Kevin M wrote: ↑Tue Nov 22, 2022 6:32 pm
I'd appreciate input from anyone who actually buys and sells TIPS
or other Treasuries, or anyone else who can point out any flaws in my analysis.
Kevin M wrote: ↑Tue Nov 22, 2022 4:30 pm
... I own 100 of the Jan 2023, so I would get the best sell price (min qty 100), and I would get the best ask price for the replacement, which would be either the Apr or Jul 2023.
So it looks like selling the Jan 23 and buying the Jul 23 is the better swap, but I'd appreciate any comments before I pull the trigger on this.
First off, I don't fit the underlined portion of the description above. I'm not a TIPS trader. In my IRA I only buy a new TIPS at auction every year or two to maintain a 10-year rolling ladder. In my taxable accounts I haven't bought a TIPS in the secondary market since 2008 or at auction since 2014. As each one matures, I roll the proceeds into a TIPS fund to simplify income tax reporting.
Secondly, while I appreciate all the useful work Kevin has done in his Trading Treasuries (nominal and TIPS)
thread, trading short term TIPS doesn't interest (pardon the pun) me. I generally trust the market to price TIPS appropriately taking into account the fact that TIPS are indexed to a non-seasonally adjusted CPI. I would simply pick the maturity that matched my plan, ignoring yield differences to nearby maturities.
But it's apparent Kevin gets a kick out of making these decisions, so let me try to contribute something to the discussion.
- It's important to properly frame the choice. I try to make the alternatives have the same start and end point. For example, here is one possible framing: Setting the start and end points to today and January 15, 2023, do either ...
- Alternative 1: Sell Jan 2023 today and roll proceeds into the July 2023.
- Alternative 2: Hold Jan 2023 until maturity and then use proceeds to buy the July 2023 at that time.
- The better alternative will be the one that produces the most value of the July 2023 as of 1/15/2023.
- Inflation is irrelevant in this choice. You'd be investing the same amount in TIPS of one maturity or the other either way; and they'd both receive the same inflation adjustment.
- I believe the main determinant would be the July 2023's yield on January 15th. If it's below a certain value on that date, it would have been better to do the exchange now.
- Below is a table that attempts to compare the alternatives:
- Rows 10-17 show alternative # 1 where the Jan 2023 is sold now and all the proceeds used to purchase the July 2023.
- Row 15 shows that for each $1,000 of principal of the Jan 2023, we could buy $1,007.87 of principal of the July 2023.
- Row 17 shows that with the Jan 15 interest payment this would grow to $1,009.76 on 1/15/2023.
- Rows 18-25 show alternative # 2 where we wait until its redemption to exchange the January 2023's proceeds into the July 2023.
- Row 21 shows that the January 2023 will redeem for $1,000.63 including the final interest payment.
- On row 22 we postulate that the July 2023's yield will be 2.205% on that date.
- Row 24 shows that this means each $1,000 of principal will cost $990.95.
- Row 25 shows that, with this cost, we would get $1,009.76 of principal in exchange for the Jan 2023 proceeds. This matches the value we'd have if we'd made the exchange now (on row 17).
- If the July 2023's yield is lower than 2.205% on 1/15/2023, then it would be better to buy now. If it is higher, then it would be better to wait.
Code: Select all
Row Col A Col B Col C
2 Principal 1,000
3 Settlement 11/23/2022
4 Maturity 1/15/2023 7/15/2023
5 Coupon 0.125% 0.375%
6 Previous coupon date 7/15/2022 7/15/2022 =COUPPCD($B3,B4,2,1)
7 Next coupon date 1/15/2023 1/15/2023 =COUPNCD($B3,B4,2,1)
8 Days in period 184 184 =B7-B6
9 Days until settlement 131 131 =$B3-B6
Code: Select all
10 If Jan 23 exchanged for Jul 23 now
11 Price 99.798 98.929
12 Yield 1.530% 2.057% =YIELD($B3,B4,B5,B11,100,2,1)
13 Accrued interest 0.44 1.33 =$B2*(B5/2)*(B9/B8)
14 Total cost 998.42 990.62 =$B2*(B11/100)+B13
15 Principal purchased 1,007.87 =B2*(B14/C14)
16 Interest 1/15/23 1.89 =C15*(C5/2)
17 Value 1/15/23 if bought 11/23/22 1,009.76 =C15+C16
Code: Select all
18 If Jan 23 held to redemption
19 Price 100.000
20 Interest 1/15/23 0.63 =B2*(B5/2)
21 Total value at redemption 1,000.63 =B2+B20
22 Assumed yield on 1/15/23 2.205%
23 Corresponding price 99.095 =PRICE(B4,C4,C5,C22,100,2,1)
24 Total cost 990.95 =B2*(C23/100)
25 Principal purchased 1,009.76 =B2*(B21/C24)
The above analysis is probably overly complicated, and I'm not even sure it's valid. But I hope it helps with Kevin's decision.