UPCOMING 10 year Tips and 20 years Tips auction

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antiqueman
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UPCOMING 10 year Tips and 20 years Tips auction

Post by antiqueman »

This coming Wednesday there is a 20 year tips auction.

This coming Thursday there is a 10 year tips auction.

I assume the yield for both auctions will be negative.

At what point do you consider the negative yield so bad that you would not purchase a tips with that negative yield?

Would that be -0.25 or -0.40 or -0.50. At what point is the negative yield just too distasteful to accept. I realize that to some extent that depends on each persons personal situation. I am just seeking a general guideline.

Also, would you prefer a higher negative yield on a 10 year tips over a lower negative yield on a 20 year tips?

Thank you.
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#Cruncher
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by #Cruncher »

antiqueman wrote: Mon Jul 20, 2020 12:53 amThis coming Wednesday there is a 20 year tips auction.
Incorrect. The auction Wednesday is for a 20-year nominal Treasury bond, not a TIPS. [1] See the offering announcement. [2]
antiqueman in same post wrote:This coming Thursday there is a 10 year tips auction.
Correct. Here is the offering annountcement. [2] My guess for the yield is -0.9% arrived at by extrapolating from Friday's WSJ TIPS Quotes yields for the two TIPS maturing in July of 2028 and 2029:

-0.940% : July 15 2028
-0.911% : July 15 2029
-0.882% : July 15 2030
auction estimate
  1. The Treasury currently has no 20-year TIPS auctions planned. (TIPS auctions are listed on the light blue rows of the Tentative auction schedule PDF file.) This isn't a big problem since older TIPS maturing in about 20 years (February 2040 and February 2041 which currently yield about -0.4%) can be purchased on the secondary market.
  2. Normally I find these on TreasuryDirect's Upcoming Auctions page. But when I first looked, the 20-year nominal was not listed. Now when I look, the 20-year is listed, but the 10-year TIPS is not. Maybe the page is in the middle of being updated. Fortunately you can also find links to offering announcements in the Announcements and Results by Auction Year section of this TD webpage.
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antiqueman
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by antiqueman »

Thank you # cruncher for your response.

In your opinion, what amount of negative yield is so negative on a 20 year tips that you would not consider purchasing it?



Also , am I correct that in evaluating whether to purchase a tips with a negative yield, one subtracts the negative yield from the inflation percentage over a given time. For example,if one bought a 20 year tips with a -0.50 yield and inflation over the 20 years is 3 percent, the holder of the tips would only ultimately receive the benefit of 2.5 inflation protection? ( Hope I am asking the question correctly).
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vineviz
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by vineviz »

antiqueman wrote: Mon Jul 20, 2020 10:43 am Thank you # cruncher for your response.

In your opinion, what amount of negative yield is so negative on a 20 year tips that you would not consider purchasing it?



Also , am I correct that in evaluating whether to purchase a tips with a negative yield, one subtracts the negative yield from the inflation percentage over a given time. For example,if one bought a 20 year tips with a -0.50 yield and inflation over the 20 years is 3 percent, the holder of the tips would only ultimately receive the benefit of 2.5 inflation protection? ( Hope I am asking the question correctly).
I wouldn’t suggest looking at these questions in quite the way you are framing them.

The first question should be: when will the expense you are funding with the TIPS occur? That alone tells you whether you want a 10, 20, or 30-year TIPS.

Second, the inflation protection is 100% of your principal amount. The negative real yield has nothing to do with the inflation protection: that just tells you how many TIPS you must buy today to get $X of real income in 20-years.

If you want $1,000 in purchasing power in 20 years you must spend roughly $1,200 in TIPS today.

But if the nominal bonds were somehow are priced EXACTLY right to account for future inflation , you’d also need to spend $1,200 on a 20-year nominally Treasury bond to get the same result. You’re just taking more risk with the nominal bond, whereas the TIPS is risk-free.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
rab
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by rab »

antiqueman wrote: Mon Jul 20, 2020 10:43 am Thank you # cruncher for your response.

In your opinion, what amount of negative yield is so negative on a 20 year tips that you would not consider purchasing it?



Also , am I correct that in evaluating whether to purchase a tips with a negative yield, one subtracts the negative yield from the inflation percentage over a given time. For example,if one bought a 20 year tips with a -0.50 yield and inflation over the 20 years is 3 percent, the holder of the tips would only ultimately receive the benefit of 2.5 inflation protection? ( Hope I am asking the question correctly).
Here is a discussion of the upcoming 10-year TIPS bond auction as inflation protection: https://seekingalpha.com/article/435926 ... -year-tips
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by #Cruncher »

antiqueman wrote: Mon Jul 20, 2020 10:43 amIn your opinion, what amount of negative yield is so negative on a 20 year tips that you would not consider purchasing it?
If you need a 20-year TIPS, buy it regardless of the yield. But the only possible need I see is as part of a non-rolling TIPS ladder to provide a guaranteed constant dollar income stream in retirement. (Some people call this a "liability matching portfolio" or LMP.) Without this need I'd recommend shorter maturity TIPS -- 1 to 10 years on average.
antiqueman in same post wrote:... if one bought a 20 year tips with a -0.50 yield and inflation over the 20 years is 3 percent, the holder of the tips would only ultimately receive the benefit of 2.5 inflation protection?
Your nominal yield would indeed be 2.5%. It's rather confusing to say your "inflation protection" is 2.5% since, as vineviz points out, "the inflation protection is 100% of your principal amount". Your house insurance protects the total value of your house regardless of the particular claims you may submit on it.

vineviz wrote: Mon Jul 20, 2020 10:59 amThe negative real yield has nothing to do with the inflation protection: that just tells you how many TIPS you must buy today to get $X of real income in 20-years.
Correct, the yield has nothing to do with the inflation protection. But neither does it tell you how many TIPS (i.e., how much face value) your must buy to get a given amount of purchasing power at maturity. That is determined by the index ratio, not by the yield. The yield will determine -- given the coupon -- how much you have to pay for that principal.

For example, to have $20,000 of today's purchasing power in 2040, you'd need to buy $17,000 face value of the 2.125% TIPS maturing Feb 15, 2040. We get this by dividing $20,000 by the 1.18623 index ratio as of 7/21/2020. Because of its currently low yield (-0.393% according to Monday's WSJ TIPS Quotes) and large coupon, the price is currently about 151 + 9/32, meaning you'd have to pay about $30,000 for this:
30,507 = 17000 * 1.18623 * (151 + 9 / 32) / 100
vineviz in same post wrote:If you want $1,000 in purchasing power in 20 years you must spend roughly $1,200 in TIPS today.
I don't know how you get $1,200, vineviz. The amount would depend on the particular TIPS. For example, with the 2.125% coupon Feb 15, 2040 mentioned above, you'd have to pay about $1,500 for each $1,000 of today's purchasing power. But much of this cost is for the stream of coupons between now and maturity. If there were a zero coupon TIPS maturing on the same date with the same -0.393% yield to maturity, you'd have to pay only about $1,080:
1,080 = 1000 / (1 - 0.393% / 2) ^ ((DATE(2040, 2, 15) - DATE(2020, 7, 21)) / (365.25 / 2))
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by vineviz »

#Cruncher wrote: Tue Jul 21, 2020 2:21 am
antiqueman wrote: Mon Jul 20, 2020 10:43 amIn your opinion, what amount of negative yield is so negative on a 20 year tips that you would not consider purchasing it?
If you need a 20-year TIPS, buy it regardless of the yield. But the only possible need I see is as part of a non-rolling TIPS ladder to provide a guaranteed constant dollar income stream in retirement. (Some people call this a "liability matching portfolio" or LMP.) Without this need I'd recommend shorter maturity TIPS -- 1 to 10 years on average.
That's not what I would recommend. Buying TIPS with a duration shorter than your investment horizon (e.g. as part of a rolling ladder) leaves the investor exposed to interest rate risk, a risk that can be costlessly eliminated through duration matching even without committing to a fully cash-flow matching approach.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
HappyJack
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by HappyJack »

What about a fund like LTPZ long term tips. It has a steep .20 expense ratio but the duration will stay around 21.46
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Re: UPCOMING 10 year Tips and 20 years Tips auction

Post by vineviz »

HappyJack wrote: Tue Jul 21, 2020 9:18 am What about a fund like LTPZ long term tips. It has a steep .20 expense ratio but the duration will stay around 21.46
I use LTPZ in my own portfolio, mostly as a temporary allocation until I buy the individual TIPS that I need for my non-rolling ladder.

The 20 bps expense ratio irks me, though, since the fund only owns 10 bonds and the manager only needs to buy and sell one bond a year. I wish that Schwab, iShares, or Vanguard would launch a competitor.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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