Bogleheads

gadfly888 · Joined: 13 Apr 2007 Posts: 64

Good Morning,

I currently have a bunch of individual tips and vipsx bought in 3% yield
range. I've kept them this long due to inertness. Belatedly adopting
Larry Swedroe's allocation strategy of holding no TIPS when the real
yield is <1.5%, I intend to sell all my TIPS early next week and purchase
short term federal bonds. All of my bonds have been TIPS or I bonds,
so rebalancing to nominal bonds is not an option. Have any of you
adopted this strategy? If not why not?

Gad-

AzRunner · Joined: 19 Feb 2007 Posts: 722 Location: Phoenix

Yes, you will lock in your capital gain on the TIPS but you give up the inflation protection that I assume was part of your reason to buy TIPS in the first place.

I just looked at the yield on Vg Short Term Federal Bond fund (2.94%). You may be doing better with longer term TIPS.

My own thinking is that formulas work as a first step but you also need to look at the specific market situation. Right now real rates are extremely low and the flight to quality has driven up the price and thus lowered the yield on short term federal bonds (not to mention the Fed's action).

Another approach to consider is to sell your shortest term TIPS (with the lowest yield to maturity) and move those to the S-T Federal bond fund. I'm always hesitant to make wholesale moves.

The key is why you bought the TIPS in the first place and why the major change now?

Norm

Rager1 · Joined: 01 Jun 2007 Posts: 440

Gad,

I don't believe you can successfully time the bond market any more than you can successfully time the stock market. In my opinion, moving in and out of the bond market is a sure way to underperform what the market is doing.

As Norm stated, you should look at the reason you purchased them in the first place. If that reason is still valid, I see no reason to change.

Ed

Les · Joined: 10 Mar 2007 Posts: 1565 Location: Northern Calif.

I think you can be successful with either the buy-hold approach or moving to short term bonds when real rates are so low. Personally I've done the latter. But right now the yield on short term treasuries is so low relative to it's 5yr average that I'd go with either short term bond index or short term investment grade. The yield spreads between these indexes are at extremes not seen in previous crisis (Iraq war, LTCM, 9/11).

rwwoods · Posted: Sun Mar 23, 2008 6:46 pm Post subject:

I sold my TIPs when the interest rate fell below 1.5% and moved the funds to interimediate corporate bonds.
_________________
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. - Arthur Schopenhauer, German philosopher (1788 - 1860)

larryswedroe · Joined: 22 Feb 2007 Posts: 5368 Location: St Louis MO

As I have stated, I think there are two good strategies with TIPS. One is simply buy and hold and the other is to shift maturities (this is not much different really than the strategy DFA uses that is based on the historical evidence)

Right now IMO a reasonable strategy is to barbell--in the short end own CDs which are providing the best yields. On the longer end own 20 year TIPS.

Here is my thinking--historically 1 year has yielded about 1.7% over inflation, 5 year 2.2%, 10 year 2.3% and 20 year 2.4%. While all TIPS are yielding less than comparable historical maturities, the lowest differential is at the long end with the 20 year yielding about 70bp below the historical average.

By barbelling you reduce the risk of holding the longest maturities.

Right now unfortunately no really good choices. But the TIPS yield curve is relatively steep. I just wish real rates were higher. But we have a huge flight to quality and nominal treasuries of all maturities appear to provide expected negative real returns (as investors pay a liquidity premium).

Rob't · Joined: 19 Apr 2007 Posts: 101

I understand Larry's point about barbelling if your plan is to hold individual securities, but if by choice or necessity (eg your employer's plan option limitations) you are limited to mutual funds, what would be the best choice? My guess is that moving to short term corporates with the real rate of TIPS funds being so low would be the best risk/return mix. Then, when real rates start moving over 1-1.5% again, move gradually to an increasing proportion of TIPS. Rather than considering this market timing, I would suggest that one is accepting that short term rates must have an inflation expectation built in and that it is historically in excess of 1%. The reason that TIPS real rates are so low is that their NAV has been irrationally driven up by the flight to quality. While I accept the truism that the market can stay irrational longer than I can stay solvent, in this circumstance, being > 15 years from any need to make withdrawals, I'm betting on solvency.

larryswedroe · Joined: 22 Feb 2007 Posts: 5368 Location: St Louis MO

robert
I agree, but would shift to shorter term to intermediate CDs as they appear to best offer now and risk free if stay under the limits.

Hedgy · Joined: 28 Mar 2007 Posts: 232

larryswedroe · Joined: 22 Feb 2007 Posts: 5368 Location: St Louis MO

Hedgy
Like I said, you could just keep the position. Unfortunately not many good choices now. MBS look much more attractive now with spreads widening but I would not want extention risk. And Treasuries all priced for very low/negative real yields. Very tough call as I would not violate my basic premises of not taking credit risk. But if want/need higher return might look at a fund that buys government agencies or very high grade corporate bond fund that is short term (the only place credit risk appears to have been rewarded) appropriately (dont have the same call risks) and credit risk increases with time

Kirk · Joined: 16 Oct 2007 Posts: 27 Location: Los Altos, CA

OptionAl · Joined: 26 Mar 2008 Posts: 391

Though I think that it's easier to make such judgments on bonds than stocks, is this not market timing, which appears to me to be a board no-no?

Kirk · Joined: 16 Oct 2007 Posts: 27 Location: Los Altos, CA

OptionAl · Joined: 26 Mar 2008 Posts: 391

Kirk, I agree, I wasn't really addressing your post or rebalancing in general, but moving in and out of different classes and durations of bonds, especially when held in a fund.

ddb · Joined: 26 Feb 2007 Posts: 3654 Location: Manhattan

gadfly888 · Joined: 13 Apr 2007 Posts: 64

Sold all TIPS, bonds and vipsx, two days ago. Proceeds sitting in prime
money mrkt. Will submit limit buy orders for VTI in vicinity of recent
mrkt. lows with portion of proceeds. Still holding adequate bond allocation,
all older 2-3% fixed I bonds and old EE's that pay 90% of 5 yr. treasury.
Call it Mrkt. timing, call it spinach, Mr. Swedroe's assessment that viewed
historically treasuries have more downside than upside is compelling.
Mr. William Bernstein's advice that one might consider a moderate increase
to the equity allocation during times of mrkt. stress is sounding more and
more timely. Hmmm, maybe timely is a poor choice of words Wink

Gad