Good idea to hold TIPS now?

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hirlaw
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Re: Good idea to hold TIPS now?

Post by hirlaw »

This article gives the pros for buying TIPs now (you can scroll down to the "TIPS" section.)

https://www.marketwatch.com/story/retir ... 2020-07-20
grok87
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Re: Good idea to hold TIPS now?

Post by grok87 »

hirlaw wrote: Sun Aug 02, 2020 6:47 pm This article gives the pros for buying TIPs now (you can scroll down to the "TIPS" section.)

https://www.marketwatch.com/story/retir ... 2020-07-20
the article claims you can buy an inflation adjusted annuity. i think that is false but i would love to be wrong.
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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz »

grok87 wrote: Sun Aug 02, 2020 8:37 pm
hirlaw wrote: Sun Aug 02, 2020 6:47 pm This article gives the pros for buying TIPs now (you can scroll down to the "TIPS" section.)

https://www.marketwatch.com/story/retir ... 2020-07-20
the article claims you can buy an inflation adjusted annuity. i think that is false but i would love to be wrong.
It is false: Principal Financial Group used to offer CPI-linked immediate income annuities, but stopped doing so earlier this year.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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willthrill81
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Re: Good idea to hold TIPS now?

Post by willthrill81 »

FIREchief wrote: 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?
This is the real kicker that those who don't want to buy TIPS but who are fine with nominal Treasuries either don't seem to realize or just don't want to. The bond market is telling everyone that it expects bonds to lose a not insignificant amount to inflation over the coming years, regardless as to whether those bonds are nominal or inflation-linked. Some (especially in other recent threads) clearly believe that the market is wrong and that bonds will somehow continue to have the returns that they have for the last 40 years. Maybe they are right, but they are clearly speculating.

Nominal bonds 'hide' the market's inflation expectations. TIPS don't, and the reality of knowing that you'll lose buying power when you purchase them is hard for many to swallow.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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willthrill81
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Re: Good idea to hold TIPS now?

Post by willthrill81 »

vineviz wrote: Sun Aug 02, 2020 10:12 pm
grok87 wrote: Sun Aug 02, 2020 8:37 pm
hirlaw wrote: Sun Aug 02, 2020 6:47 pm This article gives the pros for buying TIPs now (you can scroll down to the "TIPS" section.)

https://www.marketwatch.com/story/retir ... 2020-07-20
the article claims you can buy an inflation adjusted annuity. i think that is false but i would love to be wrong.
It is false: Principal Financial Group used to offer CPI-linked immediate income annuities, but stopped doing so earlier this year.
Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
000
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Re: Good idea to hold TIPS now?

Post by 000 »

willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
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FIREchief
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Re: Good idea to hold TIPS now?

Post by FIREchief »

willthrill81 wrote: Sun Aug 02, 2020 11:54 pm
FIREchief wrote: 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?
This is the real kicker that those who don't want to buy TIPS but who are fine with nominal Treasuries either don't seem to realize or just don't want to. The bond market is telling everyone that it expects bonds to lose a not insignificant amount to inflation over the coming years, regardless as to whether those bonds are nominal or inflation-linked. Some (especially in other recent threads) clearly believe that the market is wrong and that bonds will somehow continue to have the returns that they have for the last 40 years. Maybe they are right, but they are clearly speculating.

Nominal bonds 'hide' the market's inflation expectations. TIPS don't, and the reality of knowing that you'll lose buying power when you purchase them is hard for many to swallow.
Great post. Unfortunately, it will likely fall on (many) deaf ears. :annoyed
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
RomeoMustDie
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Re: Good idea to hold TIPS now?

Post by RomeoMustDie »

My vote is 100% MRGR or ARB arbitrage funds since I've never heard anyone mention them before.
Derpalator
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Re: Good idea to hold TIPS now?

Post by Derpalator »

000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
LQDI
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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz »

000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
“Lack of demand” is precisely the reason provided by Principal when they discontinued the CPI cola rider.

Money illusion is a powerful cognitive bias, it seems, but it didn’t help that Principal’s inflation protection was expensive (I think the implied breakeven inflation rate on the annuity was about 75- 100bps above the implied breakeven rate in Treasuries at the end).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
hirlaw
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Re: Good idea to hold TIPS now?

Post by hirlaw »

FYI: Below is an excerpt from the article mentioned above:
Perhaps the most straightforward way of hedging against inflation in coming years is by investing in TIPS—Treasury inflation-protected securities. These bonds’ returns are pegged to the Consumer Price Index, so they automatically return more when inflation is higher.

Many retirees and soon-to-be retirees nevertheless are avoiding TIPS these days because their stated yields are negative. The 10-year TIPS, for example, currently is quoted with a yield of minus 0.65%. That headline yield triggers loss aversion among most of us, keeping all but the most fearless from even considering TIPS.

But retirees are being misled if they think of these negative yields in nominal terms. They instead are real yields—yields relative to inflation. So a better way to think of the current TIPS yields is that your return over the next 10 years will be 0.65% below whatever the CPI’s rate of growth will be. For example, if the CPI increases 10% annualized over the next decade, your return would be 9.35% annualized--guaranteed.
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willthrill81
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Re: Good idea to hold TIPS now?

Post by willthrill81 »

000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
1. Does an insurance company need a lot of demand to offer such a product?

2. Insurers can still profit from CPI-linked annuities.

3. Insurers don't have the greatest reputation already.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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willthrill81
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Re: Good idea to hold TIPS now?

Post by willthrill81 »

hirlaw wrote: Mon Aug 03, 2020 8:36 am FYI: Below is an excerpt from the article mentioned above:
Perhaps the most straightforward way of hedging against inflation in coming years is by investing in TIPS—Treasury inflation-protected securities. These bonds’ returns are pegged to the Consumer Price Index, so they automatically return more when inflation is higher.

Many retirees and soon-to-be retirees nevertheless are avoiding TIPS these days because their stated yields are negative. The 10-year TIPS, for example, currently is quoted with a yield of minus 0.65%. That headline yield triggers loss aversion among most of us, keeping all but the most fearless from even considering TIPS.

But retirees are being misled if they think of these negative yields in nominal terms. They instead are real yields—yields relative to inflation. So a better way to think of the current TIPS yields is that your return over the next 10 years will be 0.65% below whatever the CPI’s rate of growth will be. For example, if the CPI increases 10% annualized over the next decade, your return would be 9.35% annualized--guaranteed.
And how many of those retirees that don't like TIPS' currently negative real yields are buying nominal bonds that also have negative expected returns? Probably most of them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Good idea to hold TIPS now?

Post by 000 »

Derpalator wrote: Mon Aug 03, 2020 4:58 am
000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
LQDI
The bonds in LQDI are all nominal. The fund uses inflation swaps. It's not the same, as the risk of the swaps failing is higher than a diversified pool of directly CPI indexed bonds failing.
000
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Re: Good idea to hold TIPS now?

Post by 000 »

willthrill81 wrote: Mon Aug 03, 2020 10:05 am
000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
1. Does an insurance company need a lot of demand to offer such a product?

2. Insurers can still profit from CPI-linked annuities.

3. Insurers don't have the greatest reputation already.
They need enough demand to reach critical mass so the inflation-indexed longevity risks can be pooled together, or they have to charge more...
vineviz wrote: Mon Aug 03, 2020 6:00 am “Lack of demand” is precisely the reason provided by Principal when they discontinued the CPI cola rider.

Money illusion is a powerful cognitive bias, it seems, but it didn’t help that Principal’s inflation protection was expensive (I think the implied breakeven inflation rate on the annuity was about 75- 100bps above the implied breakeven rate in Treasuries at the end).
which seems to be the case. There simply is a very narrow range where the yield is high enough to get customer interest and low enough so the insurers feel comfortable with the risks they're taking.
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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz »

willthrill81 wrote: Mon Aug 03, 2020 10:05 am
000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
1. Does an insurance company need a lot of demand to offer such a product?

2. Insurers can still profit from CPI-linked annuities.

3. Insurers don't have the greatest reputation already.
1) yes
2) it appears not
3) probably not actually a factor
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz »

000 wrote: Mon Aug 03, 2020 2:55 pm
Derpalator wrote: Mon Aug 03, 2020 4:58 am
000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
LQDI
The bonds in LQDI are all nominal. The fund uses inflation swaps. It's not the same, as the risk of the swaps failing is higher than a diversified pool of directly CPI indexed bonds failing.
I doubt it: inflation swaps are some of the most liquid and least complex financial derivatives on the market. The swaps in LQDI undoubtedly present less credit risk than the bond portfolio. Probably an order of magnitude less.
"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 »

vineviz wrote: Mon Aug 03, 2020 3:42 pm
000 wrote: Mon Aug 03, 2020 2:55 pm
Derpalator wrote: Mon Aug 03, 2020 4:58 am
000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
LQDI
The bonds in LQDI are all nominal. The fund uses inflation swaps. It's not the same, as the risk of the swaps failing is higher than a diversified pool of directly CPI indexed bonds failing.
I doubt it: inflation swaps are some of the most liquid and least complex financial derivatives on the market. The swaps in LQDI undoubtedly present less credit risk than the bond portfolio. Probably an order of magnitude less.
I'm not sure why the liquidity and low complexity (per you) are determinative of credit risk.

I think inflation swaps have a high likelihood of not working as promised in the case of truly high inflation.
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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz »

000 wrote: Mon Aug 03, 2020 3:46 pm
I doubt it: inflation swaps are some of the most liquid and least complex financial derivatives on the market. The swaps in LQDI undoubtedly present less credit risk than the bond portfolio. Probably an order of magnitude less.
I'm not sure why the liquidity and low complexity (per you) are determinative of credit risk.
The swaps are liquid, simple, AND have virtually no credit risk.
000 wrote: Mon Aug 03, 2020 3:46 pm I think inflation swaps have a high likelihood of not working as promised in the case of truly high inflation.
This is the vaguest version of an unspecified fear imaginable: are you aware of a counterpart unto an inflation swap EVER defaulting?

The inflation swap market isn’t some shady backwater, and the folks at Blackrock aren’t rubes.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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willthrill81
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Re: Good idea to hold TIPS now?

Post by willthrill81 »

000 wrote: Mon Aug 03, 2020 2:57 pm
willthrill81 wrote: Mon Aug 03, 2020 10:05 am
000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
1. Does an insurance company need a lot of demand to offer such a product?

2. Insurers can still profit from CPI-linked annuities.

3. Insurers don't have the greatest reputation already.
They need enough demand to reach critical mass so the inflation-indexed longevity risks can be pooled together, or they have to charge more...
I understand that, but how big is that critical mass? 1,000? 10,000? The law of large numbers would surely 'kick in' at those levels, and I would think that there is at least that much demand in a nation of 330 million, but maybe I'm wrong.
Last edited by willthrill81 on Mon Aug 03, 2020 4:35 pm, edited 1 time in total.
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Re: Good idea to hold TIPS now?

Post by 000 »

vineviz wrote: Mon Aug 03, 2020 4:16 pm
000 wrote: Mon Aug 03, 2020 3:46 pm
I doubt it: inflation swaps are some of the most liquid and least complex financial derivatives on the market. The swaps in LQDI undoubtedly present less credit risk than the bond portfolio. Probably an order of magnitude less.
I'm not sure why the liquidity and low complexity (per you) are determinative of credit risk.
The swaps are liquid, simple, AND have virtually no credit risk.
000 wrote: Mon Aug 03, 2020 3:46 pm I think inflation swaps have a high likelihood of not working as promised in the case of truly high inflation.
This is the vaguest version of an unspecified fear imaginable: are you aware of a counterpart unto an inflation swap EVER defaulting?

The inflation swap market isn’t some shady backwater, and the folks at Blackrock aren’t rubes.
No I have no knowledge of defaults on inflation swaps. But we (in the US) haven't had a high inflation period for a while. Maybe for the entirety of the existence of a market for inflation derivatives? Not sure how long these have existed.

Ultimately, if LQDI blows up, the LQDI investors will bear the loss, not Blackrock.

The concern with these derivatives is a chain reaction of counterparty risk blowing up during unexpected future scenarios. I think Buffett called them WMDs.
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Re: Good idea to hold TIPS now?

Post by 000 »

willthrill81 wrote: Mon Aug 03, 2020 4:18 pm
000 wrote: Mon Aug 03, 2020 2:57 pm
willthrill81 wrote: Mon Aug 03, 2020 10:05 am
000 wrote: Mon Aug 03, 2020 12:04 am
willthrill81 wrote: Sun Aug 02, 2020 11:56 pm Since insurance companies can buy TIPS themselves to hedge against CPI, I'm still baffled as to why no one offers such annuities any more.
What about:
1. Lack of demand -- inflation isn't high in the public's mind and the advertised yield would be less to account for inflation risk
2. Insurers prefer to invest in corporates to profit off the spread -- there are no CPI-indexed corporates
3. Admitting inflation is a risk -- bad look for the business which is mostly nominal products
1. Does an insurance company need a lot of demand to offer such a product?

2. Insurers can still profit from CPI-linked annuities.

3. Insurers don't have the greatest reputation already.
They need enough demand to reach critical mass so the inflation-indexed longevity risks can be pooled together, or they have to charge more...
I understand that, but how big is that critical mass? 1,000? 10,000? The law of large numbers would sure 'kick in' at those levels
I am not an actuary, so I'm not sure how big it needs to be. The only answer we have is that the insurers currently don't think it's "big enough". The demand wasn't even big enough to support a single supplier.
willthrill81 wrote: Mon Aug 03, 2020 4:18 pm I would think that there is at least that much demand in a nation of 330 million, but maybe I'm wrong.
Nah, most won't worry about inflation until the media tells them to. And most people using annuities are yield-oriented.
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vineviz
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Re: Good idea to hold TIPS now?

Post by vineviz »

000 wrote: Mon Aug 03, 2020 4:24 pm The concern with these derivatives is a chain reaction of counterparty risk blowing up during unexpected future scenarios. I think Buffett called them WMDs.
It soundS like neither you nor Buffett are familiar enough with inflation swaps to have an informed opinion about them.
"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 Angst »

000 wrote: Mon Aug 03, 2020 4:27 pm
willthrill81 wrote: Mon Aug 03, 2020 4:18 pm
[Snip...]

I understand that, but how big is that critical mass? 1,000? 10,000? The law of large numbers would sure 'kick in' at those levels
I am not an actuary, so I'm not sure how big it needs to be. The only answer we have is that the insurers currently don't think it's "big enough". The demand wasn't even big enough to support a single supplier.
willthrill81 wrote: Mon Aug 03, 2020 4:18 pm I would think that there is at least that much demand in a nation of 330 million, but maybe I'm wrong.
Nah, most won't worry about inflation until the media tells them to. And most people using annuities are yield-oriented.
Lack of demand is consistent with the way people seem to focus with single minds on nominal rates and that magic 0% nominal threshold, even when in real terms, expected yields are already negative.

But I'm wondering if anyone up-thread has already brought up the possibility that with the entire real yield curve presently being well into negative territory, insurance companies simply are unable to profitably offer inflation-indexed SPIAs?

If I myself with individual TIPS holdings can only guarantee myself a negative real floor of -0.44% out 30 years (as of today's real yield curve), how could an insurance company safely offer a positive real yield SPIA? Wouldn't they want to build in some sort of floor of inflation that has to be exceeded before beginning to index to inflation? That's what we have with all TIPS purchased at auction these days.
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Re: Good idea to hold TIPS now?

Post by 000 »

Angst wrote: Mon Aug 03, 2020 5:15 pm
000 wrote: Mon Aug 03, 2020 4:27 pm
willthrill81 wrote: Mon Aug 03, 2020 4:18 pm
[Snip...]

I understand that, but how big is that critical mass? 1,000? 10,000? The law of large numbers would sure 'kick in' at those levels
I am not an actuary, so I'm not sure how big it needs to be. The only answer we have is that the insurers currently don't think it's "big enough". The demand wasn't even big enough to support a single supplier.
willthrill81 wrote: Mon Aug 03, 2020 4:18 pm I would think that there is at least that much demand in a nation of 330 million, but maybe I'm wrong.
Nah, most won't worry about inflation until the media tells them to. And most people using annuities are yield-oriented.
Lack of demand is consistent with the way people seem to focus with single minds on nominal rates and that magic 0% nominal threshold, even when in real terms, expected yields are already negative.

But I'm wondering if anyone up-thread has already brought up the possibility that with the entire real yield curve presently being well into negative territory, insurance companies simply are unable to profitably offer inflation-indexed SPIAs?

If I myself with individual TIPS holdings can only guarantee myself a negative real floor of -0.44% out 30 years (as of today's real yield curve), how could an insurance company safely offer a positive real yield SPIA? Wouldn't they want to build in some sort of floor of inflation that has to be exceeded before beginning to index to inflation? That's what we have with all TIPS purchased at auction these days.
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Re: Good idea to hold TIPS now?

Post by vineviz »

Angst wrote: Mon Aug 03, 2020 5:15 pm

But I'm wondering if anyone up-thread has already brought up the possibility that with the entire real yield curve presently being well into negative territory, insurance companies simply are unable to profitably offer inflation-indexed SPIAs?
As always, if it could be done profitably by definition someone would be doing it.

However, it’s pretty clearly mostly a demand problem and not supply problem. The investment costs would likely be 30-75 bps above a nominal annuity. Without scale, though, it gets harder to recover the fixed costs and also maintain competitive payouts vs nominal annuities as interest rates decline.

Perhaps we’ll see some progress if defined contribution plans start doing more annuitization....
"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 Angst »

vineviz wrote: Mon Aug 03, 2020 6:13 pm
Angst wrote: Mon Aug 03, 2020 5:15 pm

But I'm wondering if anyone up-thread has already brought up the possibility that with the entire real yield curve presently being well into negative territory, insurance companies simply are unable to profitably offer inflation-indexed SPIAs?
As always, if it could be done profitably by definition someone would be doing it.

However, it’s pretty clearly mostly a demand problem and not supply problem. The investment costs would likely be 30-75 bps above a nominal annuity. Without scale, though, it gets harder to recover the fixed costs and also maintain competitive payouts vs nominal annuities as interest rates decline.

Perhaps we’ll see some progress if defined contribution plans start doing more annuitization....
I hear what you're saying. I still have some trouble squaring the fact that these days there are so many TIPS threads in the forum and people speculating about future inflation but the one company that barely a year ago was still offering inflation indexed SPIAs now doesn't. It would seem that demand might be up now, certainly discussion about them is, so perhaps it means they'll come back yet again. If only Covid had arrived a year earlier... But with real rates negative across the entire yield curve? They would have to be expensive.
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Re: Good idea to hold TIPS now?

Post by vineviz »

Angst wrote: Mon Aug 03, 2020 6:40 pm
I hear what you're saying. I still have some trouble squaring the fact that these days there are so many TIPS threads in the forum and people speculating about future inflation but the one company that barely a year ago was still offering inflation indexed SPIAs now doesn't.
In some ways inflation on this forum is kind of like the weather: people seem to like to talk about it, but nobody ever does anything about it. 😉
"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?

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vineviz wrote: Mon Aug 03, 2020 6:13 pm
Angst wrote: Mon Aug 03, 2020 5:15 pm

But I'm wondering if anyone up-thread has already brought up the possibility that with the entire real yield curve presently being well into negative territory, insurance companies simply are unable to profitably offer inflation-indexed SPIAs?
As always, if it could be done profitably by definition someone would be doing it.

However, it’s pretty clearly mostly a demand problem and not supply problem. The investment costs would likely be 30-75 bps above a nominal annuity. Without scale, though, it gets harder to recover the fixed costs and also maintain competitive payouts vs nominal annuities as interest rates decline.

Perhaps we’ll see some progress if defined contribution plans start doing more annuitization....
I have only the vaguest of notions as to how annuities are structured by insurers, but I'm confused as to why the investment costs would be higher using TIPS rather than Treasuries, the latter of which is what I believe they are all using now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Good idea to hold TIPS now?

Post by vineviz »

vineviz wrote: Mon Aug 03, 2020 6:49 pm
Angst wrote: Mon Aug 03, 2020 6:40 pm
I hear what you're saying. I still have some trouble squaring the fact that these days there are so many TIPS threads in the forum and people speculating about future inflation but the one company that barely a year ago was still offering inflation indexed SPIAs now doesn't.
In some ways inflation on this forum is kind of like the weather: people seem to like to talk about it, but nobody ever does anything about it. 😉
In all seriousness, I suspect most Bogleheads don’t really need or even benefit from a true CPI-linked annuity. For the vast majority of retirees, consumption grows more slowly than inflation (ie declines in real terms) almost from the start.

For the most part only those unfortunate investors who are retiring with withdrawal rates right in the SWR danger zone (say, 3% to 4%) will have an unmanageable amount inflation risk in the absence of inflation-linked annuities.
"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?

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willthrill81 wrote: Mon Aug 03, 2020 6:54 pm
vineviz wrote: Mon Aug 03, 2020 6:13 pm
Angst wrote: Mon Aug 03, 2020 5:15 pm

But I'm wondering if anyone up-thread has already brought up the possibility that with the entire real yield curve presently being well into negative territory, insurance companies simply are unable to profitably offer inflation-indexed SPIAs?
As always, if it could be done profitably by definition someone would be doing it.

However, it’s pretty clearly mostly a demand problem and not supply problem. The investment costs would likely be 30-75 bps above a nominal annuity. Without scale, though, it gets harder to recover the fixed costs and also maintain competitive payouts vs nominal annuities as interest rates decline.

Perhaps we’ll see some progress if defined contribution plans start doing more annuitization....
I have only the vaguest of notions as to how annuities are structured by insurers, but I'm confused as to why the investment costs would be higher using TIPS rather than Treasuries, the latter of which is what I believe they are all using now.
It’s not the TIPS v. Treasuries that’s the problem: as you say, that change is easy.

But Treasuries are a minority of most insurance portfolios. Corporate bonds, agency bonds, MBS, etc are almost always nominal. The insurer would likely need to maintain an inflation swap overlay and/or some sort of natural hedge that could be leveraged, none of which is INCREDIBLY expensive or complex but all of which would be special costs of what has never been more than a niche product.
"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 willthrill81 »

vineviz wrote: Mon Aug 03, 2020 7:03 pm
willthrill81 wrote: Mon Aug 03, 2020 6:54 pm
vineviz wrote: Mon Aug 03, 2020 6:13 pm
Angst wrote: Mon Aug 03, 2020 5:15 pm

But I'm wondering if anyone up-thread has already brought up the possibility that with the entire real yield curve presently being well into negative territory, insurance companies simply are unable to profitably offer inflation-indexed SPIAs?
As always, if it could be done profitably by definition someone would be doing it.

However, it’s pretty clearly mostly a demand problem and not supply problem. The investment costs would likely be 30-75 bps above a nominal annuity. Without scale, though, it gets harder to recover the fixed costs and also maintain competitive payouts vs nominal annuities as interest rates decline.

Perhaps we’ll see some progress if defined contribution plans start doing more annuitization....
I have only the vaguest of notions as to how annuities are structured by insurers, but I'm confused as to why the investment costs would be higher using TIPS rather than Treasuries, the latter of which is what I believe they are all using now.
It’s not the TIPS v. Treasuries that’s the problem: as you say, that change is easy.

But Treasuries are a minority of most insurance portfolios. Corporate bonds, agency bonds, MBS, etc are almost always nominal. The insurer would likely need to maintain an inflation swap overlay and/or some sort of natural hedge that could be leveraged, none of which is INCREDIBLY expensive or complex but all of which would be special costs of what has never been more than a niche product.
Why would such overlays or leveraged hedges be needed at all? Don't the TIPS provide enough such inflation protection?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Good idea to hold TIPS now?

Post by vineviz »

willthrill81 wrote: Mon Aug 03, 2020 8:19 pm Why would such overlays or leveraged hedges be needed at all? Don't the TIPS provide enough such inflation protection?
The TIPS would only hedge the inflation risk for the principal invested in them, and no insurance company is running an investment portfolio that is 100% in Treasuries (or TIPS). You'd need an overlay to hedge the rest of the portfolio.
"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 000 »

willthrill81 wrote: Mon Aug 03, 2020 8:19 pm Why would such overlays or leveraged hedges be needed at all? Don't the TIPS provide enough such inflation protection?
An annuity invested 100% in TIPS would be low yield for the customer and/or low profit for the insurer. Probably both.

Seeing as TIPS real yields are now negative, I don't see how such an annuity could offer much of a positive real yield. As you stated upthread, many people are more willing to accept a yield presented as nominally positive even if it's really negative in real terms.
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Re: Good idea to hold TIPS now?

Post by willthrill81 »

vineviz wrote: Mon Aug 03, 2020 8:21 pm
willthrill81 wrote: Mon Aug 03, 2020 8:19 pm Why would such overlays or leveraged hedges be needed at all? Don't the TIPS provide enough such inflation protection?
The TIPS would only hedge the inflation risk for the principal invested in them, and no insurance company is running an investment portfolio that is 100% in Treasuries (or TIPS).
Why not?
000 wrote: Mon Aug 03, 2020 8:38 pm
willthrill81 wrote: Mon Aug 03, 2020 8:19 pm Why would such overlays or leveraged hedges be needed at all? Don't the TIPS provide enough such inflation protection?
An annuity invested 100% in TIPS would be low yield for the customer and/or low profit for the insurer. Probably both.

Seeing as TIPS real yields are now negative, I don't see how such an annuity could offer much of a positive real yield. As you stated upthread, many people are more willing to accept a yield presented as nominally positive even if it's really negative in real terms.
My understanding is that insurers don't make much off SPIAs anyway.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Good idea to hold TIPS now?

Post by 000 »

willthrill81 wrote: Mon Aug 03, 2020 9:30 pm
vineviz wrote: Mon Aug 03, 2020 8:21 pm
willthrill81 wrote: Mon Aug 03, 2020 8:19 pm Why would such overlays or leveraged hedges be needed at all? Don't the TIPS provide enough such inflation protection?
The TIPS would only hedge the inflation risk for the principal invested in them, and no insurance company is running an investment portfolio that is 100% in Treasuries (or TIPS).
Why not?
Insurance companies are yield chasing investors. Partly because of regulatory requirements on bond vs. stock.
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