Inflation: The long and short of TIPS

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Inflation: The long and short of TIPS

Postby gkaplan » Thu Jan 24, 2013 9:43 am

Treasury Inflation-Protected Securities—commonly called TIPS—can help protect an investor's buying power from rising prices. As with all Treasury bonds, interest and principal payments for TIPS are guaranteed by the U.S. government. What distinguishes a TIPS bond from a typical Treasury bond is that its principal amount and semiannual coupon payments are adjusted to keep pace with inflation.

In this interview, Chuck Thomas, an analyst in Vanguard's Investment Strategy Group, describes Vanguard's outlook on inflation, as well as how inflation-protected securities (TIPS) can be incorporated in a portfolio. He explains the differences between short-term and long-term TIPS and the tradeoffs of choosing one over the other....


https://personal.vanguard.com/us/insights/article/inflation-TIPS-012013
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Re: Inflation: The long and short of TIPS

Postby dbr » Thu Jan 24, 2013 11:24 am

I think that is a very good article.
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Re: Inflation: The long and short of TIPS

Postby LadyGeek » Thu Jan 24, 2013 11:34 pm

Sorry, the OP was beaten to the post by this thread: "Inflation: The Long and Short of TIPS"

(Thread locked to redirect responses to the earliest post.)

My fault, I missed AM vs. PM. This was first. :oops:
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Re: Inflation: The long and short of TIPS

Postby FoolStreet » Fri Jan 25, 2013 1:26 am

dbr wrote:I think that is a very good article.


I was following along nicely until I got to this part:

Can you explain real duration and how it's different from the duration on a typical bond portfolio?
Duration is simply a measure of any bond's sensitivity to its movements in its interest rate.


I don't see how duration is a measure of bond sensitivity to int rates.
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Re: Inflation: The long and short of TIPS

Postby dickenjb » Fri Jan 25, 2013 8:39 am

FoolStreet wrote:I don't see how duration is a measure of bond sensitivity to int rates.


The sentence is incomplete. A bond's duration is a measure of a bond's market price sensitivity to interest rates.

The longer the duration, the more the price will move in response to interest rate changes.
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Re: Inflation: The long and short of TIPS

Postby FoolStreet » Fri Jan 25, 2013 11:14 am

dickenjb wrote:
FoolStreet wrote:I don't see how duration is a measure of bond sensitivity to int rates.


The sentence is incomplete. A bond's duration is a measure of a bond's market price sensitivity to interest rates.

The longer the duration, the more the price will move in response to interest rate changes.


It feels more backward than incomplete. The sensitivity is a function of the duration. Not the other day around. IMHO
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Re: Inflation: The long and short of TIPS

Postby Doc » Fri Jan 25, 2013 11:36 am

FoolStreet wrote:
dickenjb wrote:
FoolStreet wrote:I don't see how duration is a measure of bond sensitivity to int rates.


The sentence is incomplete. A bond's duration is a measure of a bond's market price sensitivity to interest rates.

The longer the duration, the more the price will move in response to interest rate changes.


It feels more backward than incomplete. The sensitivity is a function of the duration. Not the other day around. IMHO


Try math not English. Duration is the first derivative of the price yield curve P(i).

Duration = ∂ P(i)/ ∂ i

Does that help?
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Re: Inflation: The long and short of TIPS

Postby FoolStreet » Wed Jan 30, 2013 2:03 pm

Doc wrote:
FoolStreet wrote:
dickenjb wrote:
FoolStreet wrote:I don't see how duration is a measure of bond sensitivity to int rates.


The sentence is incomplete. A bond's duration is a measure of a bond's market price sensitivity to interest rates.

The longer the duration, the more the price will move in response to interest rate changes.


It feels more backward than incomplete. The sensitivity is a function of the duration. Not the other day around. IMHO


Try math not English. Duration is the first derivative of the price yield curve P(i).

Duration = ∂ P(i)/ ∂ i

Does that help?


Oooh, this is fun! Its like I'm joining the inner circle and learning the bogle head secret handshake. All along, I thought duration was something like, 5 years for a 5 year TIP bought at the 5 year auction. Or that 10 year tips were sold during the 10 year auction.

I have one for you: What is the integral of 3 R cubed?
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Re: Inflation: The long and short of TIPS

Postby Dave_M » Wed Jan 30, 2013 2:59 pm

That's an easy one:

3/4*r^4; or if you prefer (3*r^40)/4

and my High School Calc teacher would remind me to add +c, for the constant term that 'went away' during differentiation

so: 3/4*r^4 + c

(my ti-89 says so, so it must be right) :sharebeer

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Re: Inflation: The long and short of TIPS

Postby FoolStreet » Wed Jan 30, 2013 4:03 pm

Dave_M wrote:That's an easy one:

3/4*r^4; or if you prefer (3*r^40)/4

and my High School Calc teacher would remind me to add +c, for the constant term that 'went away' during differentiation

so: 3/4*r^4 + c

(my ti-89 says so, so it must be right) :sharebeer

dave


Not everyone can tell a joke, or at least it's all in the delivery. Let me try this again and we'll see if it still works...

It was supposed to be:

What is the derivative of 3r cubed?
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Re: Inflation: The long and short of TIPS

Postby FoolStreet » Thu Jan 31, 2013 3:47 pm

FoolStreet wrote:
Dave_M wrote:That's an easy one:

3/4*r^4; or if you prefer (3*r^40)/4

and my High School Calc teacher would remind me to add +c, for the constant term that 'went away' during differentiation

so: 3/4*r^4 + c

(my ti-89 says so, so it must be right) :sharebeer

dave


Not everyone can tell a joke, or at least it's all in the delivery. Let me try this again and we'll see if it still works...

It was supposed to be:

What is the derivative of 3r cubed?



=1/3 x 3 x r squared dr
=r squared dr
=r x r x dr
=r x dr x r


Said aloud, it would sound like, "har dee har har"

Get it? Har dee har har.

Yeah, the delivery sucked. Some people can tell a joke.


Anyway, back to duration of TIPS....
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Re: Inflation: The long and short of TIPS

Postby ps56k » Fri Feb 01, 2013 4:59 pm

I happen to stumble across this article while browsing along the Vanguard app on my mini iPad.
Just repeating here for easy ref -
https://personal.vanguard.com/us/insights/article/inflation-TIPS-012013

The part that struck me, was mentioning the strategy for holding TIPS at all.... norm vs ??

It was more about how do you feel bond funds in general will react to interest rate inflation ?
How will something like VBMFX react if and when the rates are allowed to increase ?
Will the rates be metered out gradually, or more like a forced door opening ?

It seemed like the holding of VIPSX was for that potential floodgate opening,
and VIPSX was the raft to float above the other VBMFX bond funds that can't react fast enough to the inflation.

SO - I did drink from the VIPSX punch bowl -
Now we just have to decide if we see a trickle coming or a flood ?
Hold the VIPSX raft - or sell the raft and add it to VBMFX inner tube ?
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