Good idea to hold TIPS now?

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mike2468
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Good idea to hold TIPS now?

Post by mike2468 » Thu Jul 30, 2020 8:45 am

Hello,

My wife and I are around 2 1/2 years from retirement and are thinking about holding some TIPS in our portfolio. I know nobody knows if or when inflation will come but I feel like I should be prepared if it does.

45% of our bond portfolio is in Fidelity U.S. Bond Index Fund (FXNAX) and the remaining 55% is in a combination of Total U.S. and Total International Stock Indexes.

I was thinking about selling some of our current bonds to buy Fidelity Inflation Protected Bond Index (FIPDX) but not sure how much or even if this is a good choice or good time to do it now. I read in another forum that one should buy short term TIPS. I was thinking of buying maybe 20% of our bond holdings.

Your thoughts are appreciated.
Mike

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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz » Thu Jul 30, 2020 10:11 am

mike2468 wrote:
Thu Jul 30, 2020 8:45 am
I was thinking about selling some of our current bonds to buy Fidelity Inflation Protected Bond Index (FIPDX) but not sure how much or even if this is a good choice or good time to do it now. I read in another forum that one should buy short term TIPS. I was thinking of buying maybe 20% of our bond holdings.
Short-term TIPS are almost surely a terrible idea.

FIPDX is a great choice, though, and for most investors I’d say between 1/3 and 2/3 of their bonds could reasonably be TIPS.

Another simple approach to just completely replace your FXNAX with a 50/50 combination of FIPDX and FCBFX, which is Fidelity’s corporate bond fund. This pseudo-replicates the corporate/Treasury balance of total bond but with TIPS instead of nominal Treasuries.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

corp_sharecropper
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Re: Good idea to hold TIPS now?

Post by corp_sharecropper » Thu Jul 30, 2020 1:04 pm

vineviz wrote:
Thu Jul 30, 2020 10:11 am
mike2468 wrote:
Thu Jul 30, 2020 8:45 am
I was thinking about selling some of our current bonds to buy Fidelity Inflation Protected Bond Index (FIPDX) but not sure how much or even if this is a good choice or good time to do it now. I read in another forum that one should buy short term TIPS. I was thinking of buying maybe 20% of our bond holdings.
Short-term TIPS are almost surely a terrible idea.

FIPDX is a great choice, though, and for most investors I’d say between 1/3 and 2/3 of their bonds could reasonably be TIPS.

Another simple approach to just completely replace your FXNAX with a 50/50 combination of FIPDX and FCBFX, which is Fidelity’s corporate bond fund. This pseudo-replicates the corporate/Treasury balance of total bond but with TIPS instead of nominal Treasuries.
Can you explain the highlighted statement?

Any chance you could also include your thoughts in intermediate term tips (I'm guessing that's what FIPDX is) vs long term tips like LTPZ?

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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz » Thu Jul 30, 2020 2:36 pm

corp_sharecropper wrote:
Thu Jul 30, 2020 1:04 pm
vineviz wrote:
Thu Jul 30, 2020 10:11 am

Short-term TIPS are almost surely a terrible idea.
Can you explain the highlighted statement?

Any chance you could also include your thoughts in intermediate term tips (I'm guessing that's what FIPDX is) vs long term tips like LTPZ?
My primary reasoning has to do with the OP's life stage: short-term bonds of any sort generate unnecessarily high interest rate risk for an investor in their situation. As you remarked, intermediate-term (e.g. FIPDX) or long-term TIPS would be the general recommendation because they better match the inflation risk and interest rate risk faced by most investors +/- five years of retirement.

More broadly, though, I see no role in a portfolio for short-term TIPS that something else couldn't do as well or better. Because of the short lag between the reported Consumer Price Index and the corresponding TIPS princpal adjustment, it turns out that historically a mark-to-market short-term TIPS fund hasn't tracked inflation much better than nominal Treasuries do. And most total bond funds already have short-term nominal Treasuries included, so selling one to add the other is offsetting from a risk management standpoint.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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dodecahedron
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Re: Good idea to hold TIPS now?

Post by dodecahedron » Thu Jul 30, 2020 2:40 pm

vineviz wrote:
Thu Jul 30, 2020 2:36 pm
corp_sharecropper wrote:
Thu Jul 30, 2020 1:04 pm
vineviz wrote:
Thu Jul 30, 2020 10:11 am

Short-term TIPS are almost surely a terrible idea.
Can you explain the highlighted statement?

Any chance you could also include your thoughts in intermediate term tips (I'm guessing that's what FIPDX is) vs long term tips like LTPZ?
My primary reasoning has to do with the OP's life stage: short-term bonds of any sort generate unnecessarily high interest rate risk for an investor in their situation. As you remarked, intermediate-term (e.g. FIPDX) or long-term TIPS would be the general recommendation because they better match the inflation risk and interest rate risk faced by most investors +/- five years of retirement.

More broadly, though, I see no role in a portfolio for short-term TIPS that something else couldn't do as well or better. Because of the short lag between the reported Consumer Price Index and the corresponding TIPS princpal adjustment, it turns out that historically a mark-to-market short-term TIPS fund hasn't tracked inflation much better than nominal Treasuries do. And most total bond funds already have short-term nominal Treasuries included, so selling one to add the other is offsetting from a risk management standpoint.
Interesting point of view. Personally I do not disagree so my inflation protected bonds have intermediate duration. However, obviously the folks at Vanguard feel strongly that their short term TIPS mutual (not intermediate) is the best choice for their Target Date funds for folks close to or in retirement.

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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz » Thu Jul 30, 2020 3:14 pm

dodecahedron wrote:
Thu Jul 30, 2020 2:40 pm
However, obviously the folks at Vanguard feel strongly that their short term TIPS mutual (not intermediate) is the best choice for their Target Date funds for folks close to or in retirement.
I suspect the folks in the Vanguard Equity Index Group (the team that oversees their target date funds) are far too intelligent to believe that. The people on that team tend to have pretty solid quantitative skills, and there’s far too much evidence that their TDF product design is suboptimal for them to be unaware of it.

One downside to being an early (and successful) entrant in a product category like this is that inertia is an incredibly powerful force.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

000
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Re: Good idea to hold TIPS now?

Post by 000 » Thu Jul 30, 2020 9:39 pm

I agree with Vineviz on short term TIPS. Vanguard's rationale on this does not make sense to me. Cash + long term TIPS would be a better approach. If inflation happens, I would want the "protection" of TIPS to last as long as possible.

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Re: Good idea to hold TIPS now?

Post by abuss368 » Thu Jul 30, 2020 11:25 pm

mike2468 wrote:
Thu Jul 30, 2020 8:45 am
Hello,

My wife and I are around 2 1/2 years from retirement and are thinking about holding some TIPS in our portfolio. I know nobody knows if or when inflation will come but I feel like I should be prepared if it does.

45% of our bond portfolio is in Fidelity U.S. Bond Index Fund (FXNAX) and the remaining 55% is in a combination of Total U.S. and Total International Stock Indexes.

I was thinking about selling some of our current bonds to buy Fidelity Inflation Protected Bond Index (FIPDX) but not sure how much or even if this is a good choice or good time to do it now. I read in another forum that one should buy short term TIPS. I was thinking of buying maybe 20% of our bond holdings.

Your thoughts are appreciated.
Mike
I would keep your simple and effective Three Fund Portfolio. No need to add complexity.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

000
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Re: Good idea to hold TIPS now?

Post by 000 » Thu Jul 30, 2020 11:28 pm

abuss368 wrote:
Thu Jul 30, 2020 11:25 pm
I would keep your simple and effective Three Fund Portfolio. No need to add complexity.
A Three Fund Portfolio of US, ex-US stocks, and TIPS has even less complexity than the version with Total Bond. No need to worry about corporate bond credit risk or inflation! [OT comment removed by admin LadyGeek]

Dude2
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Re: Good idea to hold TIPS now?

Post by Dude2 » Fri Jul 31, 2020 6:15 am

The OP may be thinking that an investment in TIPS will protect the overall portfolio from inflation, and, unfortunately, that is not true. Nevertheless, a bond-heavy portfolio can probably benefit from the "unexpected inflation protection" component that TIPS offer. If they were to move 20% of their bond holdings into TIPS, it isn't going to come with the risk of being a life-changing, regrettable decision, but please do not consider that an investment in TIPS as described in the OP is going to save the portfolio from inflation nor that a person on the brink of retirement better "act fast" to protect their assets before it's too late. I think for the OP that further reading is in order. The takeaway is the "bond heavy portfolio" part. This is where it matters and why people might consider inclusion of TIPS; whereas, other people use TIPS (or bonds of particular durations) in the context of liability matching portfolios. A large proportion of bonds in a portfolio that consists entirely of TBM (a BH mantra) is just the kind of thing that maybe needs to consider inclusion of TIPS [as grok recommends, perhaps when portfolio has greater than 50% bonds, although Vanguard TR funds start including TIPS even sooner]. For people with stock-heavy mindsets, this is all probably irrelevant (and also LMP), but for folks that are going to ride into the sunset with a 3 fund portfolio and expect bond allocation to exceed 50%, they might consider TIPS. I am not against the VG TR glide slope on this and favor not having to do it myself.

The paper often pondered over:
https://advisors.vanguard.com/insights/ ... PSCmbtInfl
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Re: Good idea to hold TIPS now?

Post by dbr » Fri Jul 31, 2020 7:39 am

vineviz wrote:
Thu Jul 30, 2020 3:14 pm
dodecahedron wrote:
Thu Jul 30, 2020 2:40 pm
However, obviously the folks at Vanguard feel strongly that their short term TIPS mutual (not intermediate) is the best choice for their Target Date funds for folks close to or in retirement.
I suspect the folks in the Vanguard Equity Index Group (the team that oversees their target date funds) are far too intelligent to believe that. The people on that team tend to have pretty solid quantitative skills, and there’s far too much evidence that their TDF product design is suboptimal for them to be unaware of it.

One downside to being an early (and successful) entrant in a product category like this is that inertia is an incredibly powerful force.
Vanguard are the one's putting out the argument that short TIPS are better for inflation protection (whatever that means) than longer TIPS because a short TIPS fund has a higher correlation with inflation than a longer TIPS fund. The higher correlation is because short TIPS don't have as much volatility due to changes in real rates conflating the correlation as longer TIPS do, but that has nothing to do with how much risk to inflation exists.

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Re: Good idea to hold TIPS now?

Post by Dude2 » Fri Jul 31, 2020 8:01 am

Here's the other paper that was even more pondered over:

https://www.vanguardcanada.ca/documents/tips.pdf

One point smart people make is that there has not been much movement in inflation for some time, so analyses about correlation may be faulty. The bottom line is that inclusion of TIPS is probably not a bad thing as a way to diversify risk. What happens if you invest in TIPS and there is no inflation? Hopefully nothing bad. What happens if there is deflation? Just hold to maturity. What happen if real rates go negative? That affects everything, and it may be a way that economies are stimulated, i.e. stocks may do better.

Definitely don't get sold on TIPS, though, solely because they have the words "inflation protected" in their title. Again, I say, if you don't want to sweat these academic details in the face of the great unknowns moving forward, buy a low cost target date fund and only worry about the stock/bond ratio.
Henceforth I’ll bear Affliction till it do cry out itself, “Enough, enough,” and die.

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Re: Good idea to hold TIPS now?

Post by vineviz » Fri Jul 31, 2020 9:21 am

dbr wrote:
Fri Jul 31, 2020 7:39 am

Vanguard are the one's putting out the argument that short TIPS are better for inflation protection (whatever that means) than longer TIPS because a short TIPS fund has a higher correlation with inflation than a longer TIPS fund. The higher correlation is because short TIPS don't have as much volatility due to changes in real rates conflating the correlation as longer TIPS do, but that has nothing to do with how much risk to inflation exists.
I've never seen a Vanguard white paper that was as clearly an air ball as the one on short-term TIPS.

Even more striking is the fact that they've never launched an indexed intermediate-term TIPS fund or even an ETF share class of their "actively managed" Inflation-Protected Securities Fund. The Schwab U.S. TIPS ETF (SCHP) has taken in nearly $2 billion USD in net assets so far this year, and Vanguard is completely missing.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Good idea to hold TIPS now?

Post by bigskyguy » Fri Jul 31, 2020 10:07 am

I would ask you, why do you want to hold TIPS? I'll tell you why I am committed to holding TIPS. I am 71 (my spouse 61), and at my age I am interested in secure annual cash flow, and stability of principal. I have done the majority of my portfolio growth over the last 50 years. I want what I have to cover my expenses and to be there for the next 20-30 years (I plan to hit the century mark, God willing). So I have committed a significant portion (major) of my portfolio to liability matching with a TIPS ladder to supplement my SS income stream. The TIPS ladder goes to 2039, with an eventual future bulge purchase of TIPS for 2040-49 that will likely be converted to annuity under my wife's name to cover the home stretch. That covers our cash flow. The remainder of our portfolio is being invested in our version of a risk parity portfolio, to provide a return that fluctuates less than either the market or a 60/40 portfolio. Return that is RELATIVELY stable on a year by year basis is important to me. I thank Tyler and Portfolio Charts with assistance in doing so.
At each stage of life there is a time and a purpose. From my perspective, TIPS during the accumulation portion of one's investing life are optional, depending upon their inflation adjusted return relative to Treasuries. They weren't available until the late 90's, so they played a limited role in our portfolio until the last 10 years. They are effectively Treasuries with an optional inflation protection rider that costs a small percentage of premium. As of today, the 30 year TIPS returns -.42%, the 30 year Treasury 1.2%. If you believe that inflation between today and 2050 will be less than 1.62%, then purchase Treasuries. I for one see no way that inflation will remain that low for the next generation, since inflation is one of the most potent ways of relieving debt. And debt will most assuredly be a big issue moving forward. Additionally, I for one believe that risk should be taken with equities, not with fixed income. Therefore, given my perspective, today I would place ALL of my fixed income in TIPS, even if I were in the early phases of my accumulation period, and all of my risk in equities.
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Re: Good idea to hold TIPS now?

Post by jason2459 » Fri Jul 31, 2020 10:18 am

I still see little need for short term tips. With short term bills and bonds turn over keeping up nominally. I did go in on an intermediate term TIPS mutual fund and feel comfortable with it and understand it. It is a bridge until this next part is complete.

I am looking at building a ladder of individual TIPS bonds and get rid of the ER of the fund and add the security of deflation protection along with the inflation protection.

TIPS to me as an accumulator makes sense for the stable value portion of my AA even if it's a small portion.

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Re: Good idea to hold TIPS now?

Post by ThatsMyFamJam » Fri Jul 31, 2020 12:24 pm

With US GDP down 32% and unemployment in double digits, I see a greater risk of deflation from collapsed spending, which historically accounted for over 50% of economic activity. If TIPS are pegged to the inflation rate, what return/benefit is to be expected?

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Re: Good idea to hold TIPS now?

Post by jason2459 » Fri Jul 31, 2020 12:45 pm

ThatsMyFamJam wrote:
Fri Jul 31, 2020 12:24 pm
With US GDP down 32% and unemployment in double digits, I see a greater risk of deflation from collapsed spending, which historically accounted for over 50% of economic activity. If TIPS are pegged to the inflation rate, what return/benefit is to be expected?
TIPS and I bonds will protect against deflation and at minimum will return original investment.

Edit: to add as long as held to maturity

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Re: Good idea to hold TIPS now?

Post by jason2459 » Fri Jul 31, 2020 1:02 pm

I can't think of a safer more stable investment then TIPS or I bonds. You are protected from ever losing purchasing power in any kind of deflationary or inflationary environment as long as you don't cash out early with the upside of potentially earning interest.
Last edited by jason2459 on Fri Jul 31, 2020 1:14 pm, edited 1 time in total.

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Re: Good idea to hold TIPS now?

Post by vineviz » Fri Jul 31, 2020 1:12 pm

ThatsMyFamJam wrote:
Fri Jul 31, 2020 12:24 pm
With US GDP down 32% and unemployment in double digits, I see a greater risk of deflation from collapsed spending, which historically accounted for over 50% of economic activity. If TIPS are pegged to the inflation rate, what return/benefit is to be expected?
Remember that you're probably not the only investor in the world paying attention to GDP and unemployment reports. All the scenarios (and more) that you can imagine are already reflected in the price of bonds today, which is why market timing doesn't work any better in fixed income markets than it does in equity markets.

The purpose of an investment portfolio is to provide future income, and the degree of sensitivity that your future consumption has to inflation should be the driving force in determining your allocation between TIPS vs. nominal bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Good idea to hold TIPS now?

Post by Chicken Little » Fri Jul 31, 2020 1:27 pm

vineviz wrote:
Fri Jul 31, 2020 1:12 pm
Remember that you're probably not the only investor in the world paying attention to GDP and unemployment reports. All the scenarios (and more) that you can imagine are already reflected in the price of bonds today, which is why market timing doesn't work any better in fixed income markets than it does in equity markets.
So how did that work in the 1970’s?

Everybody knew inflation would take off a decade in advance in 1960 because the bond market told them?

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Re: Good idea to hold TIPS now?

Post by FIREchief » Fri Jul 31, 2020 1:32 pm

jason2459 wrote:
Fri Jul 31, 2020 1:02 pm
I can't think of a safer more stable investment then TIPS or I bonds. You are protected from ever losing purchasing power in any kind of deflationary or inflationary environment as long as you don't cash out early with the upside of potentially earning interest.
I agree with you, however just to clarify, if I buy a TIPS at a negative real yield, I will lose purchasing power. I just know in advance exactly how much.

disclaimer: my fixed income holdings are 100% individual TIPS and just today, for the first time, I bought a few in the secondary market at a real yield of greater than negative one percent (~-1.1%). Fortunately, I'm now done buying for the year and hope that by next January's ten year auction real rates will have improved. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Good idea to hold TIPS now?

Post by midareff » Fri Jul 31, 2020 1:35 pm

abuss368 wrote:
Thu Jul 30, 2020 11:25 pm
mike2468 wrote:
Thu Jul 30, 2020 8:45 am
Hello,

My wife and I are around 2 1/2 years from retirement and are thinking about holding some TIPS in our portfolio. I know nobody knows if or when inflation will come but I feel like I should be prepared if it does.

45% of our bond portfolio is in Fidelity U.S. Bond Index Fund (FXNAX) and the remaining 55% is in a combination of Total U.S. and Total International Stock Indexes.

I was thinking about selling some of our current bonds to buy Fidelity Inflation Protected Bond Index (FIPDX) but not sure how much or even if this is a good choice or good time to do it now. I read in another forum that one should buy short term TIPS. I was thinking of buying maybe 20% of our bond holdings.

Your thoughts are appreciated.
Mike
I would keep your simple and effective Three Fund Portfolio. No need to add complexity.
ditto.... if you want to add something how about adding some corporates in a separate fund to bring your current 25.2% corporate bonds held to 50%.

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Re: Good idea to hold TIPS now?

Post by Dead Man Walking » Fri Jul 31, 2020 1:56 pm

I wonder if the experts at Vanguard have read this thread.

DMW

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Re: Good idea to hold TIPS now?

Post by Northern Flicker » Fri Jul 31, 2020 2:00 pm

vineviz wrote:
Thu Jul 30, 2020 3:14 pm
dodecahedron wrote:
Thu Jul 30, 2020 2:40 pm
However, obviously the folks at Vanguard feel strongly that their short term TIPS mutual (not intermediate) is the best choice for their Target Date funds for folks close to or in retirement.
I suspect the folks in the Vanguard Equity Index Group (the team that oversees their target date funds) are far too intelligent to believe that. The people on that team tend to have pretty solid quantitative skills, and there’s far too much evidence that their TDF product design is suboptimal for them to be unaware of it.

One downside to being an early (and successful) entrant in a product category like this is that inertia is an incredibly powerful force.
Vanguard has white papers articulating their position on this. It is a well reasoned position. It may not be optimal or near-optimal. You may choose to disagree with them, just as they disagree with you.

Vanguard's first TIPS fund VIPSX is intermediate-term and was launched in 6/2000. The short-term TIPS fund was launched in 2012 in response to their research on the subject. I'm thus not sure what inertia you are referring to.

My understanding of Vanguard's position is that they consider inflation to be a shorter term concern because of the Fed's inflation fighting ability. Longer term, you may as well collect the inflation risk premium with nominal bonds with the assumption that Fed will fight inflation aggressively. But over shorter horizons, an uptick in inflation will cause volatility in other major asset classes. ST TIPS are better correlated with short-term inflation expectations and would be a source of asset withdrawals ehile the dislocations in stocks and longer term bonds work through.

I suspect that Vanguard also recognizes that when bonds are used in a portfolio to reduce the risk of stocks, their duration would be shorter than when bonds are used only to match future projected retirement liabilities. That's because the types of cash flows that could become needed when equity risk materializes are short in duration. These needed to be incorporsted into the liability matching if the bonds in question are intended to provide protection for being able to cover them. These might be as simple as rebalancing, or covering an unfortunate need to draw some income prematurely from a retirement portfolio due to a job loss in an economic downturn.
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Re: Good idea to hold TIPS now?

Post by vineviz » Fri Jul 31, 2020 2:03 pm

Chicken Little wrote:
Fri Jul 31, 2020 1:27 pm
vineviz wrote:
Fri Jul 31, 2020 1:12 pm
Remember that you're probably not the only investor in the world paying attention to GDP and unemployment reports. All the scenarios (and more) that you can imagine are already reflected in the price of bonds today, which is why market timing doesn't work any better in fixed income markets than it does in equity markets.
So how did that work in the 1970’s?

Everybody knew inflation would take off a decade in advance in 1960 because the bond market told them?
Anyone who has studied the history of financial markets understands how difficult it is to predict the future. That was true in 1965 and 1975 just as much as it is true today.

Market timing is a speculative game, and one in which the odds are not in in your favor. The only way to win is to not play.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

miket29
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Re: Good idea to hold TIPS now?

Post by miket29 » Fri Jul 31, 2020 2:11 pm

mike2468 wrote:
Thu Jul 30, 2020 8:45 am
I was thinking about selling some of our current bonds to buy Fidelity Inflation Protected Bond Index (FIPDX) but not sure how much or even if this is a good choice or good time to do it now. I read in another forum that one should buy short term TIPS. I was thinking of buying maybe 20% of our bond holdings.
If this is in a retirement account, why buy a fund instead of TIPS themselves? If held to maturity the bond is guaranteed to pay face value, protecting against deflation. TIPS funds never mature, they keep buying and selling bonds, so they don't have this protection. TIPS funds can have more volatility then Treasury funds in market panic. TIPS bonds are backed by the full faith and credit of the government so if held to maturity there is as little risk as there is in anything in life.

If there is inflation and you buy TIPS bonds you will end up with assets worth 1% less per year than the full nominal value you started with since the TIPS real interest rate is about -1% at the moment. On the other hand the duration of the Fidelity U.S. Bond Index Fund is about 5.6 years, so each 1% unexpected rise in inflation will permanently cost you 5.6% of your investment in the fund.

What I'm planning on doing is putting a substantial amount into 5 year TIPS bonds. I don't need all the money then, but I can decide at that time how to reinvest it. The cost will be 5% of my investment due to the negative real interest rate. 5 years from now I will take the money, 95% of what I started with, and decide how to reinvest it. The 5 year breakeven rate is about 1.4%, so if inflation over the next 5 years averaged over that then I'm better off than if I had held 5-year Treasuries.
Last edited by miket29 on Fri Jul 31, 2020 2:12 pm, edited 1 time in total.

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Re: Good idea to hold TIPS now?

Post by Chicken Little » Fri Jul 31, 2020 2:11 pm

vineviz wrote:
Fri Jul 31, 2020 2:03 pm
Chicken Little wrote:
Fri Jul 31, 2020 1:27 pm
vineviz wrote:
Fri Jul 31, 2020 1:12 pm
Remember that you're probably not the only investor in the world paying attention to GDP and unemployment reports. All the scenarios (and more) that you can imagine are already reflected in the price of bonds today, which is why market timing doesn't work any better in fixed income markets than it does in equity markets.
So how did that work in the 1970’s?

Everybody knew inflation would take off a decade in advance in 1960 because the bond market told them?
Anyone who has studied the history of financial markets understands how difficult it is to predict the future. That was true in 1965 and 1975 just as much as it is true today.

Market timing is a speculative game, and one in which the odds are not in in your favor. The only way to win is to not play.
+1

Maybe could have been clearer?

By the way, a lot of investors on here are timing the living crap out of the bond market since we ticked negative.

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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz » Fri Jul 31, 2020 2:15 pm

Northern Flicker wrote:
Fri Jul 31, 2020 2:00 pm
Vanguard's first TIPS fund VIPSX is intermediate-term and was launched in 6/2000. The short-term TIPS fund was launched in 2012 in response to their research on the subject. I'm thus not sure what inertia you are referring to.
The inertia to which I was referring is the force that keeps their TDF glide path looking like a relic of the mid-2000s.

Northern Flicker wrote:
Fri Jul 31, 2020 2:00 pm
ST TIPS are better correlated with short-term inflation expectations and would be a source of asset withdrawals while the dislocations in stocks and longer term bonds work through.
Even if the first part of that sentence were true, the Vanguard target date funds don't have tactical asset allocation policies. Their funds don't have any mechanism for definition a "dislocation" much less adjusting the asset allocation in response or targeting fund withdrawals to one particular asset class.

Furthermore, whether short-term TIPS are "better correlated with short-term inflation expectations" was the question that Vanguard asked and answered in their white paper. But it's the wrong question for any investor whose goal is to use their accumulated wealth to provide future income. Every investor in a target date fund, in other words.
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Re: Good idea to hold TIPS now?

Post by Northern Flicker » Fri Jul 31, 2020 2:18 pm

miket29 wrote: If this is in a retirement account, why buy a fund instead of TIPS themselves? If held to maturity the bond is guaranteed to pay face value, protecting against deflation. TIPS funds never mature, they keep buying and selling bonds, so they don't have this protection.
Holding the bonds directly is not a bad strategy, but it is incorrect to say that the portfolio managers of a TIPS fund lack the option to hold TIPS to maturity. That may be true of an intermediate-term TIPS index fund that must track its index, but it is not true of an actively managed TIPS fund, nor some short-term TIPS index funds.
Last edited by Northern Flicker on Fri Jul 31, 2020 5:27 pm, edited 1 time in total.
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Re: Good idea to hold TIPS now?

Post by Northern Flicker » Fri Jul 31, 2020 2:43 pm

vineviz wrote:
Fri Jul 31, 2020 2:15 pm
Northern Flicker wrote:
Fri Jul 31, 2020 2:00 pm
Vanguard's first TIPS fund VIPSX is intermediate-term and was launched in 6/2000. The short-term TIPS fund was launched in 2012 in response to their research on the subject. I'm thus not sure what inertia you are referring to.
The inertia to which I was referring is the force that keeps their TDF glide path looking like a relic of the mid-2000s.
The short-term TIPS fund was added to their TDF family in 2012. They also have increased the non-US equity allocation percentages twice. Whether or not these changes are good things, inertia is not a criticism that sticks with Vanguard TDF's. In fact, a more common criticism has been that strategic changes have exposed participants to timing risk, not that they are operating on inertia.
vineviz wrote:
Northern Flicker wrote:
Fri Jul 31, 2020 2:00 pm
ST TIPS are better correlated with short-term inflation expectations and would be a source of asset withdrawals while the dislocations in stocks and longer term bonds work through.
Even if the first part of that sentence were true, the Vanguard target date funds don't have tactical asset allocation policies. Their funds don't have any mechanism for definition a "dislocation" much less adjusting the asset allocation in response or targeting fund withdrawals to one particular asset class.
Tactical asset allocation changes are not needed. If one asset appreciates in a portfolio when others fall, withdrawals can be made from that asset class while moving back in balance with respect to the strategic asset allocation.
Furthermore, whether short-term TIPS are "better correlated with short-term inflation expectations" was the question that Vanguard asked and answered in their white paper. But it's the wrong question for any investor whose goal is to use their accumulated wealth to provide future income. Every investor in a target date fund, in other words.
You may actually want to familiarize yourself with Vanguard TDF's before forming an opinion on the level of quality of their portfolios. It is far from the case that every investor in Vanguard TDF's are holding short-term TIPS. Vanguard only incorporates TIPS into their TDF's for retirees that are in or close to retirement. If you look at this from a liability-matching perspective, the role of the asset in the portfolio is matched to shorter term liabilities that retirees expect to have, and those close to retirement may unexpectedly have (job loss close to planned retirement).
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Re: Good idea to hold TIPS now?

Post by vineviz » Fri Jul 31, 2020 2:54 pm

Northern Flicker wrote:
Fri Jul 31, 2020 2:43 pm
In fact, a more common criticism has been that strategic changes have exposed participants to timing risk, not that they are operating on inertia.
Many "common" refrains seen on Bogleheads.org are baseless, and this is one of them.

Northern Flicker wrote:
Fri Jul 31, 2020 2:00 pm
ST TIPS are better correlated with short-term inflation expectations and
Tactical asset allocation changes are not needed. If one asset appreciates in a portfolio when others fall, withdrawals can be made from that asset class while moving back in balance with respect to the strategic asset allocation.
My point was exactly that: the TDF is constantly rebalancing to its target allocation, which means that it's disingenuous to suggest that withdrawals are coming "from" any one asset class.
Northern Flicker wrote:
Fri Jul 31, 2020 2:43 pm
It is far from the case that every investor in Vanguard TDF's are holding short-term TIPS.
Yeah, that's not what I said. What I said was that every TDF investor has as a goal "to use their accumulated wealth to provide future income". The Vanguard glide path is not designed to support that goal particularly well. As I think I said earlier, I know their people are smart enough to understand this.
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Re: Good idea to hold TIPS now?

Post by 000 » Fri Jul 31, 2020 3:02 pm

000 wrote:
Thu Jul 30, 2020 11:28 pm
abuss368 wrote:
Thu Jul 30, 2020 11:25 pm
I would keep your simple and effective Three Fund Portfolio. No need to add complexity.
A Three Fund Portfolio of US, ex-US stocks, and TIPS has even less complexity than the version with Total Bond. No need to worry about corporate bond credit risk or inflation! [OT comment removed by admin LadyGeek]
With my comment about the possible risks of TIPS removed, I encourage anyone considering TIPS to do their own research on possible risks.

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Re: Good idea to hold TIPS now?

Post by Northern Flicker » Fri Jul 31, 2020 5:22 pm

vineviz wrote: My point was exactly that: the TDF is constantly rebalancing to its target allocation, which means that it's disingenuous to suggest that withdrawals are coming "from" any one asset class.
Dollars are fungible. Ignoring taxes, which are a general issue for TDF's in a taxable account, whether the portfolio is rebalanced before or after a withdrawal, the effect is the same.

Consider a fund with 2 assets, A and B, with asset allocation a 50-50 mix of the two. Suppose A is up 10% and B is down 10%, and you wish to rebalance and withdraw 5% of the portfolio. Regardless of where you take the withdrawal from, if you rebalance after the withdrawal, B has a larger balance than before you started and A has a lower balance than before you started. The same is true if you rebalance first and then withdrawal equal amounts from A and B. In all cases, the appreciation realized in A is the fundamental source of the withdrawal.
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Re: Good idea to hold TIPS now?

Post by grok87 » Sat Aug 01, 2020 6:32 am

just chiming in to say that TIPS have now outperformed nominal treasuries over almost all recent time periods.
from morningstar, comparing VIPSX (Vanguard tips fund) and VSIGX (vanguard intermediate treasury index fund) which have roughly similar durations:

fund.........3mo...........ytd...........1yr...........3yr............5yr..........10 yr
vsigx.........0.88..........8.38..........9.79..........5.1..........3.68.........3.26
vipsx.........3.93..........8.43.........10.23.........5.38 ..........3.93........3.56

it is often said on this forum that tips are not going to outperform nominal treasuries unless actual inflation comes in higher than expected. the above results show that this is simply NOT true.

why have tips outperformed? because inflation EXPECTATIONS have risen- i.e. market is pricing in higher FUTURE inflation and tips real yields have dropped more than nominal yields.

cheers,
grok
RIP Mr. Bogle.

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Re: Good idea to hold TIPS now?

Post by nedsaid » Sat Aug 01, 2020 10:21 am

grok87 wrote:
Sat Aug 01, 2020 6:32 am
just chiming in to say that TIPS have now outperformed nominal treasuries over almost all recent time periods.
from morningstar, comparing VIPSX (Vanguard tips fund) and VSIGX (vanguard intermediate treasury index fund) which have roughly similar durations:

fund.........3mo...........ytd...........1yr...........3yr............5yr..........10 yr
vsigx.........0.88..........8.38..........9.79..........5.1..........3.68.........3.26
vipsx.........3.93..........8.43.........10.23.........5.38 ..........3.93........3.56

it is often said on this forum that tips are not going to outperform nominal treasuries unless actual inflation comes in higher than expected. the above results show that this is simply NOT true.

why have tips outperformed? because inflation EXPECTATIONS have risen- i.e. market is pricing in higher FUTURE inflation and tips real yields have dropped more than nominal yields.

cheers,
grok
So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns just as nominal bonds. Pretty much, TIPS are a bet on a resurgence of inflation that may or may not happen. In that context, TIPS become a hedge rather than an investment with real returns over time.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause. I would rather buy more when real rates turn positive but that may not happen again for quite a while. Shoot, I would even take a zero percent real return. I saw on Y Charts that the breakeven rate for 5 year TIPS is now 1.37%. I think what that means is that TIPS will have a positive real return if inflation is greater than 1.37%.

5 year TIPS have a -1.14% yield as of July 30 compared to a 5 year Treasury yield of 0.23%, hence the 1.37% break even rate. I saw that the Philadelphia Fed 5 year mean inflation forecast for 2nd Qtr 2020 was 1.88%. If that forecast holds, then TIPS would be a buy.
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Re: Good idea to hold TIPS now?

Post by vineviz » Sat Aug 01, 2020 10:50 am

nedsaid wrote:
Sat Aug 01, 2020 10:21 am

So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns. Pretty much, TIPS are a bet on a resurgence of inflation.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause.
Don’t use your portfolio to “bet” on financial markets.

Stick to basic principles: what percentage of your basic (non-discretionary) spending needs aren’t covered by Social Security?

Use that gap - and your overall risk tolerance - to determine how much to invest in TIPS. Current rates are out of your control, so they shouldn’t factor into the decision.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Good idea to hold TIPS now?

Post by nedsaid » Sat Aug 01, 2020 10:55 am

vineviz wrote:
Sat Aug 01, 2020 10:50 am
nedsaid wrote:
Sat Aug 01, 2020 10:21 am

So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns. Pretty much, TIPS are a bet on a resurgence of inflation.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause.
Don’t use your portfolio to “bet” on financial markets.

Stick to basic principles: what percentage of your basic (non-discretionary) spending needs aren’t covered by Social Security?

Use that gap - and your overall risk tolerance - to determine how much to invest in TIPS. Current rates are out of your control, so they shouldn’t factor into the decision.
My inner sense is that you are correct. Still there is something in me that hates to buy "expensive" assets. Probably what I should do is ignore the yields, overcome my aversion to buying assets that look expensive, hold my nose and buy.
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Re: Good idea to hold TIPS now?

Post by HappyJack » Sat Aug 01, 2020 11:17 am

Warren Buffett has famously said, “I would rather be approximately right than precisely wrong.”

Maybe ease into a stronger position over time.

Disclosure: my LMP is comprised of LTPZ, FIPDX and some VFIUX.

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Re: Good idea to hold TIPS now?

Post by bigskyguy » Sat Aug 01, 2020 1:11 pm

nedsaid wrote:
Sat Aug 01, 2020 10:55 am
vineviz wrote:
Sat Aug 01, 2020 10:50 am
nedsaid wrote:
Sat Aug 01, 2020 10:21 am

So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns. Pretty much, TIPS are a bet on a resurgence of inflation.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause.
Don’t use your portfolio to “bet” on financial markets.

Stick to basic principles: what percentage of your basic (non-discretionary) spending needs aren’t covered by Social Security?

Use that gap - and your overall risk tolerance - to determine how much to invest in TIPS. Current rates are out of your control, so they shouldn’t factor into the decision.
My inner sense is that you are correct. Still there is something in me that hates to buy "expensive" assets. Probably what I should do is ignore the yields, overcome my aversion to buying assets that look expensive, hold my nose and buy.
Your sentiments, I suspect, are very widely shared. It is very difficult to look at the investment marketplace and find anything that is anything other than expensive. Gold is at or near all time highs, real and nominal bonds the same, stocks the same. Even value stocks are priced at levels normally seen for the market as a whole. So anyone choosing to move cash just about anywhere will fine the market pricey. Seems for all investors you either buy high now, or keep your powder dry until the excess subsides. Being patient is tough. I know I’m sitting on investable cash now that I’d prefer to put to use. I just don’t see anything reasonable to put it in.
I do admire those who stick to their investment schedule regardless. It’s like those who go running good weather or bad. Stay the course is hard.

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Re: Good idea to hold TIPS now?

Post by Dead Man Walking » Sat Aug 01, 2020 9:14 pm

bigskyguy wrote:
Sat Aug 01, 2020 1:11 pm
nedsaid wrote:
Sat Aug 01, 2020 10:55 am
vineviz wrote:
Sat Aug 01, 2020 10:50 am
nedsaid wrote:
Sat Aug 01, 2020 10:21 am

So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns. Pretty much, TIPS are a bet on a resurgence of inflation.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause.
Don’t use your portfolio to “bet” on financial markets.

Stick to basic principles: what percentage of your basic (non-discretionary) spending needs aren’t covered by Social Security?

Use that gap - and your overall risk tolerance - to determine how much to invest in TIPS. Current rates are out of your control, so they shouldn’t factor into the decision.
My inner sense is that you are correct. Still there is something in me that hates to buy "expensive" assets. Probably what I should do is ignore the yields, overcome my aversion to buying assets that look expensive, hold my nose and buy.
Your sentiments, I suspect, are very widely shared. It is very difficult to look at the investment marketplace and find anything that is anything other than expensive. Gold is at or near all time highs, real and nominal bonds the same, stocks the same. Even value stocks are priced at levels normally seen for the market as a whole. So anyone choosing to move cash just about anywhere will fine the market pricey. Seems for all investors you either buy high now, or keep your powder dry until the excess subsides. Being patient is tough. I know I’m sitting on investable cash now that I’d prefer to put to use. I just don’t see anything reasonable to put it in.
I do admire those who stick to their investment schedule regardless. It’s like those who go running good weather or bad. Stay the course is hard.
My answers to vineviz’s questions are probably different than most investors. All of non discretionary and typical discretionary spending is covered by my pension income. My conservative asset allocation and the fact that I have no need to take risk give me the freedom to “bet” on financial markets. I agree with nedsaid when he states that he thinks most assets are overpriced. I have some investable cash that I’m patiently waiting to invest. One part of my investment policy statement states that I should be patient when I believe an investment is expensive. My intent is to avoid buying high and selling low. Consequently, I’m staying the course if staying the course allows an investor to have purchasing discretion.

DMW

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Re: Good idea to hold TIPS now?

Post by Call_Me_Op » Sun Aug 02, 2020 10:15 am

jason2459 wrote:
Fri Jul 31, 2020 1:02 pm
I can't think of a safer more stable investment then TIPS or I bonds. You are protected from ever losing purchasing power in any kind of deflationary or inflationary environment as long as you don't cash out early with the upside of potentially earning interest.
Not sure I agree on the TIPS. The real yield on TIPS is negative. Thus with TIPS you are guaranteed to lose purchasing power before taxes - and lose more after you pay taxes.
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Re: Good idea to hold TIPS now?

Post by FIREchief » Sun Aug 02, 2020 10:39 am

Call_Me_Op wrote:
Sun Aug 02, 2020 10:15 am
jason2459 wrote:
Fri Jul 31, 2020 1:02 pm
I can't think of a safer more stable investment then TIPS or I bonds. You are protected from ever losing purchasing power in any kind of deflationary or inflationary environment as long as you don't cash out early with the upside of potentially earning interest.
Not sure I agree on the TIPS. The real yield on TIPS is negative. Thus with TIPS you are guaranteed to lose purchasing power before taxes - and lose more after you pay taxes.
For someone who wants zero default risk, do you think that nominal US Treasuries are better?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Good idea to hold TIPS now?

Post by jason2459 » Sun Aug 02, 2020 10:51 am

In the last TIPS auction I certainly saw positive yield on 10 year tips.

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Re: Good idea to hold TIPS now?

Post by grok87 » Sun Aug 02, 2020 11:01 am

nedsaid wrote:
Sat Aug 01, 2020 10:21 am
grok87 wrote:
Sat Aug 01, 2020 6:32 am
just chiming in to say that TIPS have now outperformed nominal treasuries over almost all recent time periods.
from morningstar, comparing VIPSX (Vanguard tips fund) and VSIGX (vanguard intermediate treasury index fund) which have roughly similar durations:

fund.........3mo...........ytd...........1yr...........3yr............5yr..........10 yr
vsigx.........0.88..........8.38..........9.79..........5.1..........3.68.........3.26
vipsx.........3.93..........8.43.........10.23.........5.38 ..........3.93........3.56

it is often said on this forum that tips are not going to outperform nominal treasuries unless actual inflation comes in higher than expected. the above results show that this is simply NOT true.

why have tips outperformed? because inflation EXPECTATIONS have risen- i.e. market is pricing in higher FUTURE inflation and tips real yields have dropped more than nominal yields.

cheers,
grok
So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns just as nominal bonds. Pretty much, TIPS are a bet on a resurgence of inflation that may or may not happen. In that context, TIPS become a hedge rather than an investment with real returns over time.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause. I would rather buy more when real rates turn positive but that may not happen again for quite a while. Shoot, I would even take a zero percent real return. I saw on Y Charts that the breakeven rate for 5 year TIPS is now 1.37%. I think what that means is that TIPS will have a positive real return if inflation is greater than 1.37%.

5 year TIPS have a -1.14% yield as of July 30 compared to a 5 year Treasury yield of 0.23%, hence the 1.37% break even rate. I saw that the Philadelphia Fed 5 year mean inflation forecast for 2nd Qtr 2020 was 1.88%. If that forecast holds, then TIPS would be a buy.
Hi nedsaid,
I am also somewhat confused about what the best thing to do is. What i am doing personally is explained in this recent post
viewtopic.php?f=10&t=311560&start=50
wrote: As per the thrust of this original post, while i'm holding on to my long term tips, (although the negative -0.5% yields do give me some pause) i've stopped adding to my tips ladder (it was pretty much built pre covid crisis anyway) and am directing tips coupons, new funds and some of my short term tips into building up the David Swensen retirement portfolio.
i am also continuing to buy ibonds which as i'm sure you know do have the 0% yield.

cheers,
grok
RIP Mr. Bogle.

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Re: Good idea to hold TIPS now?

Post by grok87 » Sun Aug 02, 2020 11:02 am

vineviz wrote:
Sat Aug 01, 2020 10:50 am
nedsaid wrote:
Sat Aug 01, 2020 10:21 am

So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns. Pretty much, TIPS are a bet on a resurgence of inflation.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause.
Don’t use your portfolio to “bet” on financial markets.

Stick to basic principles: what percentage of your basic (non-discretionary) spending needs aren’t covered by Social Security?

Use that gap - and your overall risk tolerance - to determine how much to invest in TIPS. Current rates are out of your control, so they shouldn’t factor into the decision.
agree
RIP Mr. Bogle.

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Re: Good idea to hold TIPS now?

Post by nedsaid » Sun Aug 02, 2020 11:08 am

grok87 wrote:
Sun Aug 02, 2020 11:01 am
nedsaid wrote:
Sat Aug 01, 2020 10:21 am
grok87 wrote:
Sat Aug 01, 2020 6:32 am
just chiming in to say that TIPS have now outperformed nominal treasuries over almost all recent time periods.
from morningstar, comparing VIPSX (Vanguard tips fund) and VSIGX (vanguard intermediate treasury index fund) which have roughly similar durations:

fund.........3mo...........ytd...........1yr...........3yr............5yr..........10 yr
vsigx.........0.88..........8.38..........9.79..........5.1..........3.68.........3.26
vipsx.........3.93..........8.43.........10.23.........5.38 ..........3.93........3.56

it is often said on this forum that tips are not going to outperform nominal treasuries unless actual inflation comes in higher than expected. the above results show that this is simply NOT true.

why have tips outperformed? because inflation EXPECTATIONS have risen- i.e. market is pricing in higher FUTURE inflation and tips real yields have dropped more than nominal yields.

cheers,
grok
So Grok, what should an investor do now? Should we buying TIPS? I am reluctant when I see negative real rates for both TIPS and nominal treasuries. If inflation stays very low, TIPS purchased now will produce negative real returns just as nominal bonds. Pretty much, TIPS are a bet on a resurgence of inflation that may or may not happen. In that context, TIPS become a hedge rather than an investment with real returns over time.

I have 12% or so of my bonds in TIPS, I would like to buy more and negative real rates are giving me pause. I would rather buy more when real rates turn positive but that may not happen again for quite a while. Shoot, I would even take a zero percent real return. I saw on Y Charts that the breakeven rate for 5 year TIPS is now 1.37%. I think what that means is that TIPS will have a positive real return if inflation is greater than 1.37%.

5 year TIPS have a -1.14% yield as of July 30 compared to a 5 year Treasury yield of 0.23%, hence the 1.37% break even rate. I saw that the Philadelphia Fed 5 year mean inflation forecast for 2nd Qtr 2020 was 1.88%. If that forecast holds, then TIPS would be a buy.
Hi nedsaid,
I am also somewhat confused about what the best thing to do is. What i am doing personally is explained in this recent post
viewtopic.php?f=10&t=311560&start=50
wrote: As per the thrust of this original post, while i'm holding on to my long term tips, (although the negative -0.5% yields do give me some pause) i've stopped adding to my tips ladder (it was pretty much built pre covid crisis anyway) and am directing tips coupons, new funds and some of my short term tips into building up the David Swensen retirement portfolio.
i am also continuing to buy ibonds which as i'm sure you know do have the 0% yield.

cheers,
grok
Hi Grok,

Thank you for your response. It sounds like Vineviz says to go ahead and buy if needed. It sounds like you have the same caution about adding to TIPS that I do. I guess it is in my DNA, I have an aversion buying expensive assets, buying TIPS with negative yields gives me great pause. Probably what I will do is weeny out and buy TIPS in small amounts over time or I may do nothing at all. But yes, I am wishy washy and that is reflected in my avatar.
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Re: Good idea to hold TIPS now?

Post by Angst » Sun Aug 02, 2020 11:53 am

Kinda like FIREchief, I have a non-rolling ladder of TIPS for eventually supplementing SS retirement income. I have a few more future 30-year rungs I want covered and so I'll have a decision to make before this month's out. I held my nose back in February and bought part of my 2050 rung while thinking I'd complete it 6 months later, hoping yields might rise a bit by then...
:oops:
My, how our standards can shift one way or the other as we slowly get used to a new environment...
[insert GIF of clueless frog in stovetop pan of water]

I could always assign this year's I Bonds to complete the rung, but what do I know? Perhaps we're now in for decades of low to sub-zero real rates...?
[insert GIFs of flags of Japan and the EU]

I might just be buying this month, probably should. We'll see.

Angie

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Re: Good idea to hold TIPS now?

Post by FIREchief » Sun Aug 02, 2020 1:15 pm

jason2459 wrote:
Sun Aug 02, 2020 10:51 am
In the last TIPS auction I certainly saw positive yield on 10 year tips.
Which auction was that?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Good idea to hold TIPS now?

Post by #Cruncher » Sun Aug 02, 2020 2:04 pm

grok87 wrote:
Sat Aug 01, 2020 6:32 am
From morningstar, comparing VIPSX (Vanguard tips fund) and VSIGX (vanguard intermediate treasury index fund) which have roughly similar durations:
fund ... 10 yr [extracting only 10-year comparison from Grok's table]
vsigx ... 3.26
vipsx ... 3.56
... Why have tips outperformed? Because inflation EXPECTATIONS have risen ... and tips real yields have dropped more than nominal yields.
Not so -- at least over ten years. As shown below. inflation expectations, as expressed by the Breakeven Inflation Rate (BEI}, have actually fallen over the past ten years. Consequently TIPS yields have dropped less than yields of nominal Treasuries. For example 10-year constant maturity nominal rates fell 2.39% points while 10-year constant maturity TIPS rates fell only 2.14% points, corresponding to a 0.25% point drop in the BEI, from 1.80% in 2010 to 1.55% now.

Code: Select all

                       5 YR    10 YR    30 YR
 Nominal  7/30/2010    1.60     2.94     3.98 
          7/31/2020    0.21     0.55     1.20 
             Change   (1.39)   (2.39)   (2.78)
             
    TIPS  7/30/2010    0.17     1.14     1.85 
          7/31/2020   (1.19)   (1.00)   (0.45)
             Change   (1.36)   (2.14)   (2.30)
             
     BEI  7/30/2010    1.43     1.80     2.13 
          7/31/2020    1.40     1.55     1.65 
             Change   (0.03)   (0.25)   (0.48)
I think the real reason VIPSX grew slightly more over the past ten years is that it holds longer term bonds which increase more in price when yields fall. According to its portfolio tab VIPSX holds bonds maturing in 1 to 30 years and has an average duration of 7.8 years. On the other hand VSIGX's portfolio tab shows it holds bonds maturing in 3 to 10 years and has an average duration of only 5.3 years.

* Nominal rates are from the Daily Treasury Yield Curve Rates 2010 and 2020. TIPS rates are from the Daily Treasury Real Yield Curve Rates 2010 and 2020.

grok87
Posts: 9139
Joined: Tue Feb 27, 2007 9:00 pm

Re: Good idea to hold TIPS now?

Post by grok87 » Sun Aug 02, 2020 6:27 pm

#Cruncher wrote:
Sun Aug 02, 2020 2:04 pm
grok87 wrote:
Sat Aug 01, 2020 6:32 am
From morningstar, comparing VIPSX (Vanguard tips fund) and VSIGX (vanguard intermediate treasury index fund) which have roughly similar durations:
fund ... 10 yr [extracting only 10-year comparison from Grok's table]
vsigx ... 3.26
vipsx ... 3.56
... Why have tips outperformed? Because inflation EXPECTATIONS have risen ... and tips real yields have dropped more than nominal yields.
Not so -- at least over ten years. As shown below. inflation expectations, as expressed by the Breakeven Inflation Rate (BEI}, have actually fallen over the past ten years. Consequently TIPS yields have dropped less than yields of nominal Treasuries. For example 10-year constant maturity nominal rates fell 2.39% points while 10-year constant maturity TIPS rates fell only 2.14% points, corresponding to a 0.25% point drop in the BEI, from 1.80% in 2010 to 1.55% now.

Code: Select all

                       5 YR    10 YR    30 YR
 Nominal  7/30/2010    1.60     2.94     3.98 
          7/31/2020    0.21     0.55     1.20 
             Change   (1.39)   (2.39)   (2.78)
             
    TIPS  7/30/2010    0.17     1.14     1.85 
          7/31/2020   (1.19)   (1.00)   (0.45)
             Change   (1.36)   (2.14)   (2.30)
             
     BEI  7/30/2010    1.43     1.80     2.13 
          7/31/2020    1.40     1.55     1.65 
             Change   (0.03)   (0.25)   (0.48)
I think the real reason VIPSX grew slightly more over the past ten years is that it holds longer term bonds which increase more in price when yields fall. According to its portfolio tab VIPSX holds bonds maturing in 1 to 30 years and has an average duration of 7.8 years. On the other hand VSIGX's portfolio tab shows it holds bonds maturing in 3 to 10 years and has an average duration of only 5.3 years.

* Nominal rates are from the Daily Treasury Yield Curve Rates 2010 and 2020. TIPS rates are from the Daily Treasury Real Yield Curve Rates 2010 and 2020.
thank #Cruncher. i agree i was wrong. i thought vsigx was 5-10 year bonds. as you point out it is 3-10 year bonds.
cheers,
grok
RIP Mr. Bogle.

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