Bogleheads

[SmallHi]

Does anyone feel like this board is becoming stranger and stranger by the day? We are now witnessing 100+ post threads on TIPS auctions? 3 of the top 7 threads are on TIPS? Am I the only one that finds this a bit odd? The fascination with TIPS completely escapes me.

Let me get this straight....with stocks off 40% to 60% from their highs, we should be excited about locking in CPI + 3% for 30 years? Based on the market's inflation expectations and current yields, most fixed income strategies (excluding most nominal treasuries) have an expected return of CPI + 3%.

Even going back 40 years, a simple short term bond portfolio (1-5YR T-Notes) has delievered about +2.5% real, and thats with 3X less volatility. Also, I am guessing as closely as some bogleheads watch their portfolios, short term price swings on long term TIPS securities will not be ignored. And I seriously question whether investors can handle stock-like volatility on bond investments.

One thing that we have learned in all this....

TIPS returns do not = CPI + 2.5%.

As a matter of fact, through today, the iShares Lehman TIPS fund is now down (3.8%) in the last 12 months. CPI through September was running at about +5% for the last year. Thats more like CPI minus 8.8%.

sh

[wab]

[RobG]

Also, the threads on TIPS seem to be mostly about buying individual TIPS, not the fund. The volatility of the actual bond price is somewhat meaningless if it will be held until maturity.

[Mel Lindauer]

[wab]

[moneyman11]

[ZZ]

Some posters have just made their first IRA deposit with a long future ahead. At the other extreme, some want to keep what they have. Very simple.

ZZ

[AlwaysaQ]

I bought my first TIPS at the July '07 auction. I planned to buy more but the coupon rates fell a great deal. I, for one, am very glad that Larry mentioned that the TIPS rates were high by historical standards.

Many of the people on this board are in retirement and TIPS are of interest to them. Others are much younger and are watching the equity markets very closely. Others are learning about tax loss harvesting for the first time.

Different strokes for different folks.

[soaring]

you don't have to buy 30 yr tips to get near 3%. five's are close and 10 was at 3% just the other day and 20yr was too.

So the commitment isn't just 30 yrs. some of us in withdrawal phase don't have 20 yrs to wait for stocks if it takes that long.

Maybe the amount of yrs you have until you begin the withdrawal phase has something to do with your vision?

gene
_________________
Desiderata

[detifoss]

weird post SH

I know you are a bit of a ST corporate evangelist, but the obsession with the TIPS real yields is because it is a free lunch.

Do I have my whole portfolio in TIPS? no - far from it. At this point as of today, I have 8.3% of it in the 2026 issue, and another 3.0% of it in the TIP ETF. Total of 11.3%.

Now, why is it that you would argue against a strategy of extending the duration of TIPS when the real yields rise ot >3.0%?

you are correct to say that most of us invest based on an expectation of inflation + some % (ie we seek a real return). it is also correct to assume that in the long run we can assume that ST nominals are expected to achieve 3+% above CPI.

but why in the world would I take an expected strategy that is equivalent to a guaranteed strategy. what would be the rationale?

most of us with strong equity weighting do so because we expect CPI + 5-6% returns in the long run. If I was given guaranteed returns of CPI +5-6% I can guarantee you that I would shift rather quickly from my equity allocation to TIPS - I'll take guaranteed over expected any day thank you very much.

And the volatility of a guaranteed investment is meaningless. Your statement that most can't handle the volatility of TIPS is somewhat illogical IMO.

Volatility of expected return based asset class - difficult.
Volatility of guaranteed return based asset class - easy.

I respect your philosophy and posts tremendously, but in this case, IMO, you are allowing your investing philosophy to cloud your judgment of this opportunity.

[nisiprius]

[SmallHi]

Yeah, thanks for repeating the "TIPS talking points". Here are the flaws:

a) you cannot ingore short term TIPS price movements while at the same time saying that those same short term price movements relative to stocks make them an efficient portfolio compliment. Its one way or the other folks.

b) as has been pointed out a number of times, historical (pre 97) TIPS correlation data is dependent on CPI +2.5%, which is clearly flawed. With real life data going back over 10 years, TIPS have not been as negatively correlated with stocks as short term treasuries.

c) I appreciate your estimation of future inflation, but it doesn't matter, anymore than your forecast of future stock returns matters. Here is what the market says:
5YR inflation = +0.34%
10YR inflation = +0.71%

At those levels, no fixed income securities have negative real yields. Vanguard ST Investment Grade, for example, has an expected real yield of about +5.2%.

d) CPI risk is not your risk. Your personal spending rate, which is subject to change at any moment and sensitive to the price risk of your investments you'll be using to fund that spending rate in retirement, is your risk. A 20YR TIP is blind to that reality.

feel free to chat up TIPS, its a fairly minor deal, even at these prices.

sh

[SmallHi]

[SmallHi]

[wab]

I agree that 3% TIPS aren't the deal of a lifetime. But 5% TIPS would be.

There is a difference between the volatility of a security with a guaranteed total return vs the volatility of a security with no such guarantee, don't you think?

And I think everybody agrees that CPI risk isn't a personal risk, but it's the only one we can hedge against in the market with bonds. All bonds care about is CPI, not your personal inflation risk.

[nisiprius]

SmallHi, I honestly don't get your point. It's not as if once having bought a TIPS you were signing a contract never to buy anything else. If you want CPI + 2.5%, then if TIPS yield 3% real you say "cool" and you buy them. If they're only yielding 2% you say "Bummer, I can't do this the easy way," and you buy something else and cross your fingers.

On the other hand, if 2% real is good enough than when TIPS are yielding 2% you say "Cool" and you buy them.

Whenever you buy TIPS you get what you expect. Whenever you buy something else, you cross your fingers and hope. Might do better, might do worse.

What are you suggesting I buy instead of TIPS? Because it will probably come in handy. I'll file it away for the next time TIPS have a 1.375% coupon. But right now TIPS look good, and, unlike any other investment I know, when TIPS look good it means they actually are good.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[psteinx]

[nisiprius]

P. S. I agree that there's been some overwrought excitement, but I think it's easy to explain. First, a lot of people who didn't even know what a bond was are suddenly going to their brokerage website and seeing articles with titles likeLooking for conservative investments in a volatile market?

Second, TIPS are usually boring, dull-as-watching-paint-dry. But we've had this funny little blips that means that there's actually something for the financial columnists to write about. And their editors are after them for some angle on what to do when stocks are tanking. So, suddenly people are reading articles that mention TIPS as the flavor-of-the-month.

I must confess it's taken some discipline for me not to jump on this Great Buying Opportunity and just take my usual cautious nibble in the last auction. Pretty good deal, sorta balances out the lousy deal I got in the last one, good enough for me. I don't want to sell stocks into a down market to buy TIPS, and I certainly don't want to dig into my emergency funds to buy TIPS, so, too bad for me.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[Mel Lindauer]

Some facts to ponder:

Actually, since 1926, the real return on st treasuries has been a paltry 0.7%.

ST returns have exceeded 2.0% real only three times in any 30 year period from 1899 to present.

The real return of ST Treasuries from 1988 to 2006 was only 1.7%.

So, when one looks at 3.0% guaranteed real in those terms, it's not too hard to get excited about them, despite the naysayers.

Regards,

Mel

Source: Jeremy Siegels "Stocks for the Long Run" http://books.google.com/books?....;ct=result

[wab]

[Mel Lindauer]

[detifoss]

[bobcat2]

I think TIPS are great and I think the current yield on TIPS of around 3% real is perhaps currently the best deal going. Nevertheless, the assertion that TIPS bought at auction now at 3% real thereby guarantee a real return of 3% if held to maturity is obviously false. After all these coupon bearing bonds are subject to reinvestment risk, and it's highly unlikely the coupons can be reinvested in TIPS at 3% real or even on average within 50 BP's of 3% real.

None of this keeps TIPS from currently being a very good investment, but they definitely don't guarantee a 3% real return if held to maturity. Now if we could get the investment industry to offer zero coupon TIPS to us retail folks that would be a different story altogether.

Bob K
_________________
The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones. - JM Keynes
Good questions outrank easy answers. - PA Samuelson

[mudfud]

[larryswedroe]

few thoughts

First, as I have pointed out the nominal return volatility of a REAL return bond is irrelevant. Makes no sense. Consider this. Say TIPS yield 2% and over next two years the real yield to maturity is always 2%. Now first year inflation is 20% and next year 0. The total returns will be 22 and 2. Now you will have very high volatilty of nominal returns, but it is irrelevant as should be obvious. One should only care about the volatility of the real return.

Second, the historical real return to ST bonds is nowhere near 3%. One month is about 0.7. One year about 1.7 and 5 year about 2.2 (and that is certainly not ST any longer).

Third, SH's statements about the market's expected inflation implied by current yields is simply wrong. There are other issues in the pricing of TIPS including NOW, the liquidity issue. And of course there is also a risk premium for unexpected inflation. One way to observe this is to look at the consensus economic forecasts of longer term inflation and they are all MUCH higher than the figures presented.

Fourth, we don't need long term data on correlations as the answer is pretty simple, stocks are negatively correlated with inflation and TIPS are positively correlated. And note despite the belief, the longer the term (at least to five years) the more negative the correlation of inflation and stocks.

Fifth, the point about your personal inflation is IRRELEVANT because you have to look at the alternative and that is NOMINAL bonds. And they don't hedge your personal inflation risk either. And if TIPS can meet your personal spending needs they are in effect the risk free investment.

The bottom line is that EVERY SINGLE academic paper I am aware of says TIPS should dominate fixed income portfolios UNLESS the risk premium is very high (and even then it might be preferred depending on how risk averse one is to that risk).

Personally I don't think they are a minor deal at all but a major one. But that is my opinion.

[Robert T]

.
Sh,

[SmallHi]

[nisiprius]

[snray02]

Small Hi: Hang in there. I don't own TIPS and have no intention of buying any. I understand their appeal but they don't interest me at all. They simply don't fit in my AA. Sam

[Cosmo]

I have always felt that TIPS have their place in one's portfolio. However, I think the large increase in TIPS posts and how they have performed relative to the Total Market index over the last 7-8 years just goes to show you that we are yet one more step towards MARKET -ok, I am going to say it -CAPITULATION. And when we get back to a prolonged period of double digit annual returns with equities (and it WILL happen again -eventually), we will look back and laugh at these "guaranteed 3% real rate" posts.

Cosmo

[SmallHi]

Robert,

A few comments:

[nisiprius]

[bobbyrx]

I have been adding periodically to TIPS fund (VAIPX). 30% of total assets in TIP fund. At a 3% real return- It may be heresy to confess, but I would take that right now for all my investments and not look back.
Any downside to putting bulk of portfolio in TIPS, except the possibility of missing out on a greater than 3% real return on a more balanced equity portfolio?

[moneyman11]

At least when it comes to TIPS, people are talking and getting excited about buying something low. Unlike so many other assets which don't get discussed on here until they are at or near their peak in price.

Emerging Markets? Commodities? REITS? Not too many posts these days talking about scooping these up at historic lows.

[SmallHi]

Larry, gotta disagree with you here:

[SmallHi]

[wab]

[tfb]

Say there's no negative correlation between TIPS and stocks. So what? You can't eat negatively correlation. I thought we are all investing for a good real return. A guaranteed good real return? All the better.
_________________
The Finance Buff

[nisiprius]

[Robert T]

.
Sh,

Just a few responses.

[djw]

moneyman11,

Nobody posting about buying Emerging Markets, Commodities, and REITs?

Okay, let me break that logjam. Just today I bought additional shares in VEIEX (Emerging Markets index) by selling some VPACX (Pacific index, mostly Japan) which has been my best international fund recently. I think some people call this "rebalancing."

I also shifted some US fund money into International my selling some VTSMX (US Total Stock Market index) and buying some VFWIX (FTSE World ex US index).

I'm itching to buy more VGSIX (REITs) right now, but I exchanged some shares when it popped up 15% vs. VTSMX recently, so I'm waiting for now due to the wash sale rule and VGs 60-day rule.

As far as commodities, two weeks ago I bought VGENX (Energy) for the first time and I'm glad I did. It popped up the day after I bought it. I've already taken a $3,500 profit and reinvested it elsewhere. VGENX has since fallen and I wish I could exchange money into it, but the 60-day rule is keeping me from acting. I hope it stays down so I can invest more in December, but if it takes off again, I'll be happy to take more profits out instead.

Getting back to the original subject, I bought into VBLTX (Long Term Bonds index) a week ago. It's the first time I've bought a bond fund instead of individual bonds. Some of my corporate bonds have seen their quoted prices fall off a cliff, so I needed to take some action to rebalance and return to my AA's 50/50 stock/bond ratio.

I've owned some TIPS for about 5 years now and I'm looking at buying some VIPSX (TIPS fund) as part of my rebalancing strategy. Now that markets are so volatile, it's easier to keep stocks/bonds in balance with some bond funds whose values can be adjusted by performing exchanges in or out as necessary.

[DblDoc]

[Roy]

[nisiprius]

[grayfox]

What all the TIPS fans are missing is that the high real yield of TIPS is for credit risk they are taking on. Sure TIPS may be AAA rated today, but so were all those sub-prime mortgage bonds until the **** hit the fan a few months ago.

If you look at historical returns, the real yield on AAA TIPS issued by Romulus Augustulus back in 476 shot up to 5% just before the Roman empire fell. Will history repeat?

[richard]

nisiprius - which site are you using for those charts?

thanks

[Valuethinker]

[larryswedroe]

Small Hi

Before I get into the discussion, let me repeat what I have said many times, short term high quality bonds are a GOOD alternative to TIPS, just not as good. They were the best until TIPS came along. And at times IMO CDs can be even better because the risk premiums get high, as was the case earlier this year when TIPS yields went negative.

I dont understand your arguments on the first point at all. First, what matters is what is correct, not if someone understands the issue or not. They need to learn the right way to think about things. Second, your point on portfolio volatility being driven totally be the equity side is also not only wrong (there is still some volatility in the real return and there is the negative correlation which reduces portfolio risk) but actually that is the point----you want to DAMPEN the portfolio risk to the appropriate level--in effect making sure the amount of volatility caused by the equity moves is what you can handle

On the second point, the longer the data the more meaningful it is. We dont just look at ERP from say your modern era or the HmL premium but we look longer. But now it is right to look at the shorter data on fixed income? So when it suits you choose to ignore the longer data?

And even if you do use the more recent data, Current TIPS yields are now above the average. And you seem to ignore that you gain two important benefits, as others have pointed out, YOU HAVE NO RISK--investors clearly prefer certainty over uncertainty and should logically be willing to pay a premium (insurance premium or risk premium) to get that guarantee.

As to the forecasts, you mistake what I was saying, given that there is no futures market for inflation we cannot parse out the components of the nominal yield to separate out the liquidity premium and the unexpected inflation risk premium. So the best way IMO to get handle on EXPECTED inflation is to take a look at consensus economic forecasts--that likely is good estimate of the market's estimate.
And TIPS clearly now have a liquidity premium but have the exact same credit risks as nominal treasuries and no call risks either--so that is the only difference (unlike with other fixed income instruments which have those other risks). So if you don't care about liquidity then the premium is a free lunch.

As to your statement about nominals having lower correlations unequivocably--
Here is the data from inception in 3/97
The quarterly correlation with the S&P vs tbills is +0.09, vs 1 year notes it is -.2 and against TIPS it is -.34
If you lookt at annual correlation through Feb then you get these figures:
+0.05 for bills, -.25 for 1 year and -.68 for TIPS
And keep in mind that correlations are AVERAGES. Right now we have very unusual period when the liquidity premium is unusually large.
And also for longer data ST nominals have no to slight positive correlation as you go longer on the curve. TIPS should be negative.

Like I said, show me a single paper with a different conclusion. I have yet to see one. And again, I think ST bonds are fine, just not as good and you run significant reinvestment risk which you seem to ignore.

[ziggy29]

[nisiprius]