/2016 to 1/2026 TIPS would require the 2026's to be yielding near 3%, yet they're yielding just under 2% now.
Yep, I am indeed fuzzy on the details, so this needs more input.

However, it can easily happen that a rule like this tends to work against wanting long term bonds as the yield curve tends to flatten at the long end most of the time.
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Timing TIPS ?

Post by Taylor Larimore »

I plan to follow a TIPS shifting strategy similar to that advocated by Larry Swedroe. Based on present yields, I'm overweight Long Term TIPS and need to make a shift.
I figure the full-time experienced manager and his associates of our TIPS fund (VIPSX) knows more than I do, so I let him do any shifting he feels necessary.
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VIPSX: Market time or stay-the-course ?

Post by marathonwmn »

I figure the full-time experienced manager and his associates of our TIPS fund (VIPSX) knows more than I do, so I let him do any shifting he feels necessary.
Thank you, Taylor, for your observation. I own VIPSX and was disturbed that I didn't "get" what the folk were talking about in this thread!

Am I wrong in thinking that VIPSX is a set and forget holding within my bond AA?
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Post by Taylor Larimore »

marathonwmn wrote:
I figure the full-time experienced manager and his associates of our TIPS fund (VIPSX) knows more than I do, so I let him do any shifting he feels necessary.
Thank you, Taylor, for your observation. I own VIPSX and was disturbed that I didn't "get" what the folk were talking about in this thread!

Am I wrong in thinking that VIPSX is a set and forget holding within my bond AA?
Hi marathonwmn:

You can market time VIPSX (Inflation-Protected Securities) or stay-the-course.

We purchased VIPSX at its inception and have held it ever since with no attempt at market timing. VIPSX has outperformed our Total Bond Market Index fund during a long period of declining inflation.

That's good enough for me.
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Re: Timing TIPS ?

Post by Sammy_M »

Taylor Larimore wrote:I figure the full-time experienced manager and his associates of our TIPS fund (VIPSX) knows more than I do, so I let him do any shifting he feels necessary.
I believe someone here, maybe TFB, looked at how the VIPSX portfolio changed during the period in which we saw large spikes in real yields. If I'm not mistaken, VIPSX had very minor changes, if any. If I didn't have the urge to tinker, I'd probably be on the 50/50 TIPS/nominal plan and would tune out when people were talking about abnormally high or low yields. So, I certainly don't see anything wrong with a fixed TIPS allocation and rebalancing. I suspect shifting isn't going to make much of a difference one way or the other in the long run. However, I wouldn't expect the VIPSX manager to do anything but hold steady through all rate environments.
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Post by dbr »

Taylor Larimore wrote:
marathonwmn wrote:
I figure the full-time experienced manager and his associates of our TIPS fund (VIPSX) knows more than I do, so I let him do any shifting he feels necessary.
Thank you, Taylor, for your observation. I own VIPSX and was disturbed that I didn't "get" what the folk were talking about in this thread!

Am I wrong in thinking that VIPSX is a set and forget holding within my bond AA?
Hi marathonwmn:

You can market time VIPSX (Inflation-Protected Securities) or stay-the-course.

We purchased VIPSX at its inception and have held it ever since with no attempt at market timing. VIPSX has outperformed our Total Bond Market Index fund during a long period of declining inflation.

That's good enough for me.
I also hold VIPSX for the long run and do not attempt to fix a good plan by trying to find a better plan.

There has been plenty of commentary on the forum that could incline a person to feel like an idiot for just holding a plain old bond fund and letting it be, but neither Taylor nor I nor a lot of other people have any hesitation to do exactly that.
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Re: Timing TIPS ?

Post by Doc »

Taylor Larimore wrote:
I plan to follow a TIPS shifting strategy similar to that advocated by Larry Swedroe. Based on present yields, I'm overweight Long Term TIPS and need to make a shift.
I figure the full-time experienced manager and his associates of our TIPS fund (VIPSX) knows more than I do, so I let him do any shifting he feels necessary.
Attention everyone. Breaking news. Taylor Larimore makes a plug for active management. :lol:

FWIW Here is a quote from Morningstar's analyst report on VIPSX:
Strategy
The goal here is to provide inexpensive exposure to the inflation-protected bond market. Most of management's actions involve trying to identify undervalued issues along the inflation-protected bond-maturity spectrum. Historically, the fund has stuck exclusively with Treasury issues.
http://analysis.morningstar.com/analyst ... ountry=USA

Probably the real question here is if John Hollyer and Ken Volpert know more than Larry Swedroe.
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Re: Timing TIPS ?

Post by tfb »

Sammy_M wrote:
Taylor Larimore wrote:I figure the full-time experienced manager and his associates of our TIPS fund (VIPSX) knows more than I do, so I let him do any shifting he feels necessary.
I believe someone here, maybe TFB, looked at how the VIPSX portfolio changed during the period in which we saw large spikes in real yields. If I'm not mistaken, VIPSX had very minor changes, if any.
That's correct. Vanguard managers didn't do much to extend maturity when long-term TIPS hit above 3%. Details are in

Vanguard TIPS Fund Portfolio Changes
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Post by Sammy_M »

tfb wrote:I was able to pick up some good secondary CDs. 2-year 2.3%, 3-year 2.9%. These are almost as good as the best rates available elsewhere. Good rates don't come up everyday. Hence the bookmarklet. Expect a blog post soon.
tfb,
thanks again. i just grabbed some 2.5 yr secondary cds at 2.6%. i understand they came with a slight degree of risk even with FDIC insurance since i paid above 100, but the issuer's A1 moodys rating seemed pretty good.
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