30 yr TIPs auction announced 16 oct: yield=1.10%?

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Erwin
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Erwin »

One further comment on TIPs. I am always concern whether the true inflation is properly reflected in the CPI. So when I hear someone buying a 30 year TIP with such a miser real interst, I wonder.

I picked up the following comment from another blog;

When are TIPS attractive? Well let me share a little personal research- which everyone should do. In the last year my car insurance has gone up 4% (same car, a year older). My health insurance has gone up 12% and the utility company is lobbying for a 5% increase (which they’ll get). Just a checkup at the dentist went up 8%. And what was the CPI for the last year, under 2%? The famous bond investor Bill Gross has said for years that the government CPI figures are a hoax and I’m thinking he’s right. So laddering TIPS thinking you’re maintaining purchasing power may be just an illusion. (From a medium size Midwestern city.)

Any comments ?
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by petercooperjr »

mpt follower wrote:When are TIPS attractive? Well let me share a little personal research- which everyone should do. In the last year my car insurance has gone up 4% (same car, a year older). My health insurance has gone up 12% and the utility company is lobbying for a 5% increase (which they’ll get). Just a checkup at the dentist went up 8%. And what was the CPI for the last year, under 2%? The famous bond investor Bill Gross has said for years that the government CPI figures are a hoax and I’m thinking he’s right. So laddering TIPS thinking you’re maintaining purchasing power may be just an illusion. (From a medium size Midwestern city.)

Any comments ?
Well, the method used to compute CPI is pretty transparent. Look at the Detailed Expenditure Category report, which I found within a few clicks of going to the BLS's web site.
From Aug. 2013 through Aug. 2014:
  • Car insurance has gone up 4.1% (matches your number)
  • Health insurance has changed -1.8% (rather different from your number. Did your employer start paying a different percentage, or some other reason for your plan just didn't fit the national average there?)
  • Electricity has gone up 4.1% (not quite 5%, but you said that it hadn't taken effect yet).
  • Dental services up 2.0% (Doesn't break it down to checkups vs. other dental work, though.)
Now, it's quite likely that your expenditures aren't quite in the same proportions as the CPI uses, and it won't match your life exactly, but I don't think it's a hoax.
There are other threads on how reliable the CPI is, and while it may not perfectly match everybody I think it's probably as reasonable an approximation as what you're going to get.

If you want to buy TIPS (to get the thread a bit back more on track), and think that CPI is always understated by, say, 1% (or at least that it understates your personal rate since you spend more in different categories than the average person), then feel free to subtract that from the real yield to decide if it'll meet your needs. But be sure to do the same when measuring your real yield with any other investment.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by market timer »

petercooperjr wrote: [*] Health insurance has changed -1.8% (rather different from your number. Did your employer start paying a different percentage, or some other reason for your plan just didn't fit the national average there?)
Something to consider with regard to health insurance is that one's own premium should outpace inflation, due to consuming more health care as one ages. Someone at say, age 55, likely pays a lower premium than someone at age 56, all else equal. Inflation measures price changes holding quantity and quality constant, so comparing your premium as a 55-year-old vs. your premium as a 56-year-old is not holding quantity and quality constant.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

grok87 wrote:so i've had a look at the data. here is the source i used- see page 10 in particular.
There are lot of unanswered questions with the past real return data .

First, Larry often doesn't give the source for his data when he's writing short articles or Boglehead posts so we don't know the basis for his 2 to 3% typical real rate range . (That range is not that different from Grok's most recent 30 year data.)

The Deutsche Bank article is vague on the Treasury duration. I don't know if this is meaningful.
Deutshe Bank wrote:The stunning result of the last two month’s sell-off in equities and credit is that we now have
a situation where the best asset class over the last 25 years is now long-dated Treasuries.
In some previous threads about Treasury real yields there was some question as to how to define inflation in the past. Different definitions gave different results.

The different time frames that Grok is looking out bring up other questions.

The post WW2 period is definitely the most useful because it eliminates the great depression and the war itself. I'm not sure if the post war recovery is meaningful going forward. Likewise I am also skeptical of the high inflation rates in the 70's. I think the Fed changed from the money supply target to interest rate targets after this period. This may or may not have significance going forward. (We are not debating TIPS usefulness in periods of high unexpected performance but rather if 1% real for 30 years is an attractive investment.)

:?: Question for Grok. Are the GDP figures you used nominal or real?
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

Sents wrote:What is the advantage to buy 30 year TIPS from an auction over lets say Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)?
The securities in the fund is more or less weighted to the bond issuance where a 30 year ladder gives equal (real) weight to each year. This results in a much shorter duration for the fund than the ladder. So if you subscribe to Grok's long term philosophy you should prefer the ladder and if you think my philosophy is better you should go with the fund. Grok is also building a liability matching portfolio which is arguably less risky than the fund.

(I think that the VIPSX fund duration is also too long but I am not trying to build a LMP portfolio.)

Aside: Anyone. Is it LMP or MLP?
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Doc wrote:
grok87 wrote:so i've had a look at the data. here is the source i used- see page 10 in particular.
There are lot of unanswered questions with the past real return data .

First, Larry often doesn't give the source for his data when he's writing short articles or Boglehead posts so we don't know the basis for his 2 to 3% typical real rate range . (That range is not that different from Grok's most recent 30 year data.)

The Deutsche Bank article is vague on the Treasury duration. I don't know if this is meaningful.
Deutshe Bank wrote:The stunning result of the last two month’s sell-off in equities and credit is that we now have
a situation where the best asset class over the last 25 years is now long-dated Treasuries.
In some previous threads about Treasury real yields there was some question as to how to define inflation in the past. Different definitions gave different results.

The different time frames that Grok is looking out bring up other questions.

The post WW2 period is definitely the most useful because it eliminates the great depression and the war itself. I'm not sure if the post war recovery is meaningful going forward. Likewise I am also skeptical of the high inflation rates in the 70's. I think the Fed changed from the money supply target to interest rate targets after this period. This may or may not have significance going forward. (We are not debating TIPS usefulness in periods of high unexpected performance but rather if 1% real for 30 years is an attractive investment.)

:?: Question for Grok. Are the GDP figures you used nominal or real?
Hi Doc,

The GDP figure are real.
Not trying to be snarky but I did state that twice in the post!
:)

The long term treasury rates is a trickier question. I believe it is the 10 year.

The usefulness of the Deutsche Bank research, IMHO, is to put a slightly longer term perspective on the question: what real rate of returns might investors fairly expect from bonds. I think of it like the shiller pe/10 analysis for stocks.
If one looks at the last couple of decades one sees higher real rates.if you go back to the 50s-70s the real rates are actually quite poor.
so is 1% too low, i don't know. it may be. i'm not a big buyer at these levels, just doing my usual thrice-yearly dollar-cost-averaging-in purchase at auction.
cheers,
grok

p.s. I've been reading Harrison Bergeron...
RIP Mr. Bogle.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

grok87 wrote:Hi Doc,

The GDP figure are real.
Not trying to be snarky but I did state that twice in the post!


The long term treasury rates is a trickier question. I believe it is the 10 year.

The usefulness of the Deutsche Bank research, IMHO, is to put a slightly longer term perspective on the question: what real rate of returns might investors fairly expect from bonds. I think of it like the shiller pe/10 analysis for stocks.
If one looks at the last couple of decades one sees higher real rates.if you go back to the 50s-70s the real rates are actually quite poor.
so is 1% too low, i don't know. it may be. i'm not a big buyer at these levels, just doing my usual thrice-yearly dollar-cost-averaging-in purchase at auction.
cheers,
grok

p.s. I've been reading Harrison Bergeron..
Missed the real GNP. I'm guilty of skimming.

I don't know the answer to the Treasury rate question. Thirty years is way beyond my investment horizon. And if I was younger I would wait to establish a 30 year ladder until I was close to retirement. It's a matter of your "need and ability" to take risk. And if you don't have the ability to take risk, 30 year TIPS make a lot of sense as long as you don't "need" more income.

p.s. I ordered "Welcome to the Monkey House" on CD from the library. I'm to old to read. I need to be talked to.
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Erwin
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Erwin »

grok87 wrote:
Doc wrote:
grok87 wrote:so i've had a look at the data. here is the source i used- see page 10 in particular.
There are lot of unanswered questions with the past real return data .

First, Larry often doesn't give the source for his data when he's writing short articles or Boglehead posts so we don't know the basis for his 2 to 3% typical real rate range . (That range is not that different from Grok's most recent 30 year data.)

The Deutsche Bank article is vague on the Treasury duration. I don't know if this is meaningful.
Deutshe Bank wrote:The stunning result of the last two month’s sell-off in equities and credit is that we now have
a situation where the best asset class over the last 25 years is now long-dated Treasuries.
In some previous threads about Treasury real yields there was some question as to how to define inflation in the past. Different definitions gave different results.

The different time frames that Grok is looking out bring up other questions.

The post WW2 period is definitely the most useful because it eliminates the great depression and the war itself. I'm not sure if the post war recovery is meaningful going forward. Likewise I am also skeptical of the high inflation rates in the 70's. I think the Fed changed from the money supply target to interest rate targets after this period. This may or may not have significance going forward. (We are not debating TIPS usefulness in periods of high unexpected performance but rather if 1% real for 30 years is an attractive investment.)

:?: Question for Grok. Are the GDP figures you used nominal or real?
Hi Doc,

The GDP figure are real.
Not trying to be snarky but I did state that twice in the post!
:)

The long term treasury rates is a trickier question. I believe it is the 10 year.

The usefulness of the Deutsche Bank research, IMHO, is to put a slightly longer term perspective on the question: what real rate of returns might investors fairly expect from bonds. I think of it like the shiller pe/10 analysis for stocks.
If one looks at the last couple of decades one sees higher real rates.if you go back to the 50s-70s the real rates are actually quite poor.
so is 1% too low, i don't know. it may be. i'm not a big buyer at these levels, just doing my usual thrice-yearly dollar-cost-averaging-in purchase at auction.
cheers,
grok

p.s. I've been reading Harrison Bergeron...
If you think in terms of lending your hard earned money to the government, and only get inflation in return, it seems to me that you are lending it for free. So, for me the 1% you quoted seems fair. At 2% inflation iit is a decent reward. Under these conditions, I think that I would be willing to build the retirement ladder.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

In a concurrent thread "TIPS and Rick Ferri"
Larry Swedroe wrote: fwiw
The BIGGEST advantage of TIPS IMO is that they allow you to earn the term premium without taking inflation risk
Larry
The issue here is not inflation protection but the time frame. Do you want to commit to a 30 year investment at 1% real?

If Grok is right and long term real rates of 1% are "normal" or "expected" the answer is yes. But if Swedroe is right and the "normal/expected" for a ten is 2 to 3% the answer is no.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

secondary market yield now is 0.888%

at this point we'll be lucky to get 0.90% yield at auction.

I am still planning on buying at these levels...
RIP Mr. Bogle.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Angst »

grok87 wrote:secondary market yield now is 0.888%

at this point we'll be lucky to get 0.90% yield at auction.

I am still planning on buying at these levels...
things are kinda volatile right now. rates might be better by next week.
this morning, the 10 year T is down 8 points. :?
wait, now it's just 7.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Artsdoctor »

Doesn't this argument ultimately come down to whether or not you're interested in integrating a life cycle approach into your investment plan?

I've been buying and selling TIPS for 10 years based on Larry's guidelines, and it's worked out relatively well. I had been in the accumulation mode the whole time.

However, I've decided that the life cycle approach has merit and slowly started building a floor for retirement since it's about 10 years away. I've taken that money "off the table" as Bill Bernstein and many others have outlined because I think starting to build a floor 10 years before retirement is reasonable and the bull market since 2009 since has been very kind. A portion of that floor will provide me with guaranteed income from ages 65-85, but I've not put all of my eggs in that basket (so I hopefully won't have to hire that hit man that Doc described as I approach my 85th birthday). In reality, I'm building my own 20-year annuity but keeping control of the money. I could have bought an annuity and I still might much later in life; however, I wanted to keep control of my assets at least for now.

TIPS are certainly expensive now, but we've been waiting for those real rates to rise for several years now. If I wouldn't have started somewhere, I'd still be waiting and waiting. Investing in sequential 10-year TIPS and rolling them is an option but it's hard to plan for that (how many do you actually have to buy to fund that annual income supplement?). I decided that I can afford the security of the TIPS ladder, holding the bonds to maturity and never selling (unless the two of us both develop terminal illnesses), and taking more "aspirational risk" elsewhere. I'd love to have a real rate of 3% but I suspect I'd be waiting an awfully long time.

Larry's formula still holds if you're interesting in buying and selling TIPS. I don't think his numbers apply when you're building your retirement fixed income ladder and anticipating holding to maturity, or at least that how I've interpreted the data.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

Artsdoctor wrote:However, I've decided that the life cycle approach has merit and slowly started building a floor for retirement since it's about 10 years away.
If you buy an annuity to fund all or part of your retirement there is some "insurance" cost that you pay to the annuity company to cover the risk and expenses. If you you choose to use a TIPS ladder instead you avoid the insurance cost and expense but accept a lower return because of the low rates. If you are considering the life cycle approach I suggest that the TIPS ladder vs. annuity comparison is more appropriate then current real yield vs. historic real yield comparison that many of us including Doc rail about.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Artsdoctor »

^ Doc: Yes, that is absolutely correct. I believe that comparing a TIPS ladder to an annuity is the right approach, at least in my mind.

It is interesting, in a way. I like the life cycle approach and I am very comfortable building my "floor" with money that I've taken off the table. It will work itself out over the next few years as individual bonds and CDs mature, and I've made my peace with how expensive TIPS are. But I like the idea of having as close to a guaranteed income as you can get, even adjusted for inflation.

It just so happens that I've been able to do that with my tax-advantaged accounts. However, I would not have been happy with a TIPS ladder being my entire retirement! By having the floor, I can really afford to take risk on the taxable (and more equity-heavy) side. Depending on how things go over several years, I can increase the floor amount and/or extend the floor further out.

For some reason, I find that this approach allows me to sleep the best at night. I don't kick myself for locking in a low real rate because I can't do anything about it and once I committed to a TIPS ladder, I've accepted it for what it is. I can't change my age and I feel this 10-year interval between now and retirement is really the best time to do it, regardless of rates.

If I were buying and selling TIPS as part of an active accumulation portfolio, I wouldn't hesitate to use Larry's formula because it makes intuitive sense.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Angst »

Doc wrote:
Artsdoctor wrote:However, I've decided that the life cycle approach has merit and slowly started building a floor for retirement since it's about 10 years away.
If you buy an annuity to fund all or part of your retirement there is some "insurance" cost that you pay to the annuity company to cover the risk and expenses. If you you choose to use a TIPS ladder instead you avoid the insurance cost and expense but accept a lower return because of the low rates. If you are considering the life cycle approach I suggest that the TIPS ladder vs. annuity comparison is more appropriate then current real yield vs. historic real yield comparison that many of us including Doc rail about.
I do have trouble wrapping my feeble brain around this, but I try. To me, the annuity vs. ladder comparison seems more like apples vs. oranges while the current vs. historic real yield comparison boils down to an argument about the price (or value) of oranges, and isn't that what it's all about? I also note that mortality credits don't come to bear in a TIPS ladder.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Artsdoctor »

Angst,

A TIPS ladder and an annuity accomplish similar goals, but of course they're very different products. There are annuities that have fixed time periods, and there are annuities that pay out for the rest of your life. Some annuities are fixed amounts, and some are indexed to inflation. The more bells and whistles (indexed to inflation, spousal benefits, guaranteed pay-outs), the more they cost, as you'd imagine.

At the end of the day, what you're after is a guaranteed income flow. It's true that at the end of a 20-year TIPS ladder, the money is gone. However, I have no intention of putting all of my money in a TIPS and I will extend the "floor" with either excess earnings or buy a SPIA.

The price of the TIPS ladder nowadays is unfortunately high and of course I wish that were not the case. It doesn't do me any good to compare the real rate of return to what once was because I'm building a floor over the next few years and I don't have a crystal ball or the luxury of waiting. But annuities also take into consideration current interest rates so you're not getting rich on them either.

Both have benefits and disadvantages. At 55, I can't stand the idea of signing over a very large chunk of money to an insurance company because I can't wrap my head around how likely it will be that the insurance company will be solvent in 30 years.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Angst »

Artsdoctor wrote:At the end of the day, what you're after is a guaranteed income flow. It's true that at the end of a 20-year TIPS ladder, the money is gone. However, I have no intention of putting all of my money in a TIPS and I will extend the "floor" with either excess earnings or buy a SPIA.
ADr, I think we're pretty much on the same page, and in the same boat too, for that matter, if I may mix metaphors. I wouldn't want to hitch myself to an insurance company 30 years ahead of time either; I'll look into an SPIA in my 70's at the earliest. However, I also think I'll continue building my TIPS ladder to 90 or perhaps even beyond. I haven't purchased it all outright but am accumulating new rungs annually as well as filling in earlier ones as I can and am willing to accept current rates. Regardless, the ladder is only a piece to a puzzle that also includes SS, company pension, equity and so forth. I look at successful retirement planning as something of a moving target, one that probably won't completely settle down and come into focus until sometime after I've retired, perhaps long after, and then I'll die!
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Angst wrote:
Artsdoctor wrote:At the end of the day, what you're after is a guaranteed income flow. It's true that at the end of a 20-year TIPS ladder, the money is gone. However, I have no intention of putting all of my money in a TIPS and I will extend the "floor" with either excess earnings or buy a SPIA.
ADr, I think we're pretty much on the same page, and in the same boat too, for that matter, if I may mix metaphors. I wouldn't want to hitch myself to an insurance company 30 years ahead of time either; I'll look into an SPIA in my 70's at the earliest. However, I also think I'll continue building my TIPS ladder to 90 or perhaps even beyond. I haven't purchased it all outright but am accumulating new rungs annually as well as filling in earlier ones as I can and am willing to accept current rates. Regardless, the ladder is only a piece to a puzzle that also includes SS, company pension, equity and so forth. I look at successful retirement planning as something of a moving target, one that probably won't completely settle down and come into focus until sometime after I've retired, perhaps long after, and then I'll die!
make that a "me three" on the credit risk of an insurance company for 30 years being undesirable.

the other aspect of it is that you can think of an annuity as insurance (against running out of money). In general insurance is expensive and you only want to buy the insurance you need. you want to avoid swapping dollars back and forth with the insurance company. what i mean by that is "paying a premium"- for annuity payouts that you are virtually certain to get because you are virtually certain to be alive. in other words where the mortality credits are low.

so one strategy that i think can make sense is building an annuity ladder up to or a little past (say 5-10 years) past one's life expectancy. then for the years beyond that ideally you could buy a deferred inflation-linked annuity. not sure if that product exists yet, at least in the form i would want to buy it (i hear there are some deferred annuities that say they are inflation linked but aren't really).
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Erwin »

Although I have been retired for 11 years (I am 66) and have lived comfortable out of my savings (covering over 50% of my needs) without building any type of long term bond ladder, I have recently began thinking about it, and after reading all the different options, have come to the conclusion that Evensky's 5 year cash reserve (as a TIPs or zero coupon treasury ladder) that is replenished annual (assuming the market cooperates) to always cover 5 years is very adequate. I have had so many unexpected events in my life that I am uncomfortable locking into a 30 year ladder.
See Wade Pfau's work on retirement floors for details: http://www.advisorperspectives.com/news ... rategy.php
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Angst »

mptf, I think I understand your perspective and it makes sense to me. My ladder will accommodate only about 20% of my expected annual needs. I too have some fear of both unexpected events as well as simply the locking in of money into low yield LT TIPS. It's important to find a balance between the various sources and types of retirement savings one is comfortable with using. A rolling 5 year reserve ladder (covering 100% expenses?) sounds like another effective and perhaps alternative tool worth considering. (I still need to check Wade's link - I believe I read it a year or so ago.)
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by White Coat Investor »

Sents wrote:What is the advantage to buy 30 year TIPS from an auction over lets say Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)?
No ER to pay plus you don't have to worry about the effects on you of other investors in the fund selling low, forcing the fund to sell low, and hurting your returns. I buy the fund, but I understand why some don't. Bernstein is very much against buying any kind of treasury fund. I don't think it's that big of a deal to pay 10 basis points for a well run fund.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by #Cruncher »

The auction has been officially announced (see auction announcement PDF file.) It will take place next Thursday 10/23/2014 and the issue date will be 10/31/2014. $7 billion is being offered. This will make this year's total offering of $23 billion ($9, $7, and $7 billion in each of three auctions) the same as last year (see list of 30-year TIPS auctions).

To help in deciding whether or not to participate in this auction, here are yesterday's yields compared to what they were on 6/19/2014, the date of the previous 30-year TIPS auction:

TIPS Constant Maturity Yields (Daily Treasury Real Yield Curve Rates 2014)

Code: Select all

  Date       5yr      7yr      10yr     20yr     30yr
--------    -----    -----     ----     ----     ----
06/19/14    (0.31)    0.23     0.39     0.87     1.14
10/15/14     0.00     0.26     0.29     0.65     0.88
             ----     ----     ----     ----     ----
Change       0.31     0.03    (0.10)   (0.22)   (0.26)
5-year TIPS rates have risen over the past four months while the rates on longer terms TIPS have fallen. In particular the 30-year rate has fallen 0.26% points to only 0.88%. 5-year TIPS look much better compared to 30-year TIPS than they did four months ago. Last June one was rewarded with 0.058% points of higher yield per year of maturity for the longer term [ (1.14 + 0.31) / 25 ]. Today one is rewarded with only 0.035% points per year [ (0.88 - 0.00) / 25 ].

Nominal Treasury Constant Maturity Yields (Daily Treasury Yield Curve Rates 2014)

Code: Select all

06/19/14     1.71     2.22     2.64     3.20     3.47
10/15/14     1.37     1.80     2.15     2.64     2.92
             ----     ----     ----     ----     ----
Change      (0.34)   (0.42)   (0.49)   (0.56)   (0.55)
Rates have fallen for all maturities of nominal Treasuries over the past four months.

Breakeven Inflation Rates (Nominal rates less TIPS rates)

Code: Select all

06/19/14     2.02     1.99     2.25     2.33     2.33
10/15/14     1.37     1.54     1.86     1.99     2.04
             ----     ----     ----     ----     ----
Change      (0.65)   (0.45)   (0.39)   (0.34)   (0.29)
The market is anticipating less growth in the CPI than it was four months ago, particularly over the next five years. A 30-year TIPS bought today will do better than a 30-year nominal Treasury bought today if the CPI rises more than 2.04% per year. For purchases four months ago the CPI would have had to rise more than 2.33% per year for the TIPS to come out ahead.

Edit. Added following after seeing Grok's estimate below of the total purchase cost for $10,000 of face value. The middle column corresponds exactly to his estimate. The three columns to the left are if the yield turns out lower and the three to the right are if it turns out higher.

Code: Select all

                                    [ Grok ]
     0.70%      0.75%      0.80%    0.86214%    0.90%       0.95%      1.00%   Yield
  ---------  ---------  ---------  ---------  ---------  ---------  --------
   117.848%   116.408%   114.987%   113.250%   112.206%   110.844%   109.501%  Price
  12,027.77  11,880.79  11,735.85  11,558.52  11,451.96  11,312.95  11,175.86  Total cost at 1.02062 index ratio
  12,057.13  11,910.16  11,765.22  11,587.88  11,481.33  11,342.32  11,205.23  Total cost incl $29.36 accrued interest
I computed these figures using the Excel PRICE() and ACCRINT() functions. For example, here they are for the case of a 0.86214% [ * ] yield. Each can be pasted, starting with the '=' sign, into an Excel cell and modified if you want the result for different parameters:

Code: Select all

11,558.52 =1.02062 * 10000 * (PRICE(  DATE(2014, 10, 31), DATE(2044, 2, 15), 1.375%, 0.86214%, 100, 2, 1) / 100)
    29.36 =1.02062 * 10000 *  ACCRINT(DATE(2014,  8, 15), DATE(2015, 2, 15), DATE(2014, 10, 31), 1.375%, 1, 2, 1)
2nd edit: * This yield could never occur at a Treasury auction since bids are limited to 3 decimal places. E.g., 0.862% or 0.863% would be possible, but not 0.86214%. I'm using it only because it corresponds to the 113.25% price Grok mentions.
Last edited by #Cruncher on Thu Oct 16, 2014 11:26 pm, edited 2 times in total.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

#Cruncher wrote:The auction has been officially announced...
thanks for the useful info #Cruncher.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Just placed my order. Here is a guide to help decide how much each bond will likely cost at auction:

1) Bloomberg shows the current price on the secondary at 113 + 8/32 = 113.25
2) The inflation factor is 1.02062
3) The accrued interest per bond is 2.936 per $1,000 of face or 0.2936 per $100 of face.
4) So if the price on Bloomberg is P, then the likely auction cost of a bond is 1.02062 * P + 0.2936
5) So right now the likely auction cost is 115.8788
6) Or in other words if you want to buy 10 bonds or $10,000 of face then the likely auction cost would be $11,587.88

hope this helps
cheers,
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

grok87 wrote:Just placed my order. Here is a guide to help decide how much each bond will likely cost at auction:

1) Bloomberg shows the current price on the secondary at 113 + 8/32 = 113.25
2) The inflation factor is 1.02062
3) The accrued interest per bond is 2.936 per $1,000 of face or 0.2936 per $100 of face.
4) So if the price on Bloomberg is P, then the likely auction cost of a bond is 1.02062 * P + 0.2936
5) So right now the likely auction cost is 115.8788
6) Or in other words if you want to buy 10 bonds or $10,000 of face then the likely auction cost would be $11,587.88

hope this helps
cheers,
And you are going to have to remember to amortize that extra $113 over 30 years every year for the next 30 years if you hold it in taxable.

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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by FinancialDave »

grok87 wrote:Just placed my order. Here is a guide to help decide how much each bond will likely cost at auction:

1) Bloomberg shows the current price on the secondary at 113 + 8/32 = 113.25
2) The inflation factor is 1.02062
3) The accrued interest per bond is 2.936 per $1,000 of face or 0.2936 per $100 of face.
4) So if the price on Bloomberg is P, then the likely auction cost of a bond is 1.02062 * P + 0.2936
5) So right now the likely auction cost is 115.8788
6) Or in other words if you want to buy 10 bonds or $10,000 of face then the likely auction cost would be $11,587.88

hope this helps
cheers,
Am I reading this correctly in that if inflation is zero and out of the picture then this 30 year bond pays you .2936% per year (or is it per 6 mo?) in interest??

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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by #Cruncher »

Doc wrote:
grok87 wrote:1) Bloomberg shows the current price on the secondary at 113 + 8/32 = 113.25
2) The inflation factor is 1.02062 ...
And you are going to have to remember to amortize that extra $113 over 30 years every year for the next 30 years if you hold it in taxable.
You don't have to amortize each year. You could ignore the purchase premium. Or you could wait until 2044 to deduct it. But in the first case you'd be paying more taxes than necessary; and in the second case, paying them sooner than necessary.

By the way, if the price is 113.25%, the premium per $1,000 face value is $135.23, not $113.

Code: Select all

135.23 = 1000 * 13.25% * 1.02062
FinancialDave wrote:
grok87 wrote:... 3) The accrued interest per bond is 2.936 per $1,000 of face or 0.2936 per $100 of face. ...
Am I reading this correctly in that if inflation is zero and out of the picture then this 30 year bond pays you .2936% per year (or is it per 6 mo?) in interest??
No, $0.2936 is only the interest accrued for the period from 8/15/2014 (the previous interest payment date) until the 10/31/2014 issue date. It is calculated as follows:

Code: Select all

  $1.375      annual interest per $100 of principal
= $0.6875     per six month period
= $0.0037364  per day for the 184 days from 8/15/2014 to 2/15/2015, the next interest payment date
= $0.2877     for the 77 days from 8/15/2014 to 10/31/2014
= $0.2936     when adjusted for the 1.02062 inflation factor on 10/31/2014
Edited adding... Here's the rationale for charging the purchaser the accrued interest: On 2/15/2015, the next interest payment date, he will receive interest for the full six-month period 8/15/2014 - 2/15/2015. But since he will only be paying for the bonds on 10/31/2014, it's fair that he reimburse the Treasury for the 8/15/2014 - 10/31/2014 portion of that period.
Last edited by #Cruncher on Thu Oct 16, 2014 11:06 pm, edited 1 time in total.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by rca1824 »

Doc wrote: Another approach to the same result is to buy a ten and roll it three times or some combination of the same. That way you don't lock in the low 1% yield for thirty years.
Doesn't this violate the no-arbitrage condition of market equilibrium? Are you assume the market is in disequilibrium? It seems that there is a trade-off: current 1% yield should be an unbiased estimate of what real yields will be over the next 30 years, so if you plan to buy ten-years and roll them, you must know something the market doesn't know about the expected direction yields will move. Otherwise, no one would buy 30-year bonds and always buy a shorter term and reroll them.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

Re amortization of (market) bond premium
#Cruncher wrote: You don't have to amortize each year. You could ignore the purchase premium. Or you could wait until 2044 to deduct it.
Maybe I have this backwards? You have to accrete Original Issue Discount (which is also the TIPS inflation increase). You have the choice of accrediting market discount or waiting until the sale/maturity. Since it's advantageous to amortize the bond market premium instead of waiting until the end I just assumed it was the (required?) default. Maybe I'm wrong about the "required".
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

rca1824 wrote:
Doc wrote: Another approach to the same result is to buy a ten and roll it three times or some combination of the same. That way you don't lock in the low 1% yield for thirty years.
Doesn't this violate the no-arbitrage condition of market equilibrium? Are you assume the market is in disequilibrium? It seems that there is a trade-off: current 1% yield should be an unbiased estimate of what real yields will be over the next 30 years, so if you plan to buy ten-years and roll them, you must know something the market doesn't know about the expected direction yields will move. Otherwise, no one would buy 30-year bonds and always buy a shorter term and reroll them.
No it doesn't violate the no-arbitrage condition. By that criteria today's yield (or price) is correct.

But some people will buy the 30 at low yield because they want to match a future nominal obligation with a risk free security. This is Grok's major reason for having a 30 year ladder. Insurance companies may have similar needs. But it still remains that the real yield is well below historical norms. Also the Fed is keeping interest rates abnormally low to stimulate the economy. As investors interested in funding our retirement we have to ask ourselves if we want this risk free low return investment or are we willing to take on more risk by buying the ten now and hoping/expecting that the return on a "twenty" will be higher ten yen years from now.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Johno »

rca1824 wrote:
Doc wrote: Another approach to the same result is to buy a ten and roll it three times or some combination of the same. That way you don't lock in the low 1% yield for thirty years.
Doesn't this violate the no-arbitrage condition of market equilibrium? Are you assume the market is in disequilibrium? It seems that there is a trade-off: current 1% yield should be an unbiased estimate of what real yields will be over the next 30 years, so if you plan to buy ten-years and roll them, you must know something the market doesn't know about the expected direction yields will move. Otherwise, no one would buy 30-year bonds and always buy a shorter term and reroll them.
There's no reason to believe that bond term premia (in all rates, or in this case real rates) are unbiased estimators of future rates. Again to take the more familiar case of all in nominal rates, it's not saying the market is in disequilibrium or that you 'know something it doesn't' to borrow short and lend long. That's what banks do as a business, and it doesn't depend on them 'knowing what the market doesn't'. They are merely harvesting a rate/credit spread term premium, at risk to getting burned when actual future rate/spread movements (and/or realized defaults) burn through that premium, for which they have capital*. But it's well recognized that there's a term premium in rates and credit spreads (that is that future spot rates generally come out lower than what's implied by current forward rates, same with forward credit spreads). It's no violation of any arbitrage condition.

It's harder to say with any certainty what the term premium is for real yields on TIPS. Assuming the 30yr bond has a positive term premium (excess yield over the market's actual ie. *risk inclusive*, not *risk neutral* expectation of future short rates for the next 30 yrs) and more so than the 10 yr say, then we might assume the TIPS real yield term premium goes in the same direction, in which case you really would be betting against the market to buy and roll 10yr TIPS three times rather than accept the 30 yr real yield now. However again it's hard to say.

And my basic reaction to somebody saying they are willing to 'play' the TIPS real yield would be: OK fine. The difference in TIPS v regular bonds is that, obviously, the real and inflation compensation components are unbundled. The big down side risk for which we buy TIPS is that inflation eventually accelerates to the level of the late 1970's early 80's say, or perhaps worse, sometime in the next 30yrs. But that risk is equally well covered by the 30yr or rolling the 10 yr. In fact it's arguably better covered by the latter strategy because high inflation will probably bring about an expectation of higher future real rates (to quell it), ie cheaper 10yr TIPS. OTOH the downside risk of 'playing' the real rate is pretty minor, that it might be around zero for 3 consecutive 10 yr periods rather than locking in 1%: so what, in the big picture of a balanced portfolio. Of course that's not the absolute max downside which could be 3 consecutive 10yr periods of big minus TIPS yield but that's extremely unlikely IMO.

*and perhaps public support when capital is exhausted; but this really doesn't change the point: banks borrowed short and lent long for centuries before there were central banks.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by elgob.bogle »

FWIW - One can buy 5-yr TIPS bonds and 10-yr TIPS bonds each year for 5 years and end up with a 10-yr TIPs ladder at the end of 5 years. I began building mine at age 65 and will complete it just before I turn 70 at which time I will begin to receive Social Security. The two combined will served as my floor. The TIPS ladder will constitute about 1/3 of our combined portfolio, and will be held in our Roth IRA accounts. Depending on the status of the stock market, we plan to draw down Traditional IRA's & 401k account or tap into the ladder as needed. If we don't need the TIPS, we'll roll them over into new bonds each year. We like the idea of original issuance TIPS so that we also will have some deflation protection.

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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by FinancialDave »

elgob.bogle wrote:FWIW - One can buy 5-yr TIPS bonds and 10-yr TIPS bonds each year for 5 years and end up with a 10-yr TIPs ladder at the end of 5 years. I began building mine at age 65 and will complete it just before I turn 70 at which time I will begin to receive Social Security. The two combined will served as my floor. The TIPS ladder will constitute about 1/3 of our combined portfolio, and will be held in our Roth IRA accounts. Depending on the status of the stock market, we plan to draw down Traditional IRA's & 401k account or tap into the ladder as needed. If we don't need the TIPS, we'll roll them over into new bonds each year. We like the idea of original issuance TIPS so that we also will have some deflation protection.

elgob

elgob,
I applaud you for a well thought out plan and even though I am not much of a TIPS fan, I like very much that you have 1/3 of your portfolio in a Roth account -- I wish I was so lucky, though I do have about 8 years until age 70 to get me there, and I think for me it will be more fun spending down my IRA, than just converting it, though I will probably do a little of both.

fd

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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Johno wrote:
rca1824 wrote:
Doc wrote: Another approach to the same result is to buy a ten and roll it three times or some combination of the same. That way you don't lock in the low 1% yield for thirty years.
Doesn't this violate the no-arbitrage condition of market equilibrium? Are you assume the market is in disequilibrium? It seems that there is a trade-off: current 1% yield should be an unbiased estimate of what real yields will be over the next 30 years, so if you plan to buy ten-years and roll them, you must know something the market doesn't know about the expected direction yields will move. Otherwise, no one would buy 30-year bonds and always buy a shorter term and reroll them.
There's no reason to believe that bond term premia (in all rates, or in this case real rates) are unbiased estimators of future rates. Again to take the more familiar case of all in nominal rates, it's not saying the market is in disequilibrium or that you 'know something it doesn't' to borrow short and lend long. That's what banks do as a business, and it doesn't depend on them 'knowing what the market doesn't'. They are merely harvesting a rate/credit spread term premium, at risk to getting burned when actual future rate/spread movements (and/or realized defaults) burn through that premium, for which they have capital*. But it's well recognized that there's a term premium in rates and credit spreads (that is that future spot rates generally come out lower than what's implied by current forward rates, same with forward credit spreads). It's no violation of any arbitrage condition.

It's harder to say with any certainty what the term premium is for real yields on TIPS. Assuming the 30yr bond has a positive term premium (excess yield over the market's actual ie. *risk inclusive*, not *risk neutral* expectation of future short rates for the next 30 yrs) and more so than the 10 yr say, then we might assume the TIPS real yield term premium goes in the same direction, in which case you really would be betting against the market to buy and roll 10yr TIPS three times rather than accept the 30 yr real yield now. However again it's hard to say.

And my basic reaction to somebody saying they are willing to 'play' the TIPS real yield would be: OK fine. The difference in TIPS v regular bonds is that, obviously, the real and inflation compensation components are unbundled. The big down side risk for which we buy TIPS is that inflation eventually accelerates to the level of the late 1970's early 80's say, or perhaps worse, sometime in the next 30yrs. But that risk is equally well covered by the 30yr or rolling the 10 yr. In fact it's arguably better covered by the latter strategy because high inflation will probably bring about an expectation of higher future real rates (to quell it), ie cheaper 10yr TIPS. OTOH the downside risk of 'playing' the real rate is pretty minor, that it might be around zero for 3 consecutive 10 yr periods rather than locking in 1%: so what, in the big picture of a balanced portfolio. Of course that's not the absolute max downside which could be 3 consecutive 10yr periods of big minus TIPS yield but that's extremely unlikely IMO.

*and perhaps public support when capital is exhausted; but this really doesn't change the point: banks borrowed short and lent long for centuries before there were central banks.
Thanks Johno for your thoughtful post.
A couple of thoughts:

1) I'm not sure about the credit term premium. I did a post a while ago arguing that for long term corporate bonds the credit risk is not well rewarded. http://www.bogleheads.org/forum/viewtop ... 0&t=116549

2) "high inflation will probably bring about an expectation of higher future real rates"- I think the problem is we just don't know. TIPs obviously weren't around in the late 70s/early 80s. Even if they were the past may not repeat. 10 year TIPS real rates were negative from late 2011 to mid 2013. Personally my investment philosophy is not to buy assets that have negative prospective real returns. So for me the risk would be getting shut out of the tips market for a substantial period of time.

cheers,
RIP Mr. Bogle.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

grok87 wrote:Personally my investment philosophy is not to buy assets that have negative prospective real returns. So for me the risk would be getting shut out of the tips market for a substantial period of time.
This is basically my argument for not buying the thirty now. You don't need to shut yourself out of the TIPS market. Just go shorter. The philosophy of not buying assets that have negative prospective real returns is a red herring. Would you buy if the real yield was +0.01 but not -0.01? How about +0.30 versus -0.01? The negative sign is not relevant. It is the "spread" that matters.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Johno »

grok87 wrote:
Johno wrote:
rca1824 wrote:
Doc wrote: Another approach to the same result is to buy a ten and roll it three times or some combination of the same. That way you don't lock in the low 1% yield for thirty years.
Doesn't this violate the no-arbitrage condition of market equilibrium?
There's no reason to believe that bond term premia (in all rates, or in this case real rates) are unbiased estimators of future rates...it's well recognized that there's a term premium in rates and credit spreads (that is that future spot rates generally come out lower than what's implied by current forward rates, same with forward credit spreads). It's no violation of any arbitrage condition.
Thanks Johno for your thoughtful post.
A couple of thoughts:

1) I'm not sure about the credit term premium. I did a post a while ago arguing that for long term corporate bonds the credit risk is not well rewarded. http://www.bogleheads.org/forum/viewtop ... 0&t=116549

2) "high inflation will probably bring about an expectation of higher future real rates"- I think the problem is we just don't know. TIPs obviously weren't around in the late 70s/early 80s. Even if they were the past may not repeat. 10 year TIPS real rates were negative from late 2011 to mid 2013. Personally my investment philosophy is not to buy assets that have negative prospective real returns. So for me the risk would be getting shut out of the tips market for a substantial period of time.
1. Your post addressed the return of corporate bond index funds v treasuries, which isn't really the same question as whether credit spreads have a term premium. I agree with that post of yours, and I quoted in another thread (sorry not to look up and link but you can see the book) quoting Ilmanen's book 'Expected Returns', evidence of how investment grade corporate bond *index* returns lose a significant % of the spread to the phenomenon of having to sell bonds out of the portfolio, at a wider spread than which they were purchased, when the rating goes below BBB-/Baa3. Outright defaults of investment grade bonds are quite rare, but a more significant % cross that threshold during the life, have to be sold (or are generally sold) by investment grade managers, and in doing this they hand over a risk premium to BB/Ba buyers which is a surprising proportion of the spread of the whole portfolio over treasuries. IOW bonds purchased as investment grade held to maturity or default, even if they later become junk bonds, noticeably outperform continuously investment grade index returns. So again I agree and have no use for strictly investment grade corporate bond funds.

However back on the somewhat different term premium point, one can calculate the default probability of various credit levels based on S&P/Moody's historical 'transition tables' for various maturities and find that long term credit spreads are generally further in excess of the objective historical default loss estimate than short term spreads are. There's an uncertainty premium, and it increases with maturity, at least to a certain point and in general. Again, this is plain vanilla corporate banking in a nutshell, and while various banks might make some or much or their money in other (consumer, trading and investment banking etc) businesses, they make some, and some banks make most, in that plain old business. Eg. the bank's *own* long term credit spread over 'risk free' might not be way lower than the client's, but the bank borrows short and lends long, reaping the term premium of credit spread, getting burned or blowing up altogether periodically, but it's been going on for centuries.

2. No we don't know, but I still believe it's much more likely than not TIPS would cheapen in an inflationary outburst, and a strange twist to TIPS that has to be taken into account. Generally if something hedges us against a risk and that risk begins to appear greater to the market than it did, we have to kick ourselves for not having bought that hedge before, because it will almost certainly have gotten more expensive. But that's pretty clearly not as true with TIPS. Whether we agree or not TIPS real yields would rise in a higher inflation environment, I can see no plausible reason to expect they'd particularly narrow (or get more negative) in a higher inflation environment. So while TIPS mainly are to guard against inflation, there's no particular reason I can see to go out and grab that at any price when inflation expectations ares very low, like now*. And while they weren't around in the US in the early 80's, unless the market had been grossly inefficient TIPS yields would surely have skyrocketed once it was apparent Volker would raise short rates to practically any real level in order to quell inflation; though true that doesn't totally predict what would happen in a future inflationary outburst. If inflation was high and it seemed the Fed didn't care about it, then the effect wouldn't be the same.

*the TIPS v nominal treasuries breakeven rate now is ~1.6% in 5yrs, 1.9% in 10's, notably lower than only a few months ago, and lower than the last time nominal yields were at these levels.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Artsdoctor »

^ But doesn't this depend on what you plan on doing with your TIPS? If you're going to make on play on real versus nominal returns and anticipate buying and selling accordingly, I would agree with you. But if you're going to build a specific ladder taking you from 65-85, then I think you just have to suck it up. TIPS have been expensive for years now and waiting until you get your 2-2.5% real return could be many years into the future still. I wish I would have built a TIPS ladder in 2008 when real yields were ridiculously high but I didn't. On the other end, I've got to secure my basic floor for retirement income and I'd like to use TIPS to do it; consequently, I'm forced to buy into a low rate environment, at least partially. You could argue to just buy and roll in 10 year intervals but I find those calculations very difficult to wrap my head around.

About 1/2 of my retirement income will come from TIPS and the other half will come from a more traditional Total Return method. I'm still unsure what social security will be able to offer me (since I'm about 11 years away from my FRA) so I'm viewing it as a bit of bonus when I turn 70 perhaps to pay for income taxes.

I still think that a TIPS ladder is a secure part of a portfolio although definitely admit that they are very expensive instruments at this moment.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Johno wrote:
grok87 wrote:
Johno wrote:
rca1824 wrote:
Doc wrote: Another approach to the same result is to buy a ten and roll it three times or some combination of the same. That way you don't lock in the low 1% yield for thirty years.
Doesn't this violate the no-arbitrage condition of market equilibrium?
There's no reason to believe that bond term premia (in all rates, or in this case real rates) are unbiased estimators of future rates...it's well recognized that there's a term premium in rates and credit spreads (that is that future spot rates generally come out lower than what's implied by current forward rates, same with forward credit spreads). It's no violation of any arbitrage condition.
Thanks Johno for your thoughtful post.
A couple of thoughts:

1) I'm not sure about the credit term premium. I did a post a while ago arguing that for long term corporate bonds the credit risk is not well rewarded. http://www.bogleheads.org/forum/viewtop ... 0&t=116549

2) "high inflation will probably bring about an expectation of higher future real rates"- I think the problem is we just don't know. TIPs obviously weren't around in the late 70s/early 80s. Even if they were the past may not repeat. 10 year TIPS real rates were negative from late 2011 to mid 2013. Personally my investment philosophy is not to buy assets that have negative prospective real returns. So for me the risk would be getting shut out of the tips market for a substantial period of time.
1. Your post addressed the return of corporate bond index funds v treasuries, which isn't really the same question as whether credit spreads have a term premium. I agree with that post of yours, and I quoted in another thread (sorry not to look up and link but you can see the book) quoting Ilmanen's book 'Expected Returns', evidence of how investment grade corporate bond *index* returns lose a significant % of the spread to the phenomenon of having to sell bonds out of the portfolio, at a wider spread than which they were purchased, when the rating goes below BBB-/Baa3. Outright defaults of investment grade bonds are quite rare, but a more significant % cross that threshold during the life, have to be sold (or are generally sold) by investment grade managers, and in doing this they hand over a risk premium to BB/Ba buyers which is a surprising proportion of the spread of the whole portfolio over treasuries. IOW bonds purchased as investment grade held to maturity or default, even if they later become junk bonds, noticeably outperform continuously investment grade index returns. So again I agree and have no use for strictly investment grade corporate bond funds.

However back on the somewhat different term premium point, one can calculate the default probability of various credit levels based on S&P/Moody's historical 'transition tables' for various maturities and find that long term credit spreads are generally further in excess of the objective historical default loss estimate than short term spreads are. There's an uncertainty premium, and it increases with maturity, at least to a certain point and in general. Again, this is plain vanilla corporate banking in a nutshell, and while various banks might make some or much or their money in other (consumer, trading and investment banking etc) businesses, they make some, and some banks make most, in that plain old business. Eg. the bank's *own* long term credit spread over 'risk free' might not be way lower than the client's, but the bank borrows short and lends long, reaping the term premium of credit spread, getting burned or blowing up altogether periodically, but it's been going on for centuries.

2. No we don't know, but I still believe it's much more likely than not TIPS would cheapen in an inflationary outburst, and a strange twist to TIPS that has to be taken into account. Generally if something hedges us against a risk and that risk begins to appear greater to the market than it did, we have to kick ourselves for not having bought that hedge before, because it will almost certainly have gotten more expensive. But that's pretty clearly not as true with TIPS. Whether we agree or not TIPS real yields would rise in a higher inflation environment, I can see no plausible reason to expect they'd particularly narrow (or get more negative) in a higher inflation environment. So while TIPS mainly are to guard against inflation, there's no particular reason I can see to go out and grab that at any price when inflation expectations ares very low, like now*. And while they weren't around in the US in the early 80's, unless the market had been grossly inefficient TIPS yields would surely have skyrocketed once it was apparent Volker would raise short rates to practically any real level in order to quell inflation; though true that doesn't totally predict what would happen in a future inflationary outburst. If inflation was high and it seemed the Fed didn't care about it, then the effect wouldn't be the same.

*the TIPS v nominal treasuries breakeven rate now is ~1.6% in 5yrs, 1.9% in 10's, notably lower than only a few months ago, and lower than the last time nominal yields were at these levels.
re 1)- thanks, that's quite interesting. I'll have to take a look at the data on that. It doesn't really surprise me as fallen angels are thought to outperform original issue high yield bonds. But in general i avoid high yield personally as it is more highly correlated with equity risk and i prefer to take my equity risk through equities- unlimited upside, better tax-efficiency, etc.

re 2)- not sure its worth discussing further since it is all speculative without any data to refer to
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by gw »

Doc wrote:Thanks market timer. I've just spent the last 10 to 20 minutes trying to find a calculator to do that math and decided I needed Excel but my Excel skills weren't up to the task. The number is quite a bit closer to the "standard" 4% risky portfolio than I would have imagined.

But what happens if I live for 31 years with a MLP portfolio? :P

I've been going on the assumption that if you had say a ten year TIPS ladder that you didn't roll unless you hit that equity bear early in retirement that you could increase the 4% SWR substantially. But I am absolutely sure that I can't do that calculation.
Guys, remember you can easily do this math in your head (especially with today's rates). The annuity pays back 1/30th of your principal each year (3.33%), plus (waving hands) the interest on an average of half the starting principal as it's drawn down over time, or 0.5%.

So 1/30 + 1%/2 = 3.83%, just missing an extra 0.04% from the "magic" of compounding interest. Also notice that the lion's share of the payout is simply return of principle --- the interest only increases your payout by 15%.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by #Cruncher »

Artsdoctor in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2230876#p2230876]this post[/url] wrote:You could argue to just buy and roll in 10 year intervals but I find those calculations very difficult to wrap my head around.
A related alternative is to buy a shorter term TIPS today and, when it matures, roll the proceeds into the 2044 TIPS. You can calculate the approximate [ * ] breakeven yields on the 2044 at the time of rollover pretty easily. For example consider the following three alternatives using Treasury Constant Maturity Real Yields for 10/17/2014:
  • Buy a 30-year TIPS today with a 0.90% yield-to-maturity (YTM).
  • Buy a 5-year TIPS today with a 0.01% YTM and roll it over into a 25-year TIPS in 5 years.
  • Buy a 10-year TIPS today with a 0.30% YTM and roll it over into a 20-year TIPS in 10 years.
What would the yields have to be in 5 or 10 years for all three options to have the same return after 30 years?
First calculate the amount the 5, 10, and 30-year will grow to at maturity.

Code: Select all

1.0005   5-year grows to =1.0001 ^ 5
1.0304  10-year grows to =1.0030 ^ 10
1.3084  30-year grows to =1.0090 ^ 30
Then calculate the "breakeven" rates:

Code: Select all

1.08%   25-yr breakeven in  5 yrs =(1.3084 / 1.0005) ^ (1 / 25) - 1
1.20%   20-yr breakeven in 10 yrs =(1.3084 / 1.0304) ^ (1 / 20) - 1
If I buy a 5-year today and roll it over into the 30-year (with 25 years remaining) that then has a YTM of 1.08%, I'll end up with the same amount in 2044 as if I bought the 30-year today. If I buy a 10-year today and roll it over into the 30-year (with 20 years remaining) that then has a YTM of 1.20%, I'll also end up with the same amount in 2044. If yields in 5 or 10 years are less than the breakeven rates, then it would have been better to lock in the 30-year yields today; and vice-versa.

* I say "approximate" because 1) there are no maturities exactly equal to 5, 10, and 30 years today; and 2) the calculations I use are for zero-coupon bonds
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grok87
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Auction is today. last chance to put your orders in this morning.
current secondary market yield is 0.944%.
I'm hoping we get close to 1% at auction (probably a stretch).
cheers
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grok87
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

auction yield was 0.985%. actually relatively close to the 1% i was hoping for this morning.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by richard »

grok87 wrote:auction yield was 0.985%. actually relatively close to the 1% i was hoping for this morning.
The current market yield is 0.97%, up sharply since yesterday. Both stock prices and bond yields are up today, a level of optimism not seen for a week or two.
Last edited by richard on Thu Oct 23, 2014 12:54 pm, edited 3 times in total.
Angst
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Angst »

grok87 wrote:auction yield was 0.985%. actually relatively close to the 1% i was hoping for this morning.
thanks grok,
and it looks like the TD auction results show that with an adjusted price of 112.167585 and an adj accrued interest/$1,000 of $2.93636, each $1,000 will cost $1,124.61 (i trust #cruncher will let us know if i got that wrong!)

Webpage: http://www.treasurydirect.gov/instit/an ... esults.htm
PDF: http://www.treasurydirect.gov/instit/an ... 1023_1.pdf
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