I bought my first individual TIPS yesterday

[tc101]

I have had an investment in the Vanguard TIPS fund for years, but yesterday I bought my first individual TIPS. I only bought one. It only cost $990. I thought that actually putting money down would make me focus my attention more on the process.

I based my decision on things I had read here.

Did I make a good decision? This is what I bought:


UNITED STATES TREAS NTS TIPS 2.000% 01/15/2016
CUSIP 912828ET3
Pay Frequency SEMI-ANNUALLY
Coupon 2.000
Maturity Date 01/15/2016
Moody's Rating AAA
S&P Rating AAA
Issuer Events NO
Call Protection YES
Bond Type TIPS
Blue Sky States --
Interest Accrual Date 01/15/2006

[larryswedroe]

that is exactly the bond I am buying and in fact right now I am in process of selling the July of 18 that I had bought and buying this same bond. About 80bp more in yield and two years less risk. Seems crazy to me.

I spoke to the PIMCO people and they too think this is irrational anomaly due to selling by some institutional investors that were long this particular maturity.

[Erwin]

Larry,

A while back I bought a 2026 TIP bond yielding then 2.4%. Since then two things happened: the yields went up and second, some shorter bonds are yielding more than longer. So, now I can get a much shorter TIP bond yielding substantially more. Does it make sense selling the bond and buying the shorter term? Erwin

[indexfundfan]

I bought the 7/15/2015 TIP with a YTM of ~3.64% this morning. The 1/15/2016 had a little lower YTM when I was submitting the order.

[indexfundfan]

Here's the YTM (real yield) of various TIPS maturity (blue dots) at the time of this post. Can anyone comment why the 4/13 has a much lower yield?

[Sammy_M]

I bought the 7/15/2015 TIP with a YTM of ~3.64% this morning. The 1/15/2016 had a little lower YTM when I was submitting the order.

I bought both the 7/15 and 1/16 yesterday. And some 1/25. If they all had the same yield I'd have bought all 20 yrs, but decided to put half in 20yrs and half in the higher yielding 10yrs.

[tfb]

Getting on the bandwagon. Sold 4/2012 bond, bought 1/2016 bond. Extended maturity and got a higher yield.

I wanted to do the trades by phone but I gave up after waiting 30 minutes on hold with VBS.

[matt]

larryswedroe wrote:

that is exactly the bond I am buying and in fact right now I am in process of selling the July of 18 that I had bought and buying this same bond.

It sounds like Larry is turning into a pattern day-trader with TIPS lately.

[tc101]

I just bought the same bond at Schwab, but I payed $10 more than I payed yesterday at Fidelity. Am I paying too much or did the price change?

Here is how Schwab breaks down the price:

Market Price: $900.94
Est. Mark-up: $0.00

Principal Amount: $900.94
Inflation Accrual: $92.81

Factored Principal: $993.75
Factored Accrued
Interest: $7.49
Inflation Factor: 1.10302

Est Total Cost: $1,001.24

[tc101]

The thing that confuses me is that I just paid $1,001.24 for it, but on the screen it now says it has a market value of $900.78.

[tc101]

And to add to my confusion, Fidelity, where I bought the same bond yesterday for $990, says it's current value is $979.10.

One thing I am sure of is that buying a few of these individual bonds is really focusing my attention and will get me to understand the topic better.

[tc101]

Can anyone help me understand the last 3 questions?

[tfb]

I just bought the same bond at Schwab, but I payed $10 more than I payed yesterday at Fidelity. Am I paying too much or did the price change?

The price changed.

The thing that confuses me is that I just paid $1,001.24 for it, but on the screen it now says it has a market value of $900.78.

The screen is wrong.

And to add to my confusion, Fidelity, where I bought the same bond yesterday for $990, says it's current value is $979.10.

That's probably the value as of the end of yesterday. Wait until Monday and you will probably have a higher value.

[Speedy]

Larry,

A while back I bought a 2026 TIP bond yielding then 2.4%. Since then two things happened: the yields went up and second, some shorter bonds are yielding more than longer. So, now I can get a much shorter TIP bond yielding substantially more. Does it make sense selling the bond and buying the shorter term? Erwin

I'm not Larry, but I'll offer a caution. The long term 2026 bond has a high sensitivity to real rate changes. You will take a substantial capital loss by selling when rates are higher than when you purchased it. I'd estimate the capital loss at about 8% or so. This needs to be considered in your decision. If you hold that bond until real rates drop back down, that capital loss may be recovered.

In this post, an idea of TIPs sensitivity to real rates can be seen.

http://www.bogleheads.org/forum/viewtop ... highlight=

Regards,
Bill

[SilentThunder]

The thing that confuses me is that I just paid $1,001.24 for it, but on the screen it now says it has a market value of $900.78.

When you buy at Schwab right after the transaction they show the market value of the bond without adjusting for it's inflation factor. You'll get a higher quote at the end of the day when they make the inflation factor adjustment.

[wshang]

Can anyone comment whether it makes any sense to buy the TIP maturing in April 2010 represented by that ~4.3% yield by Indexfundfan? Thanks!

[tc101]

OK, now at 11pm with the markets closed, Schwab says it is worth $977.86, but I paid $1001.07. I didn't think they charged a commission. Did it go down that much from when I bought it at about 2:30?

Here are the details of the purchase

Transaction Details for:
,UST INFL INDEX 2%01/16INFL INDEX DUE 01/15/16
TRADE DATE: 11/14/2008
SETTLE DATE: 11/17/2008
SECURITY #: 8782344
CUSIP #: 912828ET3
ACTION: Buy
QUANTITY: 1000.00000
PRICE: $90.078100
PRINCIPAL: -$993.58
ACCRUED INTEREST: 7.49
COMMISSION: $0.00
REDEMPTION FEE: 0.00
EXCH PROC FEE: 0.00
PRIME BROKER/TRADE AWAY: 0.00
STATE TAXES: 0.00
WITHHOLDING TAXES: 0.00
ORDER-HANDLING FEE: 0.00
OTHER: 0.00
TOTAL: -$1001.07

[tc101]

Even if no one has the time or energy to explain the details of this to me, the one thing I really want to know is if there are any hidden charges or anything sneaky going on when I buy a TIPS at Schwab.

[tc101]

Now at Fidelity, they list the same TIPS, which I bought yesterday for $990.10, as being worth $985.31.

They give a more detailed explaination of the price:

Most Recent Value equals Value of Quantity times Factor times Most Recent Price divided by 100 =
(1,000 Quantity x 1.10322000 Inflation Factor x89.313) / 100

[tfb]

OK, now at 11pm with the markets closed, Schwab says it is worth $977.86, but I paid $1001.07. I didn't think they charged a commission. Did it go down that much from when I bought it at about 2:30?

$7.49 was accrued interest. That's gone (you will be paid back on 1/15/2009). You account will only show principal value. So you really paid $993.58. I guess Schwab is still using yesterday's pricing. Wait until Monday morning and see if they update it. Bond prices don't update more often than once a day. You have to wait for the update to catch up.

[cato]

AFAIK, Fidelity values your holdings based on the Bid at the last close. So, you're normally seeing yesterday's price. It's pretty unlikely that you actually bought at the Bid price, so if you buy near the close, you're probably going to see a loss the next day.

Also, don't forget that the value shown in your porfolio and the quote screen does not reflect any accrued interest you paid when you bought.

[SilentThunder]

OK, now at 11pm with the markets closed, Schwab says it is worth $977.86, but I paid $1001.07. I didn't think they charged a commission. Did it go down that much from when I bought it at about 2:30?

$7.49 was accrued interest. That's gone (you will be paid back on 1/15/2009). You account will only show principal value. So you really paid $993.58. I guess Schwab is still using yesterday's pricing. Wait until Monday morning and see if they update it. Bond prices don't update more often than once a day. You have to wait for the update to catch up.

I think what tc101 is seeing is Schwab's very large ask price premium. While they talk about no fees etc. they don't mention that you're paying a wide basis point difference on the ask price to it's actual market value. I bought 3 separate TIPS from Schwab last week and paid an ask premium of least 100 basis points on 2 of them. The premiums are bigger than people think (lots of people say they are only 20 to 30 basis points) and they vary depending on which TIPS you purchase.

Schwab is showing tc101 the end of day price for his TIPS. He just paid over market value for it. Probably a lot over market value.

[cmarino]

The premiums are bigger than people think (lots of people say they are only 20 to 30 basis points) and they vary depending on which TIPS you purchase.

Yes I was one saying 20-30 basis points. I checked my trades on a bloomberg. Yes it does vary by issue. What is your source?

[SilentThunder]

Yes I was one saying 20-30 basis points. I checked my trades on a bloomberg. Yes it does vary by issue. What is your source?

I was doing real time comparisons between Bloomberg's bond rate web page and what you could purchase the same TIPS for at Schwab. I was seeing differences of 133 basis points on some offerings. The Schwab quote was their ask price. What I don't know is what is the Bloomberg quote. Ask? Bid? What?

Normally I wouldn't have paid too much attention but after purchasing 3 sets of TIPS from Schwab last week I noticed I was down about 0.8% to 1.5% from my purchase price to Schwab's end of day market value at the end of each of the purchase days. Some of that is of course the market moving from the time of purchase but I know the market price of the first TIPS I purchased actually increased throughout the remainder of the day while I still ended up being down 0.8% at the end of that day. So the absolutely floor on the ask to market value spread I paid that day was 80 basis points. The more I looked into it the more I saw that Schwab has a higher ask price spread than Fidelity and spreads in general on TIPS seem pretty high at the moment on the longer dated issues. 5 year spreads were in the 30 basis point range but 16 to 20 year spreads were as high as 133.

I'll throw a caveat in here and say I wasn't performing rigorous analysis so this is kind of anecdotal. I was a little surprised at the price drops after each purchase and wanted to understand why it was so. I did some amateur analysis that showed me a possible explanation for the results I saw and stopped at that.

[soaring]

Vanguard brokerage tips web page now shows a $75 fee to purchase existing tips. I don't remember that before the site went down last month or so.

But now that it is back up it shows $75 on the calculator page of each bond I searched.

I wonder if you are getting better spreads buying at Vanguard? But in any case it better be more than a few thousand purchased or the fees are toooo much.

gene

[tc101]

I think what tc101 is seeing is Schwab's very large ask price premium. While they talk about no fees etc. they don't mention that you're paying a wide basis point difference on the ask price to it's actual market value.

So is Schwab a bad place to buy TIPS? I have accounts a Schwab, Fidelity and Vanguard. I am Voyger at Vanguard. Where would I get the best deal?

[SilentThunder]

I decided to go back and do one more set of comparisons. This is a comparison between Schwab's ask price and Bloomberg's bond rates page, http://www.bloomberg.com/markets/rates/index.html, on Saturday morning.

04/15/2013 92.66406 vs. 92.53125 or 13.281 basis points
07/15/2018 87.93750 vs. 87.53125 or 40.625 basis points
01/15/2028 85.03906 vs. 84.46875 or 57.031 basis points
04/15/2032 111.06250 vs. 110.00000 or 106.250 basis points

Not as bad as I saw last time I looked.

[tfb]

Vanguard brokerage tips web page now shows a $75 fee to purchase existing tips. I don't remember that before the site went down last month or so.

But now that it is back up it shows $75 on the calculator page of each bond I searched.

I wonder if you are getting better spreads buying at Vanguard? But in any case it better be more than a few thousand purchased or the fees are toooo much.

gene

Vanguard's commission for secondary Treasury trades:

Online. Standard, Voyager, and Voyager Select: $0.75 per $1,000 face amount, $40 min–$75 max; Flagship: $0.
Associate assistance. Standard, Voyager, and Voyager Select: $1 per $1,000 face amount, $50 min–$125 max; Flagship: $20.

If you are flagship but you are not logging in to your account, Vanguard can only show its standard commission. On purchases of $100k or more, Vanguard's fee is $75, plus spread from BondDesk.

[SilentThunder]

I think what tc101 is seeing is Schwab's very large ask price premium. While they talk about no fees etc. they don't mention that you're paying a wide basis point difference on the ask price to it's actual market value.

So is Schwab a bad place to buy TIPS? I have accounts a Schwab, Fidelity and Vanguard. I am Voyger at Vanguard. Where would I get the best deal?

I don't know tc101. I think at the moment Schwab is a little worse than Fidelity from what I've seen the last two weeks. It seems that who is the best varies over time so you have to look at all your options at the time of purchase.

The best deal from an additional cost perspective is to not buy or sell in the secondary market. Buy at auction and hold to maturity. A lot of us haven't been in individual TIPS but at +3.0% real YTMs it's hard to resist so we're purchasing in the secondary market. Going forward I'm now only purchasing at auction. I did a large asset allocation change last week so I purchased in the secondary market. I've been told that there truly is no cost at Fidelity, Schwab, and Vanguard for non-competitive bid treasury auction purchases. I'm waiting for the 10 year and 20 year TIPS auctions in January before purchasing again...because I'm out of money!

[tc101]

I'm waiting for the 10 year and 20 year TIPS auctions in January before purchasing again

Maybe that's what I'll do. I planned to rebalance the first week of December, but I could wait, or rebalance into the Vgd TIPS fund.

[Speedy]

Can anyone comment whether it makes any sense to buy the TIP maturing in April 2010 represented by that ~4.3% yield by Indexfundfan? Thanks!

That bond currently has an inflation factor of about 1.15. This means that if deflation occurs between the time you buy the bond and maturity the bond would lose value. For example, if deflation between now and April 2010 were 5%, the inflation factor at maturity would be 1.10, so the value of the bond would drop by 5% as a result of deflation. There is no rate risk if held to marutity, but deflation risk is substantial according to the market. Many think long term deflation is unlikely, but short term deflation is quite possible.

If you buy a long term bond with a low inflation factor, the risk of deflation to that bond is quite small. At maturity the Treasury will pay the face value of the bond times the inflation factor (or at least 1.0).

If you buy that April, 2010 bond you would be making a bet that short term deflation will not occur. The market is betting against you, or at least saying deflation risk is substantial between now and April, 2010.

Please refer to my subsequent posts on this thread for clarification.

Regards,
Bill

edited to add reference to later posts on this thread

[cmarino]

I'm waiting for the 10 year and 20 year TIPS auctions in January before purchasing again

Maybe that's what I'll do. I planned to rebalance the first week of December, but I could wait, or rebalance into the Vgd TIPS fund.

Yes be sure to think hard before you take the plunge on another $1,000 investment, you might save a whole 3 dollars by waiting.

[wshang]

Thanks Speedy for taking time to answer my question.

By rough calculation, the bond sells for 95. With a maturity value of 100 would one be correct to say the worst case return is (5/95)(/1.4) where 1.4 is the years to maturation, (plus any bonus from the inflation factor of ~1.1?

In other words, 3.75%+ for a 1.4 year bond?

[Speedy]

Thanks Speedy for taking time to answer my question.

By rough calculation, the bond sells for 95. With a maturity value of 100 would one be correct to say the worst case return is (5/95)(/1.4) where 1.4 is the years to maturation, (plus any bonus from the inflation factor of ~1.1?

In other words, 3.75%+ for a 1.4 year bond?

In my simple estimation, it is not so rosy: The ytm quoted is the real yield, independent of inflation/deflation. Assuming no inflation/deflation, this bond will yield 4.3% real and 4.3% nominal (annualized) at maturity. So total real (and nominal) return is 4.3% * 1.4 = 6% (not annualized).

If deflation of 5% occurs, the nominal return is 6%- 5% = 1% (not annualized). If deflation of 7% occurs, the total return is 6% - 7% = -1% (not annualized).

If inflation of 5% (not annualized) occurs, the nominal return is 6% + 5% = 11%.

Since you are buying the bond with an inflation factor of 1.15, if the inflation factor is 1.10 at maturity that would be a negative bonus, not a positive bonus. Worst possible case is very high deflation and the inflation factor drops to less than 1.0, and Treasury pays you 1.0. That would represent an inflation factor loss of 10%. So your nominal return would be 6% - 10% = -4%. Not likely, but that is the worst possible case.

Deleted

Please refer to my comments in a later post on this thread for clarification.

Regards,
Bill

editied to correct inflation factor and related information and make reference to later post

[tc101]

Yes be sure to think hard before you take the plunge on another $1,000 investment, you might save a whole 3 dollars by waiting.

By doing things slowly and cautiously I avoid making quick emotional decisions. You are correct that the money saved on the spread of 1 TIPS is not that important, but it can amount to 1%, and over time, blowing 1% on a regular basis has an impact.

[plainolebill]

I'm a rookie and after reading this and other discussion about TIPS I'm confused about the impact of deflation. In the event of deflation will a TIP drop below it's face value even if held until maturity ?

TIA

Bill

[Mel Lindauer]

I'm a rookie and after reading this and other discussion about TIPS I'm confused about the impact of deflation. In the event of deflation will a TIP drop below it's face value even if held until maturity ?

TIA

Bill

Hi Bill:

If deflation were to occur, the inflation factor would be adjusted downward, but at maturity, if it's less than 100, it would return face value.

Regards,

Mel

[plainolebill]

Thanks Mel. That's reassuring news.

[Speedy]

If deflation were to occur, the inflation factor would be adjusted downward, but at maturity, if it's less than 100, it would return face value.

I agree, however, I would like to add a clarification. When buying on the secondary market, the investor may pay considerably more than face value.

Take the April 2010 bond for example, the one that has been asked about in this thread. From the current quote, on Fidelity, the ask price is $95.328. However, the buyer pays the adjusted ask price of $110.057985. This is the ask price multiplied by the inflation factor of 1.15561.

At maturity, the holder will receive the greater of the face value or the face value times the inflation factor at the time of maturity. The worst case for the investor is that the inflation factor drops to 1.0 or less. In this worst case, the investor will receive $100 for the bond, not $110.057985 (the amount he/she paid for the bond). I'm not predicting this will happen, but it is the risk the investor takes on this bond at this time.

On the other hand if the investor buys a 2028 bond with an inflation factor of 1.04 or 1.05, the deflation risk is quite low for two reasons: 1) long term deflation is not probable and 2) in the highly unlikely event that net deflation were to occur between now and 2028, the potential loss of 4% or 5% due to deflation over 19 years is not substantial.

edited to correct typo (in bold)

[Mel Lindauer]

Thanks Mel. That's reassuring news.

Speedy's cautionary post (just above this one) should be read and understood, since there's a difference in what you actually paid and par. Remember, it's par that will be returned at maturity if deflation has taken the inflation factor below 100, not what you paid.

Regards,

Mel

[plainolebill]

Thanks again. I see on the Fidelity site the actual price of the TIPS are listed which makes it easier to compare the various issues and lessens the confusion.

I've decided to transfer some IRA money to a Fidelity IRA account and buy TIPS in the secondary market then buy additional TIPS at auction for the IRA after the 1st of the year.

Another question comes to mind, I intend to speak to Fidelity tomorrow, but what happens to the semi-annual interest?

Regards,

Bill

[tfb]

what happens to the semi-annual interest?

What about it? For each bond, you receive it in your account every six months

$1,000 * index ratio at the time of interest payment * coupon rate / 2

Everybody considering buying TIPS should read these FAQs from the Treasury:

http://www.treasurydirect.gov/indiv/res ... ps_faq.htm

And this entry in Bogleheads Wiki:

http://www.bogleheads.org/wiki/index.php/TIPS

[Mel Lindauer]

Thanks again. I see on the Fidelity site the actual price of the TIPS are listed which makes it easier to compare the various issues and lessens the confusion.

I've decided to transfer some IRA money to a Fidelity IRA account and buy TIPS in the secondary market then buy additional TIPS at auction for the IRA after the 1st of the year.

Another question comes to mind, I intend to speak to Fidelity tomorrow, but what happens to the semi-annual interest?

Regards,

Bill

Just to clarify, the interest is paid into your brokerage sweep acount, which is nomally a money market account.

Regards,

Mel

[mbs]

Please help me with the YTM on TC's bond (with apologies in advance if I'm missing the obvious).

Fidelity shows:
Maturity 1/15/2016
Coupon 2%
Inflation Factor 1.10302
Asked Price $99.03024
Asked YTM 3.633%

Does the YTM assume today's inflation factor through maturity?
If so, 100 * 1.10302 * 2% = 2.206%

And (100 * 1.10302) / 99.03024 = 1.114%, but this is 7.5 years of appreciation expressed as a percentage, not compounded and not an annualized yield.

How do you get from 2.206% to the quoted 3.633%, and what formula should I use to calculate the YTM for myself?

Thanks

[tfb]

Does the YTM assume today's inflation factor through maturity?

No, but you can if you want. The YTM is a real YTM. It doesn't depend on any inflation rate assumption.

If so, 100 * 1.10302 * 2% = 2.206%

And (100 * 1.10302) / 99.03024 = 1.114%, but this is 7.5 years of appreciation expressed as a percentage, not compounded and not an annualized yield.

It should be (100 * 1.10302) / 99.03024 - 1 = 11.4%. So if you freeze everything, you get 11.4% principal appreciation in 7.5 years. That's worth, what, 1.4-1.5% a year? Add that to your 2.2% number.

How do you get from 2.206% to the quoted 3.633%, and what formula should I use to calculate the YTM for myself?

Accurate calculation requires a financial calculator or computer software. Back of envelope calculation is done like what I've shown. But if I were you I would just trust the brokerage firm's calculation. They have computers.

[mbs]

Thanks, TFB. The back of the envelope approach works for me.

Also, I was able to replicate the 3.633% using the Excel Yield function by plugging in a rate of 2.2% (coupon * inflation rate).

[SilentThunder]

It will be interesting to see what Wednesday's CPI number from the BLS will do to TIPS pricing. I saw an estimate today that the October decline was going to be in the range of -0.8% from September's number. The TIPS Daily Index Ratios would therefore decline for the 3rd month.

I assume this should push TIPS bond prices down but I've not been following them long enough to know what the pattern is. Does anyone know what the magnitude of change to bond prices tends to be with the addition of a new month's daily index ratio? Leaving out other factors (yes, easier said than done) do bond prices tend to change more than the change in the new daily index ratios? Less? Pretty much in line?

[plainolebill]

Thanks you for the links tfb, I'd read both, I was referring to what happened to the interest in an IRA.

Regards, Bill

what happens to the semi-annual interest?

What about it? For each bond, you receive it in your account every six months

$1,000 * index ratio at the time of interest payment * coupon rate / 2

Everybody considering buying TIPS should read these FAQs from the Treasury:

http://www.treasurydirect.gov/indiv/res ... ps_faq.htm

And this entry in Bogleheads Wiki:

http://www.bogleheads.org/wiki/index.php/TIPS

[SilentThunder]

Thanks you for the links tfb, I'd read both, I was referring to what happened to the interest in an IRA.

Regards, Bill

The interest should be swept into whatever cash instrument you have available in your IRA.

[zzcooper123]

Pardon my ignorance but am I correct that the Vanguard Bond Desk charges about 1% to buy the 2016 TIPS? What is the Dealer's Yield? How do I get TIPS into my retirement account otherwise?