Return to "Normal" for TIPS?

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Mel Lindauer
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Return to "Normal" for TIPS?

Post by Mel Lindauer »

Hello Everyone:

Has anyone else noticed that the 5-year TIPS have quickly dropped from the recent auction real yield of 3.27% to today's real yield of 2.46%? That's quite a drop of 81 basis points in a very short period of time. Of course, that means higher values for current TIPS owners, but it makes them more expensive for those who missed that last window of opportunity.

The other maturity TIPS have rallied a bit, too.

Regards,

Mel
Last edited by Mel Lindauer on Wed Nov 05, 2008 8:54 am, edited 1 time in total.
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daryll40
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Post by daryll40 »

I moved my entire IRA to the Vanguard TIPS fund (was previously half tips and half short term corporate) on Monday at market close. What you are saying, therefore, cannot be right. Because markets always go OPPOSITE to how I invest! :wink:
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Post by Mel Lindauer »

daryll40 wrote:I moved my entire IRA to the Vanguard TIPS fund (was previously half tips and half short term corporate) on Monday at market close. What you are saying, therefore, cannot be right. Because markets always go OPPOSITE to how I invest! :wink:
Looks like you guessed right for once, Daryll (at least for a day, anyway). Hope your purchase doesn't jinx the rally!

Regards,

Mel
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Post by daryll40 »

Me too! :roll:
SmallHi
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TIPS

Post by SmallHi »

Huh,

July 11th - October 31st
US Total Stock Index = -22.1%
FTSE World xUS Index = -45.3%
Lehman TIPS = -13.5%

November 1st - November 4th
US Total Stock Index = +3.3%
FTSE World xUS Index = +7.3%%
Lehman TIPS = +2.4%

First stocks were down and TIPS were down, now stocks up and TIPS up? So much for that negative correlation.

Oh, wait, I forgot...because you buy and hold TIPS to maturity, and because some of their "volatility" is due to changes in inflation (but not by as much as is commonly argued) -- the changes in prices is irrelevant.

Except, I guess, if the prices are going up! :roll:

sh
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Post by nisiprius »

You know what? I much prefer to have things be "normal." I didn't like any of the reasons suggested for depressed TIPS values or (not so long ago) spectacular interest rates on muni money market funds. (I don't mean I don't believe them, I mean I think it's probably better to have mediocre TIPS yields and no credit crunch than a screaming-buy TIPS due to a credit crunch).

Normal is good. Boring is good. The sooner we get back to boring, the better. Me for the days of mediocre TIPS!
Last edited by nisiprius on Wed Nov 05, 2008 9:26 am, edited 1 time in total.
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Post by AlwaysaQ »

Nisiprius

I agree boring is good. I bought a little too early and got a bunch over 2.8 and 2.9 but only a few at 3+ but am happy to see the prices get back closer to where I bought them.
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Re: TIPS

Post by Mel Lindauer »

SmallHi wrote: Oh, wait, I forgot...because you buy and hold TIPS to maturity, and because some of their "volatility" is due to changes in inflation (but not by as much as is commonly argued) -- the changes in prices is irrelevant.

Except, I guess, if the prices are going up! :roll:

sh
My post was to show that the "window of opportunity" of what many of us considered to be a temporary "mispricing of TIPS" may have closed.

However, when TIPS prices increase over the longer term, TIPS investors obviously have more options available to them -- to either sell or hold to maturity.

Regards,

Mel
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Post by Sidney »

Investment grade corporates have settled down a bit too so I suspect we are seeing some liquidity come back to the system. Probably still a long way to go.
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Post by Rodc »

nisiprius wrote:You know what? I much prefer to have things be "normal." I didn't like any of the reasons suggested for depressed TIPS values or (not so long ago) spectacular interest rates on muni money market funds. (I don't mean I don't believe them, I mean I think it's probably better to have mediocre TIPS yields and no credit crunch than a screaming-buy TIPS due to a credit crunch).

Normal is good. Boring is good. The sooner we get back to boring, the better. Me for the days of mediocre TIPS!
Agreed. I like some excitement in some parts of my life, but I'm perfectly happy with boring in this part.
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Post by Lbill »

I agree with Nisiprius. It is worrisome to be torn between the greed of "buy now" higher TIPS yields and the fear that whatever is causing the higher rates is an unknown evil.
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Post by larryswedroe »

SH
And here I thought you were not in that camp of people that did not understood that correlations are just average figures. (:-))

For the rest of the diehards,
Unless something has correlation of -1, then the negative correlation is a TENDENCY not an absolute. And same for positive correlation--if not +1 it is just a TENDENCY.

And of course you get event driven actions that cause what seems like anomalies---like forced sales that leads to disequilibriums in markets that typically don't last very long. Equilibrium gets restored eventually and prices return to "normal"

And it certainly is possible to see TIPS and stocks move together--an example would be if confidence in US economy gets so bad that you have flight capital you could see real yields rise on all instruments and stocks getting hit because of that. So there is not certainty. Most investments hedge some but not all risks. ST bonds for example hedge some risks but certainly create REINVESTMENT risks.

The idea is to build portfolios that address your risks in the best way, the risks you are most sensitive to. And look at the whole portfolio. NOt the individual components.
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Post by SmallHi »

larryswedroe wrote:SH
And here I thought you were not in that camp of people that did not understood that correlations are just average figures. (:-))

For the rest of the diehards,
Unless something has correlation of -1, then the negative correlation is a TENDENCY not an absolute. And same for positive correlation--if not +1 it is just a TENDENCY.

And of course you get event driven actions that cause what seems like anomalies---like forced sales that leads to disequilibriums in markets that typically don't last very long. Equilibrium gets restored eventually and prices return to "normal"

And it certainly is possible to see TIPS and stocks move together--an example would be if confidence in US economy gets so bad that you have flight capital you could see real yields rise on all instruments and stocks getting hit because of that. So there is not certainty. Most investments hedge some but not all risks. ST bonds for example hedge some risks but certainly create REINVESTMENT risks.

The idea is to build portfolios that address your risks in the best way, the risks you are most sensitive to. And look at the whole portfolio. NOt the individual components.
Larry,

Just havin' a laugh with the TIPSers! Agree with everything you said, primarily the last part.

later...sh
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Post by Lbill »

Speaking as a TIPster - :lol: :lol: :shock:
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Post by discman017 »

Looking at Fidelity's website (since Vanguard's website doesn't let us see TIPS anymore), I see some oddness in the five-year TIPS yields.

April 2013: Bid yield 2.50%, ask yield 2.35% (inflation factor 1.04)

This is probably the one you're quoting, right Mel?

But then look at the TIPS with the closest maturities on either side:

April 2012: Bid yield 3.36%, ask yield 3.08% (inflation factor 1.08)
July 2012: Bid yield 3.35%, ask yield 3.25% (inflation factor 1.22)
July 2013: Bid yield 3.06%, ask yield 2.92% (inflation factor 1.19)

Some of its higher price for the April 2013 is attributable to the deflation protection inherent in the lower 1.04 inflation factor. But it doesn't seem like that deflation protection explains everything -- in particular, the April 2012 has a 1.08 factor and a yield that's about 80 basis points higher than the April 2013. So the April 2013 looks like an anomaly to me.

Does anyone else understand why different issues' yields can have such a wide divergence for similar maturities?
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Post by Mel Lindauer »

discman017 wrote:Looking at Fidelity's website (since Vanguard's website doesn't let us see TIPS anymore), I see some oddness in the five-year TIPS yields.

April 2013: Bid yield 2.50%, ask yield 2.35% (inflation factor 1.04)

This is probably the one you're quoting, right Mel?

But then look at the TIPS with the closest maturities on either side:

April 2012: Bid yield 3.36%, ask yield 3.08% (inflation factor 1.08)
July 2012: Bid yield 3.35%, ask yield 3.25% (inflation factor 1.22)
July 2013: Bid yield 3.06%, ask yield 2.92% (inflation factor 1.19)

Some of its higher price for the April 2013 is attributable to the deflation protection inherent in the lower 1.04 inflation factor. But it doesn't seem like that deflation protection explains everything -- in particular, the April 2012 has a 1.08 factor and a yield that's about 80 basis points higher than the April 2013. So the April 2013 looks like an anomaly to me.

Does anyone else understand why different issues' yields can have such a wide divergence for similar maturities?
Yes, I'm quoting the actual auction issue (4/15/2013) in the secondary market at bloomberg.com. That real yield is now quoted as down to 2.42% real.

Regards,

Mel
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Post by sscritic »

The yield curve for tips from http://www.ustreas.gov/offices/domestic ... ield.shtml

Code: Select all

   Date	 5 yr	 7 yr	 10 yr	20 yr*
11/04/08	3.45%	3.65%	2.88%	3.11%

Treasury Real Yield Curve Rates. These rates are commonly referred to as "Real Constant Maturity Treasury" rates, or R-CMTs. Real yields on Treasury TIPS (Treasury Inflation Protected Securities) at "constant maturity" are interpolated by the U.S. Treasury from Treasury's daily real yield curve. The Treasury real yield curve is based on closing real bid yields on existing TIPS with remaining terms to maturity of approximately 20 years and less. These real market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York. The real yield values are read from the real yield curve at fixed maturities, currently 5, 7, 10 and 20 years. This method provides a real yield for a 7 year maturity, for example, even if no outstanding security has exactly 7 years remaining to maturity.
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Post by discman017 »

Mel Lindauer wrote:Yes, I'm quoting the actual auction issue (4/15/2013) in the secondary market at bloomberg.com. That real yield is now quoted as down to 2.42% real.
OK, I give -- why would people pay such a big premium for the actual auction issue, vs. other issues with similar maturities?

I searched through old posts, and it looks like the same question was asked at the end of this thread, with no answer:
http://www.bogleheads.org/forum/viewtop ... 40&start=0

Thanks!
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Post by Doc »

discman017 wrote: Some of its higher price for the April 2013 is attributable to the deflation protection inherent in the lower 1.04 inflation factor. But it doesn't seem like that deflation protection explains everything --
I am also doubtful that deflation protection explains it. Having over 3% deflation 5 years form now with most developed nation's governments pumping up the money supply seems improbable to me.

The April 2013 also has a low coupon of only 0.625. I think this may be more reason than the lower inflation factor. Lower reinvestment risk? Last week there were 3 of these unusual "dips" in the yield curve. Now there is only one with one other a maybe.

Maybe one of the bonds gurus can explain this.
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Post by BlueEars »

I also vote for going back to a "normal TIPS market". Here is the 5yr constant maturity graph for reference:
http://research.stlouisfed.org/fred2/se ... I5?cid=115
Shows the wild ride we've been on.

I wish someone would give some better idea of who the sellers are. I assume we are seeing a lot of selling to drive these yields so high. How many hedge funds? When will they finish their selling? Any foreign governments? Are there some new techniques being tried like the Japan carry trade?
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Post by Doc »

Les wrote: Here is the 5yr constant maturity graph for reference:
http://research.stlouisfed.org/fred2/se ... I5?cid=115
Shows the wild ride we've been on.
The constant maturity uses a mathematical construct to calculate the exact "five year point". It's is possible that "outlier" data point could make the graphs more erratic than they really are. Never the less it's been some ride.
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Post by larryswedroe »

sh, thanks for the clarification
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Post by idoc2020 »

Mel, I was planning today on buying TIPS on the secondary market:

Jan 15 2016 3.633
coupon 2.0
YTM 3.434
current yield 2.2
gross 100.348
inflation 1.10358

the bid/ask is 89.235/90.967

Apparently it would cost me $100,825 on the Schwab website.

Has this changed very much from yesterday? I seem to recall the same basic numbers on this issue as discussed yesterday on another post. Also, I am paying too much to buy this on the secondary market? I'm having a hard time understanding how to evaluate this deal. Do I bid for this with my own price? Any help appreciated.
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Post by BlueEars »

You can see some TIPS history by going here:
http://online.wsj.com/mdc/public/page/2 ... nav_2_3000
Then select the date in the "Find Historical Data" link with the drop down calendar.
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Post by mbs »

Mel,

Don't you think we're in for some sustained downward price pressure on the TIPs? The TIP ETF has been bouncing around $94 for the last few days, but with Uncle Sam getting ready to flood the mkt with new debt, I'm not convinced it won't go lower. Any thoughts?

/mbs
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Post by Mel Lindauer »

mbs wrote:Mel,

Don't you think we're in for some sustained downward price pressure on the TIPs? The TIP ETF has been bouncing around $94 for the last few days, but with Uncle Sam getting ready to flood the mkt with new debt, I'm not convinced it won't go lower. Any thoughts?

/mbs
Hi mbs:

I don't have a working crystal ball, so I can't answer that. All I can do is recommened that whenever folks find a guaranteed real return they're happy with and can hold to maturity, they should lock it in and not worry about which direction the market may or may not go at some other point in time.

Regards,

Mel
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Post by larryswedroe »

re TIPS

likely two forces working in opposite directions here

Supply of bonds going way up--puts downward pressure on prices

Demand for capital going way down and flight to quality drives prices up

IMO the latter is the one likely to dominate, but of course my crystal ball is cloudy.
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Post by mbs »

Yes, those crystal balls can be cloudy, particularly when the light shining from them makes you feel like a deer in the headlights.

Bottom line, I think the market's volatility over the coming months will allow for lots of chances to acquire TIPs at prices that are historically good. And there's something to be said for buying incrementally rather than investing the whole allocation in one fell swoop.

Thanks for the response, Mel/Larry.

/mbs
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Post by Lbill »

I checked Fido's TIP prices just now and see that out to 2017 the real yields are > 3% to >4% for the shorter maturities. Yet for some reason the 4/15/13 which was just auctioned has a yield to worst under 2.5% which is way out of step. Anybody know why? The 2013 has a coupon of .625 so maybe it is the lower reinvestment risk, but the 1/2015 has a low coupon of 1.625% and it shows a YTM of > 3.4% (I just bought some).
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Post by Lbill »

Answering my own question - I looked at the TIPS prices again and it is clear to me that the inflation factor is playing a big role in the pricing as well. The 2013 has a low factor of 1.036 as well as the low coupon. This combination is apparently making them very attractive at least in terms of having less risk of nominal losses.
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