Yield on TIPS fund: -4.5% or -1.1%?

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Yield on TIPS fund: -4.5% or -1.1%?

Postby Browser » Wed Jan 30, 2013 12:04 pm

Checking the TIPS fund at TIAA-CREF, they show the 30-day SEC Yield as -4.55%, while Vanguard shows the SEC yield on VIPSX as -1.08%. The average maturity and duration of these funds is about the same, and they have very similar maturity distributions. Why such a large difference?
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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby Doc » Wed Jan 30, 2013 12:22 pm

Vanguard
G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE


TIAA-CREF
30-day SEC Yield CPI-Adjusted
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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby Browser » Wed Jan 30, 2013 12:32 pm

Ahh - thanks Doc. Next question: which is more meaningful - inflation adjusted yield (TIAA) or non-adjusted yield (Vanguard)? Seems to me if the reason you're buying TiPS is to hedge real yield, the TIAA approach is more relevant. That would mean that, based on 30-day yield, you are losing a whopping amount of purchasing power in a TIPs fund. Not that you're not losing it in something else too....
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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby jjustice » Wed Jan 30, 2013 12:46 pm

Browser,
If you watch the yield that TIAA reports for a while, you'll find that it jumps around wildly. Vanguard's yield is the one to use to get an idea of the current value of a TIPs fund. Over at M* we've had discussions about why TIAA's reported yield is so erratic, but it is still somewhat mysterious. All that is plain is that from time to time it will be badly misleading, which TIAA admits in a footnote.
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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby Orion » Wed Jan 30, 2013 12:48 pm

I can't quite get my head around this. If the VG fund is the real yield and the TIAA fund is the real yield plus CPI, then the CPI is -3.5%? Or am I doing this wrong?
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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby Doc » Wed Jan 30, 2013 1:03 pm

Browser wrote:Ahh - thanks Doc. Next question: which is more meaningful - inflation adjusted yield (TIAA) or non-adjusted yield (Vanguard)? Seems to me if the reason you're buying TiPS is to hedge real yield, the TIAA approach is more relevant. That would mean that, based on 30-day yield, you are losing a whopping amount of purchasing power in a TIPs fund. Not that you're not losing it in something else too....


Orion wrote:I can't quite get my head around this. If the VG fund is the real yield and the TIAA fund is the real yield plus CPI, then the CPI is -3.5%? Or am I doing this wrong?


I think both questions are answered by asking what meaning a 30 day inflation number means. Answer: meaningless. Orion, it would make the adjusted 30 day SEC yield erratic. Browser just take the unadjusted SEC yield and add 1.745993% which is my best estimate for the annual inflation rate at present. :happy
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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby Browser » Wed Jan 30, 2013 1:14 pm

Doc wrote:
Browser wrote:Ahh - thanks Doc. Next question: which is more meaningful - inflation adjusted yield (TIAA) or non-adjusted yield (Vanguard)? Seems to me if the reason you're buying TiPS is to hedge real yield, the TIAA approach is more relevant. That would mean that, based on 30-day yield, you are losing a whopping amount of purchasing power in a TIPs fund. Not that you're not losing it in something else too....


Orion wrote:I can't quite get my head around this. If the VG fund is the real yield and the TIAA fund is the real yield plus CPI, then the CPI is -3.5%? Or am I doing this wrong?


I think both questions are answered by asking what meaning a 30 day inflation number means. Answer: meaningless. Orion, it would make the adjusted 30 day SEC yield erratic. Browser just take the unadjusted SEC yield and add 1.745993% which is my best estimate for the annual inflation rate at present. :happy

That makes sense. I hadn't thought of adjusting reported yields for inflation before but it sounds right, particularly if you use the annual inflation rate which is less volatile. Isn't that a truer picture? They refer to the YTM of TIPs as "real yield" but maybe the real "real yield" is really the TIPs YTM adjusted for inflation?
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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby jjustice » Wed Jan 30, 2013 2:55 pm

What you call the "real 'real yield'" is usually called the nominal yield. Real yield + inflation adjustment = nominal yield.

I think that TIAA's calculation method is hopelessly mysterious, but Doc is right: form your expections of nominal yield by adding your best estimate of annual inflation to the real yield reported by Vanguard. Ignore TIAA's number.

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Re: Yield on TIPS fund: -4.5% or -1.1%?

Postby Browser » Wed Jan 30, 2013 4:19 pm

jjustice wrote:What you call the "real 'real yield'" is usually called the nominal yield. Real yield + inflation adjustment = nominal yield.

I think that TIAA's calculation method is hopelessly mysterious, but Doc is right: form your expections of nominal yield by adding your best estimate of annual inflation to the real yield reported by Vanguard. Ignore TIAA's number.

John

What I was trying to say is that it looks like TIAA takes the weighted official real yield of the TIPS in the fund portfolio (which is probably about -1% right now) and then they subtract the 30-day inflation rate (or something like that) from that to report a " 30-day inflation adjusted real yield". Since real yield is the nominal yield minus the inflation rate, they are subtracting the most recent 30-day inflation rate from that. That wouldn't give you the nominal yield. I'm just trying to get my head around this. I think the inflation rate that is used in calculating the real yield of a TIPs is based on the change in the last semi-annual CPI (maybe it's the annual CPI). TIAA's methodology would be sensitive to month-to-month CPI data. If the 30-day CPI has ticked up, the real yield reported by TIAA would become more negative, and vice versa. Not sure if this is what's going on or not, or what to make of it.
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