Can you explain TIPS (VIPSX loss vs. VTAPX gain) ?

[Taylor Larimore]

Bogleheads:

According to Vanguard, their Inflation-Protected Securities fund (VIPSX) had a 3-Month LOSS of -0.79%

https://personal.vanguard.com/us/funds/ ... =INT#tab=1


Vanguard recently introduced a new short-term TIPS fund (VTAPX). According to this link, it had a 3-Month GAIN of +0.66%:

https://personal.vanguard.com/us/funds/ ... =INT#tab=1

Can anyone explain why one TIPS fund went DOWN while the other TIPS fund went UP?

Thank you and best wishes.
Taylor

[grabiner]

This seems to be the same phenomenon which occurs regularly with short-term versus intermediate-term bond funds. Short-Term Inflation-Protected Securities has a duration of 2.5 years, while Inflation-Protected Securities has a duration of 8.5 years, and is thus much more volatile (but with a higher yield, negative 1.12% versus negative 2.32%). When TIPS rates rose in the last two months, that caused the longer-term fund to lose more than 1% of its value.

You can see the same effect with Vanguard's Treasury funds; Short-Term Treasury was flat in the last two months, Intermediate-Term Treasury lost 1%, and Long-Term Treasury lost 5%.

Normally, when rates rise, short-term funds will lose some value as well. However, short-term rates have not risen recently; presumably, investors are expecting that short-term rates will rise in a few years but a rise is not imminent.

[#Cruncher]

First, here is how Vanguard arrives at the -0.79% and +0.66% returns for the past three months. $1,000 invested in VIPSX on 10/31/2012 fell 0.79% to $992.12 on 1/31/2013. But $1,000 invested in VTAPZ grew 0.66% to $1,006.64 during the same period.
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)

Code: Select all

           Price/sh     Div/sh    Div Shs    Tot Shs       Tot $     % Change
           --------     ------    -------    -------     ---------   --------
10/31/12    $14.95                            66.890     $1,000.00
12/19/13    $14.53      $0.405     1.864      68.754       $999.00
01/31/13    $14.43                            68.754       $992.12    -0.79%

Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX)

Code: Select all

10/31/12    $25.02                            39.968     $1,000.00
12/19/13    $25.09      $0.026     0.041      40.009     $1,003.84
01/31/13    $25.16                            40.009     $1,006.64     0.66%

Looking at just two representative holdings of each fund:

Code: Select all

                     ------ Yield ------    ---------- Ask Price ---------
Matures      Age     10/31/12   01/31/13     10/31/12    01/31/13     Chg
--------    -----    --------   --------    ---------    --------    -----
04/15/15    2.453    -1.306%    -1.833%     104.53125    105.25       0.7%
01/15/22    9.207    -0.864%    -0.770%     109.5        108.3125    -1.1%

The yield for the April 2015 -- whose age is close to VTAPX's average 2.6 year maturity -- decreased about 0.5% point over the three month period and its price correspondingly rose 0.7%. On the other hand the yield for the January 2022 -- whose age is close to VIPSX's average 9.3 year maturity-- increased about 0.1% point over the three month period and its price correspondingly fell 1.1%.

Price Source:
WSJ TIPS Quotes 10/31/2012
WSJ TIPS Quotes 1/31/2013

[peppers]

Was just reading this.
https://institutional.vanguard.com/VGAp ... gShortTIPS

The Long and Short of TIPS

[Phineas J. Whoopee]

Hi Taylor,

While I'm not as analytical this evening as earlier posters (the Merchant of Venice bit wore me out a little ), interest rates across the real yield curve are no more constrained to move in parallel than interest rates across the nominal yield curve.

I don't have to tell you; I hope I don't have to tell anybody; but to be sure it is clear to anyone who might later come surfing bogleheads.org:

1) Bond funds are not bank accounts; and a short-term bond fund does not bear the same relationship to a longer-term fund that a short-term CD bears to a longer-term CD; and

2) In funds one owns shares. One does not own dollars.

PJW

[tfb]

The yield for the April 2015 -- whose age is close to VTAPX's average 2.6 year maturity -- decreased about 0.5% point over the three month period and its price correspondingly rose 0.7%. On the other hand the yield for the January 2022 -- whose age is close to VIPSX's average 9.3 year maturity-- increased about 0.1% point over the three month period and its price correspondingly fell 1.1%.

In other words, the yield curve steepened.

[steve roy]

Talked to a flagship person yesterday. She said that a reason Vanguard will use the short term TIPs fund in the target funds is to minimize the money market piece, which has been paying zip.