Will switching to Chained CPI hurt TIPS?

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FlyingMoose
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Will switching to Chained CPI hurt TIPS?

Post by FlyingMoose » Sat Mar 30, 2013 8:13 am

I have been seeing in the news that the government is considering changing its measure of inflation from the regular CPI to the Chained CPI.

Does this make TIPS a bad deal? They said that for 2012 CPI was 1.7% but the Chained CPI was only 1.4%.

Even if it doesn't affect TIPS right away, it shows that the government will play with the numbers for any payout that it has to make, and will likely do so with TIPS at some point in the future to save money.

Are there any inflation-protected bonds without such conflict of interest (where the organization making the payments is the same one deciding how much they should be)?

linguini
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Re: Will switching to Chained CPI hurt TIPS?

Post by linguini » Sat Mar 30, 2013 8:22 am

TIPS that have already been issued adjust based on CPI and will continue to use CPI for their duration regardless of future changes. If the treasury starts issuing new TIPS with chained CPI, this will not affect existing TIPS, and the new ones will be sold at a discount to reflect lower inflation adjustments.

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Re: Will switching to Chained CPI hurt TIPS?

Post by Calm Man » Sat Mar 30, 2013 10:53 am

linguini wrote:TIPS that have already been issued adjust based on CPI and will continue to use CPI for their duration regardless of future changes. If the treasury starts issuing new TIPS with chained CPI, this will not affect existing TIPS, and the new ones will be sold at a discount to reflect lower inflation adjustments.
How can you be sure of this? A simple change in the law can change this. I would not be certain.

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Rainier
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Re: Will switching to Chained CPI hurt TIPS?

Post by Rainier » Sat Mar 30, 2013 10:56 am

Calm Man wrote:
linguini wrote:TIPS that have already been issued adjust based on CPI and will continue to use CPI for their duration regardless of future changes. If the treasury starts issuing new TIPS with chained CPI, this will not affect existing TIPS, and the new ones will be sold at a discount to reflect lower inflation adjustments.
How can you be sure of this? A simple change in the law can change this. I would not be certain.
I agree, this can easily be changed.

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Re: Will switching to Chained CPI hurt TIPS?

Post by midareff » Sat Mar 30, 2013 10:58 am

They have also been considering changing SS payment adjustments to that index. .3% forone year is not big deal. ,3% compounded for a 30 year lifetime is a huge lifetime reduction ........ huge.

Leesbro63
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Re: Will switching to Chained CPI hurt TIPS?

Post by Leesbro63 » Sat Mar 30, 2013 11:08 am

Hey, they could say that even your old 4% fixed rate Treasury will now only pay 2%. I'm not saying it's gonna happen, but TIPS are not a in uniquely subject to game changes any more than any other government bond.

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Re: Will switching to Chained CPI hurt TIPS?

Post by abuss368 » Sat Mar 30, 2013 11:12 am

I have also been curious of the impact of such a change. In some respects, from my understanding, a chained CPI may make sense. Unless I am mistaken, I believe the premise is consumers adapt and change their spending paterns based on current prices.

I would expect the process to result in a lower payout for the governments balloning debt.

What would fellow Bogleheads consider the imapct on their Inflation bond investments? Are these investment still attractive should this change be implemented?
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Re: Will switching to Chained CPI hurt TIPS?

Post by nisiprius » Sat Mar 30, 2013 12:44 pm

There is an index named CPI-U, which is the commonly cited CPI. There is a slightly different index, CPI-W, used to calculate Social Security cost-of-living adjustments. There is a chained versus of CPI-U, C-CPI-U. There doesn't seem to be a C-CPI-W.

It still seems to be murky whether what is being contemplated is to change the definition of CPI-U and/or CPI-W or whether to keep the existing indexes intact but index Social Security to C-CPI-U, or some other chained index.

Existing TIPS are indexed to CPI-U, so if CPI-U doesn't change, existing TIPS are unaffected.

If CPI-U is changed, for the record, the deal is:

"If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index."

The Treasurer could of course break promises, fail to honor those terms, or make a dishonest judgement about whether an alteration in the CPI was materially adverse to TIPS investors. But the terms of the agreement are clear. The government does not reserve the right to alter the index of existing TIPS in a bad way. If CPI-U is changed in a bad day, they are pledged to change existing TIPS to an "appropriate alternative index."

In the current political debate, it appears as if there is general agreement that the C-CPI-U does represent a reduction, i.e. it systematically tends to calculate smaller numbers than CPI-U. So even if one argued that C-CPI-U is a more accurate measure of cost-of-living, it would still represent a materially adverse change to TIPS investors. Since there is a fair amount of foreign investment in TIPS, depending on the global balance of economic power etc. the Secretary of the Treasury might decide to keep its promise rather than tick off foreign investors.
Last edited by nisiprius on Sat Mar 30, 2013 1:51 pm, edited 1 time in total.
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Re: Will switching to Chained CPI hurt TIPS?

Post by gkaplan » Sat Mar 30, 2013 12:54 pm

5 4 3 2 1
Gordon

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Cosmo
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Re: Will switching to Chained CPI hurt TIPS?

Post by Cosmo » Sat Mar 30, 2013 1:02 pm

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clacy
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Re: Will switching to Chained CPI hurt TIPS?

Post by clacy » Sat Mar 30, 2013 1:11 pm

I don't see why this thread would be locked. This is a legitimate investment question, IMO.

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Re: Will switching to Chained CPI hurt TIPS?

Post by Sconie » Sat Mar 30, 2013 1:28 pm

clacy wrote:I don't see why this thread would be locked. This is a legitimate investment question, IMO.
Well said!
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Re: Will switching to Chained CPI hurt TIPS?

Post by Leesbro63 » Sat Mar 30, 2013 1:57 pm

Truthfully, based on other similar threads, I believe it should be locked. The fact that it's a legitimate question isn't the issue. The issue is that it involved hypothetical and proposed (or "discussed) legislation.

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Re: Will switching to Chained CPI hurt TIPS?

Post by LadyGeek » Sat Mar 30, 2013 3:08 pm

gkaplan wrote:5 4 3 2 1
Leesbro63 wrote:Truthfully, based on other similar threads, I believe it should be locked. The fact that it's a legitimate question isn't the issue. The issue is that it involved hypothetical and proposed (or "discussed) legislation.
That's what I'm thinking - it's a discussion of what the government might do, which is proposed legislation. This topic is locked. See: Forum Policy
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