TIPS vs TBILL YTM return

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ebeb
Posts: 380
Joined: Sat Dec 23, 2017 1:18 pm

TIPS vs TBILL YTM return

Post by ebeb »

Since I don't understand TIPS, I am trying to see if buying this TIPS is better or worse than buying the TBILL:
In schwab.com the TIPS Coupon=0.625% YTM=2.286% while the TBILL Coupon=0% YTM=4.658% and the maturity dates are close. What would be the actual return amount on the maturity date for investing $1000 in each.

TIPS:
Action Description Coupon Maturity sorting ascending Quote Quantity Price Min Max YTM YTW 1 Accrued
Interest Estimated
CUSIP 9128284H0 Buy US Treasury TIP 0.625% 04/15/2023
9128284H0 0.625 04/15/2023 Ask 25 99.63600 1 1000 2.286 -- 52.490 29,914.150

TBILL:
Action Description Coupon Maturity Quote Quantity Price Min Max YTM sorting decending YTW 1 Accrued
Interest Estimated
CUSIP 912796YV5 Buy US Treasury BILL 04/27/2023
912796YV5 0.000 04/27/2023 Ask 25 98.83945 1 8000 4.658 -- -- 24,709.860 View
65% VOO | 20% BND | 15% TBILL+EF | "You see, in this world there's two kinds of people, my friend: Those with loaded accounts and those who dig" - Blondie(paraphrased)
Tom_T
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Re: TIPS vs TBILL YTM return

Post by Tom_T »

You can't know exactly what you will get back on a TIPS. It depends on inflation. The nominal bond might prove to have been the better investment, or not.
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Re: TIPS vs TBILL YTM return

Post by #Cruncher »

ebeb wrote: Tue Jan 24, 2023 1:52 pm... I am trying to see if buying this TIPS is better or worse than buying the TBILL: ... the TIPS ... YTM=2.286% while the TBILL ...YTM=4.658% ...
Tom_T wrote: Tue Jan 24, 2023 2:13 pmYou can't know exactly what you will get back on a TIPS. It depends on inflation.
Tom_T is correct. The nominal return of the TIPS will depend on future inflation. Cell C13 in the table below shows that inflation of 0.851% would produce a 4.658% nominal return for the TIPS in the original post, the same as the T-Bill's return. Specifically this means that the "Reference CPI" would need to increase 0.851% from 3/1/2023, the latest date for which we know TIPS "index ratios", until 4/15/2023 when the TIPS matures. [1]

The Ref CPI on 3/1/2023 is the same as the monthly CPI for December 2022. The Ref CPI on 4/15/2023 will be approximately the average of the monthly CPIs for January and February. [2] So in other words, to produce a 4.658% nominal return the average of the January and February CPIs must be about 0.851% higher than the December CPI.

Code: Select all

  1                   Col A        Col B      Col C       Col D  Formula in Column B
  2              Face value       25,000
  3              Settlement    1/25/2023
  4                Maturity    4/15/2023
  5                  Coupon       0.625%
  6                   Price       99.636
  7  Interest period starts   10/15/2022                         =COUPPCD(B3,B4,2,1) [3]
  8      Days to settlement          102                         =B3-B7
  9   Days after settlement           80                         =B4-B3
 10    Total days in period          182                         =B4-B7
 11       Last Ref CPI date               3/01/2023
 12  Index Ratio on 3/01/23                 1.19488 [4]
 13    Index Ratio increase                  0.851% <---

Code: Select all

 14                               Real $  Idx Ratio   Indexed $  [5]
 15         Cost on 1/25/23    24,952.78    1.19883   29,914.15  =B2*(B6/100+(B5/2)*(B8/B10))
 16     Proceeds on 4/15/23    25,078.13    1.20505   30,220.39  =B2*(1+B5/2)
 17               Gain/Loss       125.34                 306.24  =B16-B15
 18                   Yield       2.286%                 4.658%  =(B17/B15)*($B10/$B9)*2     [6]
 19    Excel YIELD function       2.286%                   n/a   =YIELD(B3,B4,B5,B6,100,2,1) [7]
  1. See the first two paragraphs of the left sidebar on this help page for an explanation of "Reference CPI" and "index ratios".
  2. More precisely the 4/15/2023 Reference CPI will be 16/30 of the January CPI plus 14/30 of the February CPI.
  3. Cell B7 is calculated with the Excel COUPPCD function.
  4. Index ratios of the TIPS maturing 4/15/2023 are shown on this web page.
  5. Cells D15 & D16 equal the Real $ in column B X the index ratios in column C. The index ratio for row 16 is 0.851% more than the index ratio on 3/1/2023:
    1.20505 = 1.19488 * 1.00851
  6. The formula that computes the 2.286% real return in cell B18 computes the 4.658% nominal return when copied to cell D18.
    2.286% = (125.34 / 24952.78) * (182 / 80) * 2
    4.658% = (306.24 / 29914.15) * (182 / 80) * 2
  7. Cell B19 uses the Excel YIELD function to confirm the formula used in cell B18.
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