TIPS funds mixed ? [Why difference in 1 day returns?]

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TIPS funds mixed ? [Why difference in 1 day returns?]

Postby Taylor Larimore » Wed Apr 03, 2013 7:57 pm

Bogleheads:

Today (4/3/2013) Vanguard reported the following 1-day returns:

+.21% Inflation-Protect Securities Admiral (VAIPX)

-.04% Short-Term Inflation-Protected Securities Index Admiral (VTAPX)

Can anyone explain why the Intermediate-Term TIPS fund went UP and the Short-Term TIPS fund went DOWN?

Thank you and best wishes.
Taylor
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Re: TIPS funds mixed ?

Postby stratton » Wed Apr 03, 2013 8:00 pm

The yield curve shape changed?

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Re: TIPS funds mixed ?

Postby Taylor Larimore » Wed Apr 03, 2013 8:13 pm

stratton wrote:The yield curve shape changed?

Why?

It seems to me that if inflation or "expected inflation" changed, it would affect ALL TIPS in the same direction (up or down).

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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby LadyGeek » Wed Apr 03, 2013 8:21 pm

Taylor,

Morningstar is reporting the following 1 day NAV change. They both track as a loss.

Vanguard Inflation-Protected Secs Adm VAIPX: NAV $28.36, 1 day change of $-0.04, which is -0.14%

Vanguard Shrt-Term Infl-Prot Sec Idx Adm VTAPX: NAV: $25.23, 1 day change of $-0.01, which is -0.04%

I suspect the results are not reported correctly. This has happened before. Yahoo! Finance Displaying Incorrect S&P 500 Index Data

(I also retitled your thread for clarity.)
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Re: TIPS funds mixed ? Why difference in 1 day returns ?

Postby Taylor Larimore » Wed Apr 03, 2013 8:29 pm

Thank you, Lady Geek.

Best wishes
Taylor
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Re: TIPS funds mixed ?

Postby #Cruncher » Wed Apr 03, 2013 10:08 pm

Taylor Larimore wrote:Can anyone explain why the Intermediate-Term TIPS fund went UP [+0.21%] and the Short-Term TIPS fund went DOWN [-0.04%]?
stratton wrote:The yield curve shape changed?
Why? It seems to me that if [actual] inflation or "expected inflation" changed, it would affect ALL TIPS in the same direction (up or down).
Taylor, glancing at the WSJ TIPS real yields and prices 4/3/2013 vs the previous day, seems to confirm stratton's conjecture. The prices of most short term TIPS went down (shown in red); while that of most mid term and long term TIPS went up (shown in green].

You are right that changes in actual inflation affect TIPS of all maturities equally. The Reference CPI increased 0.03% from 230.34287 on 4/2/2013 to 230.40573 on 4/3/2013. (See Reference CPI 2013.) This small change affects the adjusted prices of all TIPS and the NAV of all TIPS funds by the same percentage. However, it does not affect the yield curve. And changes in expected inflation affect neither the price of TIPS nor its yield curve. Rather, it affects the price and yield of nominal Treasuries.

LadyGeek wrote:Morningstar is reporting the following 1 day NAV change. They both track as a loss.
Vanguard Inflation-Protected Secs Adm VAIPX: NAV $28.36, 1 day change of $-0.04, which is -0.14%
Vanguard Shrt-Term Infl-Prot Sec Idx Adm VTAPX: NAV: $25.23, 1 day change of $-0.01, which is -0.04%
Lady, these are the changes from the previous day for April 2nd. Taylor, is asking about the changes from the previous day for April 3rd.
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby stratton » Wed Apr 03, 2013 10:38 pm

Vanguard is switching their retirement income fund to short term TIPS. It has $10.1 in it so that's ~$2 billion in TIPS. That isn't all that much, but if others are doing it too...

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Re: TIPS funds mixed ?

Postby LadyGeek » Wed Apr 03, 2013 10:51 pm

#Cruncher wrote:Lady, these are the changes from the previous day for April 2nd. Taylor, is asking about the changes from the previous day for April 3rd.

Thanks for the correction, I misread the date. The associated TIPS pricing and yield info for Apr 02, 2013 is here. All of the price changes from the previous day are down (red). I gather that this has no relevance to the performance on April 03 (Taylor's question).
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It's happened again ?

Postby Taylor Larimore » Fri Apr 05, 2013 8:16 pm

Bogleheads:

It has happened again?

Today, April 5, 2013, Vanguard reports the same contrary results as two days earlier:

+0.42% Inflation-Protect Sec Adm VAIPX
-0.03% Short-Term Inflation-Protected Sec Idx Adm VTAPX

I want to thank those who gave me earlier replies.

Best wishes.
Taylor
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby IlikeJackB » Fri Apr 05, 2013 10:39 pm

Taylor, it's worse than that. VTAPX was down .12% today. (The price was down by $.03).
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby LadyGeek » Fri Apr 05, 2013 10:50 pm

All I can say is that the long-term TIPS changes are getting steeper every day. Compare: Wednesday, April 03, 2013, Thursday, April 04, 2013, and Friday, April 05, 2013

TIPS for 2043 Feb 15 daily changes are +30 (Wednesday), +72 (Thursday), +106 (Friday)

I don't know what this means.
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby Random Musings » Fri Apr 05, 2013 11:22 pm

LadyGeek wrote:All I can say is that the long-term TIPS changes are getting steeper every day. Compare: Wednesday, April 03, 2013, Thursday, April 04, 2013, and Friday, April 05, 2013

TIPS for 2043 Feb 15 daily changes are +30 (Wednesday), +72 (Thursday), +106 (Friday)

I don't know what this means.


What I see us that these bonds are trading extremely above par and you really have to stretch out duration to eek out a positive real yield. The equity markets over the past three days went down a little bit so perhaps investors were flocking to these "safe havens".

At these interest rate levels, raising cash via new debt (especially nominal) is pretty cheap. I see both positives and negatives with that.

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Short vs Longer TIPS

Postby EyeDee » Fri Apr 05, 2013 11:39 pm

.
Maybe I do not understand things correctly, but I thought changes in the TIPS funds are made up of two things: (1) what inflation does (or what people think inflation will do) and (2) what interest rates do (or what people think interest rates will do).

On days when they think interest rates are stable, the two funds would move similarly because the movement would be based upon inflation. On days when interest rate changes occur the two funds could move considerably different.

For example, today' situation (the longer fund up and the short-term fund down) could be caused by a minor reduction in inflation along with short-term interest rates holding or up and long-term interest rates down significantly (Edited to correct up/downs for rates).

Perhaps this article will help: https://personal.vanguard.com/us/insigh ... IPS-012013

From the article:
"Is there any real difference between short-term and long-term TIPS? And, if so, what are the tradeoffs between the two investments?

That's a great question, and it follows nicely from our discussion on real duration. All TIPS, regardless of their maturity, have the same inflation indexation mechanism. So, absent any movement in real interest rates, we would expect a short-term TIP and a long-term TIP to have the same return because their income payments are going to be generated from the same source.

Now, the difference between them is that they have very different real durations. So, when real interest rates do shift over time, the performance of a short TIP versus a long-term TIP can be very different and we see that if we look back over history. Short-term TIPS have been much less volatile than long-term TIPS and much less sensitive to changes in real interest rates. Now, this has two results. So, first it allows the income payments that are sensitive to inflation to drive a much larger proportion of the short-term TIPS return. Because the price isn't moving around due to real interest rate changes, you get more of that income and see more of that inflation sensitivity.

The other aspect that increases short-term TIPS' sensitivity to inflation is the fact that their prices are driven more by movements in inflation expectations themselves. So, when you have a move in inflation, short-term TIPS reflect that information much better than long-term TIPS do."
Last edited by EyeDee on Sat Apr 06, 2013 11:05 am, edited 1 time in total.
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby Mel Lindauer » Fri Apr 05, 2013 11:59 pm

Check this thread out, Taylor. viewtopic.php?p=1660692#p1660692
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We think we know, but we don't"

Postby Taylor Larimore » Sat Apr 06, 2013 7:40 am

Mel Lindauer wrote:Check this thread out, Taylor. viewtopic.php?p=1660692#p1660692

Mel:
I checked it out. I especially like this Reply by Falco:
All the more reason to pick your diversified portfolio and stick to it, regardless. We can look at all sorts of timeframes and scenarios, policy, what happens when rates rise or drop etc. and think we know, but we dont.

Thank you and best wishes.
Taylor
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Re: It's happened again ?

Postby Carpe » Sat Apr 06, 2013 10:57 am

Taylor Larimore wrote:Bogleheads:

It has happened again?

Today, April 5, 2013, Vanguard reports the same contrary results as two days earlier:

+0.42% Inflation-Protect Sec Adm VAIPX
-0.03% Short-Term Inflation-Protected Sec Idx Adm VTAPX

I want to thank those who gave me earlier replies.

Best wishes.
Taylor


If the two funds weren't able to vary in price independently, it is hard to see there being for justification of the move you made from the Inflation-Protect Securities fund to the Short-Term Inflation-Protected Securities Index fund. The increased correlation with inflation exhibited by the short term fund has to be at the expense of correlation with something else...nominal interest rates?
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby tfb » Sat Apr 06, 2013 11:12 am

When the yield curve flattens (long end down, short end up), the longer term fund will go up and the shorter term fund will go down. The opposite happens when the yield curve steepens. The shape of the yield curve can change, whether we are talking about nominal or real. Some time ago Vanguard published a paper saying the yield curve could flatten ("bear flattening").

Image

Whether it will come true or not is besides the point. Yield curve flattening doesn't have to be short end going up more than long end going up. It could also be short end going up and long end coming down. Similarly yield curve steepening doesn't have to be short end going down more than long end going down. It could also be short end going down and long end going up.

The shape of the yield curve changes. It's just how market works in response to supply and demand, partly driven by expectations, which sets prices, which determines the yield.
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby richard » Sat Apr 06, 2013 11:16 am

Looking at TIPS pricing on the WSJ web site, prices went down for maturities through July 2018 and rose for later maturities. Real yields continue to be negative until 2040, although not always increasing as maturity increases (i.e., the yield curve is somewhat bumpy through 2018).

A standard model for interest rates is that long rates reflect expected short rates plus a risk premium.

TIPS real interest rates tend to reflect expectations for the future of interest rates and the economy, desires for safety and desires for safe assets relative to supply. Expectations are clearly not optimistic, there is a great desire for safety and the government is not producing enough safe assets to meet demand.

Hard to read much into one day changes.
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Re: TIPS funds mixed ? [Why difference in 1 day returns?]

Postby LadyGeek » Sat Apr 06, 2013 12:23 pm

The wiki has a link to an excellent yield curve animation: Yield Curves

Direct link: Dynamic Yield Curve - It compares the yield curve to the S&P 500 index. Hit Pause and drag the vertical bar (S&P 500 plot) with your mouse. Very cool. 8-) I can infer a flattening over the last few days, but I'm not an expert.

Note: This animation uses java. Nothing works unless you have the latest version installed.
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Old timers must not lose what they'll need.

Postby Taylor Larimore » Sat Apr 06, 2013 4:00 pm

Carpe wrote:
Taylor Larimore wrote:Bogleheads:

It has happened again?

Today, April 5, 2013, Vanguard reports the same contrary results as two days earlier:

+0.42% Inflation-Protect Sec Adm VAIPX
-0.03% Short-Term Inflation-Protected Sec Idx Adm VTAPX

I want to thank those who gave me earlier replies.

Best wishes.
Taylor


If the two funds weren't able to vary in price independently, it is hard to see there being for justification of the move you made from the Inflation-Protect Securities fund to the Short-Term Inflation-Protected Securities Index fund. The increased correlation with inflation exhibited by the short term fund has to be at the expense of correlation with something else...nominal interest rates?

Carpe:
As you noted from an earlier post, In February I decided to exchange the 50% of our bond allocation in Intermediate-term TIPS (VIPSX) to short-term TIPS (VTAPX) to reduce risk:

* Prudent investing dictates that for most of us risk should be reduced as we age. We are in our late 80s.

* We are overweight in stock funds. Unfortunately, all three of our stock funds have large capital gains which will be triggered if we exchange to more bonds (capital gains are eliminated at death).

* Past performance has shown that VIPSX is more volatile than our 50% Total Bond Market Index Fund. Shorter-term TIPS should be a good way to reduce our overall portfolio risk without selling our Total Bond Market Index Fund with its valuable diversification (worst annual loss -2.7%).

* When interest rates increase, VTAPX should outperform VIPSX.

At our age underperformance is relatively unimportant. What IS important is to keep what we we'll need.

Best wishes.
Taylor
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Re: Old timers must not lose what they'll need.

Postby Carpe » Sat Apr 06, 2013 5:44 pm

Taylor Larimore wrote:
Carpe wrote:
Taylor Larimore wrote:Bogleheads:

It has happened again?

Today, April 5, 2013, Vanguard reports the same contrary results as two days earlier:

+0.42% Inflation-Protect Sec Adm VAIPX
-0.03% Short-Term Inflation-Protected Sec Idx Adm VTAPX

I want to thank those who gave me earlier replies.

Best wishes.
Taylor


If the two funds weren't able to vary in price independently, it is hard to see there being for justification of the move you made from the Inflation-Protect Securities fund to the Short-Term Inflation-Protected Securities Index fund. The increased correlation with inflation exhibited by the short term fund has to be at the expense of correlation with something else...nominal interest rates?

Carpe:
As you noted from an earlier post, In February I decided to exchange the 50% of our bond allocation in Intermediate-term TIPS (VIPSX) to short-term TIPS (VTAPX) to reduce risk:

* Prudent investing dictates that for most of us risk should be reduced as we age. We are in our late 80s.

* We are overweight in stock funds. Unfortunately, all three of our stock funds have large capital gains which will be triggered if we exchange to more bonds (capital gains are eliminated at death).

* Past performance has shown that VIPSX is more volatile than our 50% Total Bond Market Index Fund. Shorter-term TIPS should be a good way to reduce our overall portfolio risk without selling our Total Bond Market Index Fund with its valuable diversification (worst annual loss -2.7%).

* When interest rates increase, VTAPX should outperform VIPSX.

At our age underperformance is relatively unimportant. What IS important is to keep what we we'll need.

Best wishes.
Taylor


Taylor,

Yes, I understood your reason for the change back in February. What I found a little surprising was the question you posed in this thread, since the reason for the two funds behaving differently is surely related to the shorter term fund doing what it is supposed to do, and what you hoped it to do when you made the move - to reduce (nominal) interest rate sensitivity. The point I was trying to make was that if the two funds responded identically on a daily basis, the assumed reduction in risk would not be achieved by moving to the shorter term one.

I do share your values related to increased preservation and age.

Best Wishes
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Re: Old timers must not lose what they'll need.

Postby dbr » Sat Apr 06, 2013 6:01 pm

Carpe wrote:Taylor,

Yes, I understood your reason for the change back in February. What I found a little surprising was the question you posed in this thread, since the reason for the two funds behaving differently is surely related to the shorter term fund doing what it is supposed to do, and what you hoped it to do when you made the move - to reduce (nominal) interest rate sensitivity. The point I was trying to make was that if the two funds responded identically on a daily basis, the assumed reduction in risk would not be achieved by moving to the shorter term one.

I do share your values related to increased preservation and age.

Best Wishes


I think the issue was to the effect of one fund going up and the other going down rather than simply less sensitivity.

The possibility that the real yield curve can change shape, as can the nominal yield curve, is a subtlety that makes choices in duration a little more complex than might first seem.
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