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

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grok87
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30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Hello Bogleheads,
the next 30 year tips auction (actually a re-opening) will be announced in 10 days. At that time one can place orders if one wishes. The actual auction day is 10/23.
The current real yield on the 30 year TIP is 1.04%. Often you get a bit more yield at auction, so I'm hoping we get to 1.10%

I will be participating for my usual dollar-cost averaging in amount. My rationale in buying is that i expect to have bills to pay in retirement 30 years from now that i want to pre-fund. LMP is what they call this approach i guess (liability matching portfolio).

anyone else buying? or are folks waiting for the brand spanking new 30 year TIPs in february 2015?

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

Post by Doc »

grok87 wrote:I will be participating for my usual dollar-cost averaging in amount. My rationale in buying is that i expect to have bills to pay in retirement 30 years from now that i want to pre-fund. LMP is what they call this approach i guess (liability matching portfolio).
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.
grok87 wrote:anyone else buying? or are folks waiting for the brand spanking new 30 year TIPs in february 2015?
If you are buying in taxable be aware that the brokers don't have to start record keeping for TIPS amortization/accretion unto 2016 I think. Therefore if you buy on the reopening you have to do your own record keeping. And before anyone jumps on the "bonds in tax preferred" theme, at 1% real and no state taxes TIPS are reasonably tax efficient for many of us. Perhaps even more tax efficient than a large cap blend fund. I would wait for the "brand spanking new" issue no matter what the term if I was buying in taxable.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by AviN »

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.
Given grok87's goals, the 30-year TIPS reduces uncertainty because he knows exactly how many inflation-adjusted dollars he will have when he needs the money in 30-years.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by richard »

In February you were hoping for 1.5%. http://www.bogleheads.org/forum/viewtop ... st=1960337 Sigh.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by richard »

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.
Ten years from now you might wish you'd locked in 1.1% real.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by jdb »

richard 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.
Ten years from now you might wish you'd locked in 1.1% real.
I am going to follow Doc suggestion and buy more 10 year at the January auction. 30 years just too long for me, statistically probably not around to see it mature. Too bad the Treasury stopped auctioning 20 year bonds, that would be good ladder addition for me and prefer to purchase at auction.
Last edited by jdb on Tue Oct 07, 2014 9:13 am, edited 1 time in total.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

AviN wrote:Given grok87's goals, the 30-year TIPS reduces uncertainty because he knows exactly how many inflation-adjusted dollars he will have when he needs the money in 30-years.
Right, reducing uncertainty that impacts our well being reduces risk. In finance we accept a risk/reward trade off. And each of us has to decide where we want to be fall on that trade off line. I think accepting 1% for zero risk is an extreme point on that line.
richard wrote:Ten years from now you might wish you'd locked in 1.1% real.
Right, but I still have twenty years to go and real rates may go to 3.5% at twenty years.

There are four reasons why 1% for thirty years is an "expensive" price to pay for zero risk.

1) Historic real rates on a ten are in the range of 2 to 3%. Arguably real rates and growth of the economy are related. If we have only 1% real growth in the economy for the next 30 years we are all in deep doodoo and my certain TIPS portfolio may not mean very much.

2) The FED has been actively keeping interest rates artificially low for the past five years. QE3 has ended and QE4 is not contemplated. Rates are likely to increase. I don't know when but most I think would believe it will be much less than thirty years.

3) With rates at only 1% the cost of waiting by going with say a ten now is not going to cost me very much. My downside risk is low because I'm not making much anyway. And I have the same inflation protection in either case.

4) Safe withdrawal rates are often quoted at 4% adjusted for inflation. This is based on maybe an 8% equity return and a 5% FI return (nominal). I would have to have a huge portfolio if I would get the same retirement income from a 1% (3% nominal) investment.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by richard »

Doc wrote:
AviN wrote:Given grok87's goals, the 30-year TIPS reduces uncertainty because he knows exactly how many inflation-adjusted dollars he will have when he needs the money in 30-years.
Right, reducing uncertainty that impacts our well being reduces risk. In finance we accept a risk/reward trade off. And each of us has to decide where we want to be fall on that trade off line. I think accepting 1% for zero risk is an extreme point on that line.
richard wrote:Ten years from now you might wish you'd locked in 1.1% real.
Right, but I still have twenty years to go and real rates may go to 3.5% at twenty years.

There are four reasons why 1% for thirty years is an "expensive" price to pay for zero risk.

1) Historic real rates on a ten are in the range of 2 to 3%. Arguably real rates and growth of the economy are related. If we have only 1% real growth in the economy for the next 30 years we are all in deep doodoo and my certain TIPS portfolio may not mean very much.

2) The FED has been actively keeping interest rates artificially low for the past five years. QE3 has ended and QE4 is not contemplated. Rates are likely to increase. I don't know when but most I think would believe it will be much less than thirty years.

3) With rates at only 1% the cost of waiting by going with say a ten now is not going to cost me very much. My downside risk is low because I'm not making much anyway. And I have the same inflation protection in either case.

4) Safe withdrawal rates are often quoted at 4% adjusted for inflation. This is based on maybe an 8% equity return and a 5% FI return (nominal). I would have to have a huge portfolio if I would get the same retirement income from a 1% (3% nominal) investment.
1) History may not be the most reliable guide. Current rates reflect market expectations, which are probably at least as good an estimate of the future as the alternatives.

2) Name a time in the past 50 years when the Fed has not tried to manage interest rates. "Artificial" has little meaning in this context. Where would you expect interest rates to be given current economic conditions?

Note that the Fed's recent stimulative actions (cutting short rates, QE) have tended to increase long rates, and vice versa.

3) Fair point. If you don't mind giving up 60bp (10-30 spread) in the hope of a larger reward, go for it.

4) The validity of 4% is a rather contentious topic.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Browser »

Let's say I plan to retire in 20 years at age 65, and let's say I want to "prefund" some of my inflation-adjusted living costs starting at age 75 when I'm likely to not want to work at McDonald's any longer. Given these assumptions, it might be a good idea to start buying 30-year TIPs this year and continue to buy 30-year TIPs every year until I retire. If I were to do this, at retirement I'd have a TIPs ladder with 20 rungs to prefund my living expenses from age 75-95. Then I can work at McDonald's from age 65-75. Seems pretty simple -- why not do that?
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

Browser wrote: If I were to do this, at retirement I'd have a TIPs ladder with 20 rungs to prefund my living expenses from age 75-95.
At 1% real how big are those rungs? Do you have enough assets to do that? How about at 3%? Remember it's fixed income. The Guv agrees to give you something for 30 years and you agree to accept that something for 30 years. You can't sell it before then and expect to make more unless you reinvest the sale proceeds in something more risky.

If you have a large enough portfolio and a 1% real return for 30 years will satisfy your future needs at zero risk go ahead and take it. If it won't satisfy your needs you will have to either save more or invest in something more risky.

My preference is for a ten year ladder. I would fund my retirement form the rest of the portfolio in good years and use the maturing TIPS only in bad years replenishing it in really good years.

The reason that safe withdrawal rates are only 4% when a typical portfolio might return 5 to 8% is that we can't handle a long bear market early in retirement because we eat up our capital. Why not use that shorter TIPS ladder to protect against this probability?
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by jdb »

Browser wrote:Then I can work at McDonald's from age 65-75. Seems pretty simple -- why not do that?
http://www.bloomberg.com/news/2014-10-0 ... -7-98.html
Sounds like a plan. :happy
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Erwin »

Swedroe in his "The Only Guide to a Winning Bond Strategy", Appendix B (page 229), recommends 0% TIPS if real yield on 10 year TIPs is under 1.75%. Is that no longer valid?
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Browser »

mpt follower wrote:Swedroe in his "The Only Guide to a Winning Bond Strategy", Appendix B (page 229), recommends 0% TIPS if real yield on 10 year TIPs is under 1.75%. Is that no longer valid?
If we knew if the real yield on the 10-year would ever be higher than 1.75% again I guess it would still be valid. How long do you intend to wait for that to happen and what are you doing with your money in the meantime? As I recall the real yield on British inflation-linked gilts has been extremely low for an extremely long time period, and that may foretell the future of U.S. TIPS. Waiting for Godot??
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Erwin »

Browser wrote:
mpt follower wrote:Swedroe in his "The Only Guide to a Winning Bond Strategy", Appendix B (page 229), recommends 0% TIPS if real yield on 10 year TIPs is under 1.75%. Is that no longer valid?
If we knew if the real yield on the 10-year would ever be higher than 1.75% again I guess it would still be valid. How long do you intend to wait for that to happen and what are you doing with your money in the meantime? As I recall the real yield on British inflation-linked gilts has been extremely low for an extremely long time period, and that may foretell the future of U.S. TIPS. Waiting for Godot??
What Swedroe recommends is to invest in a regular bond of the same duration. Frankly I am confused. I am retired and would love to purchase a 10 year TIPs ladder starting at the age of 70 (4 years from now), but I have not done it waiting for better rates. Presently the funds are in an intermediate total return bond fund with a 4 year duration.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

mpt follower wrote:Swedroe in his "The Only Guide to a Winning Bond Strategy", Appendix B (page 229), recommends 0% TIPS if real yield on 10 year TIPs is under 1.75%. Is that no longer valid?
OK, I confess I've been using Larry's arguments. I actually bought two copies of Larry's bond book so I always have one close at hand.
Swedroe wrote:Logically, there should be some relationship between the real growth rate of the economy and the real rate on bonds. with this in mind we can develop a disciplined strategy to determine how much an investor should allocate to TIPS ... The long term real growth rate of the U.S. economy has been about 3 percent. Thus we might expect that the real return on bonds should not be much above that.
So is Larry's discipline no longer valid? Or do we expect the U.S economy to grow at only 1% real for the next 30 years?
Before providing a specific formula, however, note that there is no "right" answer here. The "right" answer will be determined by each investor's own willingness and ability to take the risk of unexpected inflation negatively impacting his portfolio and lifestyle.

(My emphasis.)

I think this horse is about dead at least until the next 30 year auction. :D
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

mpt follower wrote: I am retired and would love to purchase a 10 year TIPs ladder starting at the age of 70 (4 years from now), but I have not done it waiting for better rates. Presently the funds are in an intermediate total return bond fund with a 4 year duration.
I let my 10 yr TIPS ladder somewhat "self liquidate" following Lehman and like you have put it into intermediate (and short) nominals. Last April I bought a double rung of the five at auction and intend to do that for a few more years. When they begin to mature I will reinvest in another five year rung and also a ten. I think the risk of unexpected inflation for the next several years is not likely given the poor world wide economy so there is no need to rush into a TIPS ladder now especially a longer term one. Besides even very short nominals give you some inflation protection since you can reinvest early with no penalty when they mature.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Leif »

Not too excited...
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Grt2bOutdoors »

I'm not a big bond purchaser and I don't get a warm and fuzzy feeling from 1.1 or even 1.5 percent real rates. How does one get comfortable holding long term Tips with such low rates of return and especially in a taxable account where you are paying taxes on phantom interest? Can someone explain that? Why wouldn't holding a relatively short duration bond fund be the preferable course, if inflation rears its ugly head those bonds would reset to higher rates more quickly and wouldn't losses be somewhat limited if you did have to liquidate abruptly?

What am I missing here?
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Doc wrote:
grok87 wrote:I will be participating for my usual dollar-cost averaging in amount. My rationale in buying is that i expect to have bills to pay in retirement 30 years from now that i want to pre-fund. LMP is what they call this approach i guess (liability matching portfolio).
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.
grok87 wrote:anyone else buying? or are folks waiting for the brand spanking new 30 year TIPs in february 2015?
If you are buying in taxable be aware that the brokers don't have to start record keeping for TIPS amortization/accretion unto 2016 I think. Therefore if you buy on the reopening you have to do your own record keeping. And before anyone jumps on the "bonds in tax preferred" theme, at 1% real and no state taxes TIPS are reasonably tax efficient for many of us. Perhaps even more tax efficient than a large cap blend fund. I would wait for the "brand spanking new" issue no matter what the term if I was buying in taxable.
thanks Doc. I hold mine in tax-deferred but i think your advice is very helpful for those putting them in taxable accounts.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

AviN 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.
Given grok87's goals, the 30-year TIPS reduces uncertainty because he knows exactly how many inflation-adjusted dollars he will have when he needs the money in 30-years.
yep.
and I would argue it makes me more comfortable taking risk elsewhere in my portfolio knowing that i have my basic needs met with this "floor"
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

richard wrote:In February you were hoping for 1.5%. http://www.bogleheads.org/forum/viewtop ... st=1960337 Sigh.
i really wish i had bought my full yearly allocation then like jon-nyc. but hindsight is 20/20 of course
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

richard 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.
Ten years from now you might wish you'd locked in 1.1% real.
exactly. intl 10 year tips yields are often lower right now. see this thread
http://www.bogleheads.org/forum/viewtop ... 5#p2202451


10 year inflation-linked bond real rate @9/24/14
Australia..... 1.23%
Brazil......... 5.82%
Canada....... 0.40%
Chile......... 1.55%
France....... -0.32%
Germany.....-0.45%
Israel..........0.57%
Italy...........1.20%
Japan......... -0.70%
Mexico........ 2.50%
S. Africa...... 1.62%
Spain.......... 0.84%
Sweden....... -0.14%
UK............. -0.46%
US............. 0.51%
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

jdb wrote:
richard 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.
Ten years from now you might wish you'd locked in 1.1% real.
I am going to follow Doc suggestion and buy more 10 year at the January auction. 30 years just too long for me, statistically probably not around to see it mature. Too bad the Treasury stopped auctioning 20 year bonds, that would be good ladder addition for me and prefer to purchase at auction.
well i'm not sure i'll be around in 30 years either. But my wife may be...
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Browser wrote:Let's say I plan to retire in 20 years at age 65, and let's say I want to "prefund" some of my inflation-adjusted living costs starting at age 75 when I'm likely to not want to work at McDonald's any longer. Given these assumptions, it might be a good idea to start buying 30-year TIPs this year and continue to buy 30-year TIPs every year until I retire. If I were to do this, at retirement I'd have a TIPs ladder with 20 rungs to prefund my living expenses from age 75-95. Then I can work at McDonald's from age 65-75. Seems pretty simple -- why not do that?
i agree with your strategy. except i am perhaps hoping to avoid working at mcdonalds and hoping to do other work instead
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

jdb wrote:
Browser wrote:Then I can work at McDonald's from age 65-75. Seems pretty simple -- why not do that?
http://www.bloomberg.com/news/2014-10-0 ... -7-98.html
Sounds like a plan. :happy
+1
:)
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

mpt follower wrote:Swedroe in his "The Only Guide to a Winning Bond Strategy", Appendix B (page 229), recommends 0% TIPS if real yield on 10 year TIPs is under 1.75%. Is that no longer valid?
I'm a big fan of Larry's. I guess his TIPs strategy is one area we disagree.

Part of it is that i think real GDP growth will be lower going forward. The CBO is saying 2.2% real growth from 2018 on out. real bond yields should have some linkage to GDP. if real GDP growth is @2.2% i think 1.5% is the most one could hope for for real bond yields. So the 1.1% is a little low, but not crazy low.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Leif wrote:Not too excited...
me neither. not loading up. just dollar cost averaging in.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Grt2bOutdoors wrote:I'm not a big bond purchaser and I don't get a warm and fuzzy feeling from 1.1 or even 1.5 percent real rates. How does one get comfortable holding long term Tips with such low rates of return and especially in a taxable account where you are paying taxes on phantom interest? Can someone explain that? Why wouldn't holding a relatively short duration bond fund be the preferable course, if inflation rears its ugly head those bonds would reset to higher rates more quickly and wouldn't losses be somewhat limited if you did have to liquidate abruptly?

What am I missing here?
personally i only hold tips in tax-deferred. for me they are basically an insurance policy against the return to the late 70s early 80s when we had stagflation with double digit inflation.
i definitely don't want to get taxed on those inflation numbers (as part of the tips return) if they happen, at least not right away.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

grok87 wrote:Part of it is that i think real GDP growth will be lower going forward. The CBO is saying 2.2% real growth from 2018 on out. real bond yields should have some linkage to GDP. if real GDP growth is @2.2% i think 1.5% is the most one could hope for for real bond yields. So the 1.1% is a little low, but not crazy low.
Yea, that's the "oh sith" scenario. But Swedroe is putting a plus number on the growth rate not a minus one. That would put the real yield above 2.2%. Hey we don't know. But I would be hesitant to commit for 30 years on "We don't know". It's all about your risk tolerance and you need to take that risk. If your portfolio is large enough to take care of your retirement needs lock in the 30 year guarantee. If it's not enough or you would like to leave something for your heirs you might come to another conclusion. As Larry has often said
The "right" answer will be determined by each investor's own willingness and ability to take the risk ...
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Erwin »

One further comment: Given the current inflation situation, the fact that the Fed has done a pretty good job controlling it, it seems to me that at least for the conceivable time, investing in nominal bonds via an intermediate term bond fund maybe more profitable. I recall that Swedroe recently bought a 3.1 or 3.2% 8 year CD. This tells me that he feels that TIPs are going to be a poor investment in the next years. That is good enough for me to decide not to purchase TIPs yet.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Doc wrote: But Swedroe is putting a plus number on the growth rate not a minus one. That would put the real yield above 2.2%.
I agree that Swedroe's number is the growth rate.
I've read Larry's thoughts on TIPs. Again I have a lot of respect for Larry and agree with him 90%+ of the time. But I think his approach assumes that historical real rates (historical TIps real rate and achieved real rates from nominal treasuries) are a good guide to the future- i.e. that real rates will be mean reverting. I don't think he is explicitly saying real rates will be above real GDP growth- i.e I don't think he has framed it that way.

I'm in the camp that real gdp growth and real rates will be lower going forward. I guess its the bill gross "new normal" argument...
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

mpt follower wrote:One further comment: Given the current inflation situation, the fact that the Fed has done a pretty good job controlling it, it seems to me that at least for the conceivable time, investing in nominal bonds via an intermediate term bond fund maybe more profitable. I recall that Swedroe recently bought a 3.1 or 3.2% 8 year CD. This tells me that he feels that TIPs are going to be a poor investment in the next years. That is good enough for me to decide not to purchase TIPs yet.
cds are a great idea. I like penfed cds with the ability to redeem early and reinvest at higher rates if the higher rates materialize
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

grok87 wrote:Doc wrote:
But Swedroe is putting a plus number on the growth rate not a minus one. That would put the real yield above 2.2%.

I agree that Swedroe's number is the growth rate.
I've read Larry's thoughts on TIPs. Again I have a lot of respect for Larry and agree with him 90%+ of the time. But I think his approach assumes that historical real rates (historical TIps real rate and achieved real rates from nominal treasuries) are a good guide to the future- i.e. that real rates will be mean reverting. I don't think he is explicitly saying real rates will be above real GDP growth- i.e I don't think he has framed it that way.
Swedroe's Winning Bond Strategy book 2006 wrote:The long term real growth rate of the U.S. economy has been about 3 percent. Thus we might expect that the real return on bonds should not be much above that.
Grok, what is exactly the point? Do you think that real rates will be much lower than the the long term economy's growth rate or that the the long term economy's growth rate will be only about the 1% yield on the 30? If you think the economy's growth rate is going to be 1% for the next 30 years we are in the deep sith situation I alluded to. But if that is the case unexpected inflation is the least of our concerns. I would be more concerned with rioting in the streets.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by blueleaf »

"4) Safe withdrawal rates are often quoted at 4% adjusted for inflation. This is based on maybe an 8% equity return and a 5% FI return (nominal). I would have to have a huge portfolio if I would get the same retirement income from a 1% (3% nominal) investment."

4 percent wihdrawel rates are based on the worst case historical returns on stocks and bonds, which are much lower than that.

f you have a liability matching portfolio, your rate of return is known, and you don't need to maintain a huge coushion to account for downside risk.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

Doc wrote:
Swedroe's Winning Bond Strategy book 2006 wrote:The long term real growth rate of the U.S. economy has been about 3 percent. Thus we might expect that the real return on bonds should not be much above that.
Grok, what is exactly the point? Do you think that real rates will be much lower than the the long term economy's growth rate or that the the long term economy's growth rate will be only about the 1% yield on the 30? If you think the economy's growth rate is going to be 1% for the next 30 years we are in the deep sith situation I alluded to. But if that is the case unexpected inflation is the least of our concerns. I would be more concerned with rioting in the streets.
Thanks- that's a helpful Larry quote.
I'm going to take a look at the historical numbers before i respond.
RIP Mr. Bogle.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

blueleaf wrote:"4) Safe withdrawal rates are often quoted at 4% adjusted for inflation. This is based on maybe an 8% equity return and a 5% FI return (nominal). I would have to have a huge portfolio if I would get the same retirement income from a 1% (3% nominal) investment."

4 percent wihdrawel rates are based on the worst case historical returns on stocks and bonds, which are much lower than that.

f you have a liability matching portfolio, your rate of return is known, and you don't need to maintain a huge coushion to account for downside risk.
well i think a 4% safe withdrawal rate could work with an all tips portfolio at a 1% real rate. We are not going to live forever, so we can dip into principal (judiciously).
so say you have a 30 year tips ladder. you start living off it at say age 67 and have 30 year retirement horizon- i.e. till age 97. You liquidate 1/30th of the portfolio per year. That's a 3.3% return from principal. that plus the 1% real rate puts you a bit over 4% (i.e.3.3%+1%= 4.3%).
cheers,
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by market timer »

grok87 wrote: well i think a 4% safe withdrawal rate could work with an all tips portfolio at a 1% real rate. We are not going to live forever, so we can dip into principal (judiciously).
so say you have a 30 year tips ladder. you start living off it at say age 67 and have 30 year retirement horizon- i.e. till age 97. You liquidate 1/30th of the portfolio per year. That's a 3.3% return from principal. that plus the 1% real rate puts you a bit over 4% (i.e.3.3%+1%= 4.3%).
cheers,
The math doesn't exactly work out that cleanly. It's more like 3.87% over 30 years in this case--easy to work this out in Excel. You can withdraw 3.3% of the initial principal amount each year (real), but the 1% you assume you can withdraw from interest is no longer fully there once you start withdrawing principal. The interest is declining as principal declines.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

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

Post by kramer »

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.
I often use this calculator (use annual payout):

http://tcalc.timevalue.com/all-financia ... lator.aspx

and there are numerous other calculators on that site.

As for increasing the SWR, I plan to take SS at age 70 and hope to annuitize a fair amount during my 70's into (mostly) inflation-adjust annuities -- probably from the proceeds of TIPs. For a male at age 72, an inflation-adjusted life annuity is currently paying out around 6.0%.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

kramer wrote:I often use this calculator (use annual payout):

http://tcalc.timevalue.com/all-financia ... lator.aspx

and there are numerous other calculators on that site.
"Show amortization schedule"

Obviously the borrower and lender are on opposite sides of each transaction. I kept looking for the coupon only strip. :oops:
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by #Cruncher »

grok87 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2217947#p2217947]this post[/url] wrote:well i think a 4% safe withdrawal rate could work with an all tips portfolio at a 1% real rate. ... so say you have a 30 year tips ladder. ... You liquidate 1/30th of the portfolio per year.
The concept of "safe withdrawal rate" (SWR) isn't relevant with a non-rolling bond ladder. Even the term "withdrawal" doesn't really apply. The ladder automatically "liquidates" itself through interest collections and principal redemptions. The investor doesn't have to take any active steps to "withdraw".

One can, if one wishes, calculate the implicit withdrawal rate by dividing the annual proceeds by their estimated market value. The market value will depend on the yield to maturity (YTM) of each of the bonds. The following table makes the simplifying assumption that each of the bonds in the ladder has the same YTM. The third column shows an estimate of the market value of a $10,000 per year 30-year ladder assuming a YTM of 0%, 1%, and 2%. The fourth column then divides $10,000 by the market value to show the withdrawal rate.

Code: Select all

  Annual                Market    Withdrawal
Withdrawal    YTM       Value *       Rate
----------    ---       -------     -------
  10,000       0%       300,000      3.33%
  10,000       1%       258,077      3.87% **
  10,000       2%       223,965      4.46%
But this is really academic. Regardless of the yield, market value, and withdrawal rate; one will still collect $10,000 per year (in inflation-adjusted dollars if it's a TIPS ladder).

* The market value of this simplified case can be computed with Excel's PV function. For example,

Code: Select all

258077 =-PV( 1%, 30, 10000, 0, 0 )
** The 3.87% figure for a 1% YTM is what market timer mentioned in this post.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

market timer wrote:
grok87 wrote: well i think a 4% safe withdrawal rate could work with an all tips portfolio at a 1% real rate. We are not going to live forever, so we can dip into principal (judiciously).
so say you have a 30 year tips ladder. you start living off it at say age 67 and have 30 year retirement horizon- i.e. till age 97. You liquidate 1/30th of the portfolio per year. That's a 3.3% return from principal. that plus the 1% real rate puts you a bit over 4% (i.e.3.3%+1%= 4.3%).
cheers,
The math doesn't exactly work out that cleanly. It's more like 3.87% over 30 years in this case--easy to work this out in Excel. You can withdraw 3.3% of the initial principal amount each year (real), but the 1% you assume you can withdraw from interest is no longer fully there once you start withdrawing principal. The interest is declining as principal declines.
thanks for correcting me. I agree with the 3.87%
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

kramer wrote: I plan to take SS at age 70 and hope to annuitize a fair amount during my 70's into (mostly) inflation-adjust annuities -- probably from the proceeds of TIPs. For a male at age 72, an inflation-adjusted life annuity is currently paying out around 6.0%.
sounds like a good plan to me. watch those state guarantee fund limits though...
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

grok87 wrote:Hello Bogleheads,
the next 30 year tips auction (actually a re-opening) will be announced in 10 days. At that time one can place orders if one wishes. The actual auction day is 10/23.
The current real yield on the 30 year TIP is 1.04%. Often you get a bit more yield at auction, so I'm hoping we get to 1.10%

I will be participating for my usual dollar-cost averaging in amount. My rationale in buying is that i expect to have bills to pay in retirement 30 years from now that i want to pre-fund. LMP is what they call this approach i guess (liability matching portfolio).

anyone else buying? or are folks waiting for the brand spanking new 30 year TIPs in february 2015?

cheers,
real yield on the secondary market is now 0.92% or about 12 bps lower. if it stays at this leve, probably the most we could hope for at auction is around 0.95% yield.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by NoVa Lurker »

Leif wrote:Not too excited...
Yep, this is it in a nutshell.

While it may (or may not) be wise to have some long-term TIPS as part of your portfolio, it's a bit sad to lock in 1.1% real for 30 years.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Erwin »

NoVa Lurker wrote:
Leif wrote:Not too excited...
Yep, this is it in a nutshell.

While it may (or may not) be wise to have some long-term TIPS as part of your portfolio, it's a bit sad to lock in 1.1% real for 30 years.
For those that have enough money, even if the real return is 0%, some may find it attractive to develop a 30 year TIPs ladder to fund retirement expense. Any thing else you do with that money would, by definition, be riskier!
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Doc »

mpt follower wrote:For those that have enough money, even if the real return is 0%, some may find it attractive to develop a 30 year TIPs ladder to fund retirement expense. Any thing else you do with that money would, by definition, be riskier!
Correct as long as you can also prefund the "run out of money and die" scenario. Anybody know a good hit man that we can trust to fulfill his contract thirty years in the future? :|
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Hawkeye5 »

I will pass. I feel that TIPS are a bit expensive right now, and thirty years does not fit into my bond ladder anyway. Should I live to age 97 I'll be into my mutual funds for living expenses (more likely long term care).
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by grok87 »

grok87 wrote:
Doc wrote:
Swedroe's Winning Bond Strategy book 2006 wrote:The long term real growth rate of the U.S. economy has been about 3 percent. Thus we might expect that the real return on bonds should not be much above that.
Grok, what is exactly the point? Do you think that real rates will be much lower than the the long term economy's growth rate or that the the long term economy's growth rate will be only about the 1% yield on the 30? If you think the economy's growth rate is going to be 1% for the next 30 years we are in the deep sith situation I alluded to. But if that is the case unexpected inflation is the least of our concerns. I would be more concerned with rioting in the streets.
Thanks- that's a helpful Larry quote.
I'm going to take a look at the historical numbers before i respond.
so i've had a look at the data. here is the source i used- see page 10 in particular.
http://www.gramercy.com/portals/0/pdfs2 ... -%20DB.pdf

it's a little dated (ends in 2008) but it goes back for decades.
I decided to look a the post worldwar 2 period. page 10 of the report has data by decade. so i looked at the six decades that were post war. 1950-2008. here is the result:



decade....bonds gdp
1950-1959 -2.63% 4.2%

1960-1969 -1.96% 4.5%

1970-1979 -3.43% 3.2%

1980-1989 7.22% 3.1%

1990-1999 5.28% 3.2%

2000-2008 4.74% 2.3%

1950-2008 1.39% 3.4%

bonds = cagr real treasury bond returns for the decade
gdp = cagr real gdp growth

so for this 59 year period (real) gdp growth averaged 3.4% but real bond returns were only 1.39%.

going forward who knows. As i say the CBO is forecasting 2.2% real gdp growth from 2018 on out. if that plays out, i think 1-1.5% real bond returns is not necessarily that unlikely an outcome.
cheers,
RIP Mr. Bogle.
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Re: 30 yr TIPs auction announced 16 oct: yield=1.10%?

Post by Sents »

What is the advantage to buy 30 year TIPS from an auction over lets say Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)?
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