Fidelity Inflation-Protected Bond Index Fund (FSIYX)

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Buffetologist
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Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby Buffetologist » Sat Apr 15, 2017 10:19 am

I have some money in this fund in my 401K. I don't understand how the 30 day SEC yield can be 6.26% when they are holding 99.7% TIPS.

Can anyone explain how to think about this?

How can one determine if a TIPS Index fund has a positive real yield?

I'm trying to improve my understanding of TIPS funds and considering increasing my allocation.

integritetus
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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby integritetus » Sat Apr 15, 2017 11:00 am

The reported high SEC yield is a temporary anomaly. See this 2015 thread discussing the same issue.
viewtopic.php?t=167325

See particularly this well summarized comment from market timer in that 2015 thread:

market timer wrote:TIPS pay inflation plus the real yield. In March, the non-seasonally adjusted inflation change was 0.6% month/month. When you annualize this number, you get a yield greater than 6%. It is a temporary blip due to seasonality. The seasonally adjusted inflation change was just 0.2% month/month.

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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby #Cruncher » Sat Apr 15, 2017 3:35 pm

Buffetologist in original post wrote:I don't understand how the 30 day SEC yield can be 6.26% when they are holding 99.7% TIPS. Can anyone explain how to think about this?
I would just ignore it. The 6.26% 3/31/2017 "30-day Yield" reported on Fidelity's FSIYX web page has a footnote 7:
7. The fund's yield will include adjustments to the principal value of Treasury Inflation-Protected Securities (TIPS) due to changes in the government's inflation rate.
The reference CPI increased 0.58% from 241.432 on 3/1/2017 to 242.839 on 4/1/2017 as shown here. [1] Annualized this is about 7%, more than accounting for the 6.26% reported yield. In my opinion, incorporating the short term change in the CPI into a TIPS fund's yield makes it meaningless.

Buffetologist in same post wrote:How can one determine if a TIPS Index fund has a positive real yield?
FSIYX seeks to follow the "Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series-L)". This index covers all TIPS maturing in 1 or more years ("1+ index"). Periodically I calculate the weighted average real yield of this index. It was 0.12% on 3/31/2017 as I reported in this post.

Many other TIPS funds also follow this index and some of them report a real yield on their web site. For example, Vanguard's VIPSX approximates the holdings of the 1+ index and its SEC yield is on a real yield basis [2]. As of 4/13/2017 it is -0.08%. Adding back the fund's 0.20% expense ratio and subtracting FSIYX's 0.09% gives a rough estimate of 0.03% for its real yield after expenses.

  1. Because of the 3-month lag, these are the Consumer Price Indexes reported for December 2016 and January 2017 as shown here.
  2. The note to VIPSX's SEC yield states "G — Does not include any income adjustment resulting from change in inflation rate"

mitchmcc
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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby mitchmcc » Sat Jul 15, 2017 7:57 am

Does investing in a fund like this protect you exactly the same as owning the real Treasury TIPS bonds?

Is the return for a TIPS bond just "adjusted" (i.e., increased) for inflation as the years go by?

Mitch

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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby Valuethinker » Sat Jul 15, 2017 8:57 am

mitchmcc wrote:Does investing in a fund like this protect you exactly the same as owning the real Treasury TIPS bonds?

Is the return for a TIPS bond just "adjusted" (i.e., increased) for inflation as the years go by?

Mitch


Very similar. If you own the bonds directly then your duration is always falling as the bond approach maturity. In a fund the fund sells bonds before they mature and reinvests the proceeds in bonds w longer to maturity.

With the fund you will have more net asset value volatility but very similar long run r returns.

W a tips bond the principal at maturity is adjusted by inflation that has occurred since issue. The coupon is adjusted for inflation as well.

If there is deflation the coupons are reduced and the principal is reduced *except*tips bonds always redeem at a minimum of 100 per 100 dollars of bonds nominal value. I.e. they are deflation protected to some extent.

Building a ladder of tips bonds down to the date when you need the cash gives you less volatility than holding a fund but a fund should give very similar returns. If volatility is a concern then a short term tips fund is going to be much less volatile and will track inflation closely.

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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby FIREchief » Sat Jul 15, 2017 3:52 pm

I would also add that buying individual TIPS at auction and holding them to maturity results in an ER of zero. .09% is quite cheap, but it is still a slight drag.

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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby nisiprius » Sat Jul 15, 2017 6:02 pm

mitchmcc wrote:Does investing in a fund like this protect you exactly the same as owning the real Treasury TIPS bonds?

Is the return for a TIPS bond just "adjusted" (i.e., increased) for inflation as the years go by?

Mitch
It holds "real Treasury TIPS bonds." According to the last semiannual report, the list of holdings is pretty simple. 99.5% of the fund's holdings are "Treasury inflation-indexed bonds" and "Treasury inflation-indexed notes," and the holdings list is short enough to dump into a forum posting.

You always have the issue of a bond mutual fund versus individual bonds. I don't think this is meaningless, and I think holding individual bonds is slightly better if you are convinced you can really hold almost all of the bonds to maturity. I also, personally, held about thirty individual bond issues and a few years ago decided, in the interests of simplicity, to sell them all and replace them with a TIPS fund.

Here's what's in the fund. Each individual bond has an internal "principal" amount that rises with inflation; you pay taxes on the increase in that amount but you can't access it directly, and if you sell on the market you expose yourself to market fluctuation. Each individual bond pays out coupon interest with is also inflation-indexed. As with all bonds, the interest payments are based on the principal amount, not the market value of the bond, so if the market value of the bond declines, the interest payments don't change. I'm sorry to say though that the coupling between that and the mutual fund dividend payments is complicated and indirect, so that's another minor disadvantage of a fund instead of individual bonds.

Here's what's in the fund as of the end of last year:

U.S. Treasury Inflation-Indexed Bonds:
0.625% 2/15/43 $14,338,993 $13,148,803
0.75% 2/15/42 19,427,205 18,420,159
0.75% 2/15/45 24,115,243 22,722,167
1% 2/15/46 17,713,559 17,799,190
1.375% 2/15/44 21,711,708 23,722,141
1.75% 1/15/28 16,405,581 18,330,139
2% 1/15/26 20,440,351 23,041,579
2.125% 2/15/40 8,682,062 10,765,749
2.125% 2/15/41 11,042,715 13,763,280
2.375% 1/15/25 28,061,477 32,235,549
2.375% 1/15/27 16,445,752 19,278,027
2.5% 1/15/29 15,885,182 19,176,758
3.375% 4/15/32 6,408,866 8,867,642
3.625% 4/15/28 13,863,446 18,243,814
3.875% 4/15/29 16,868,773 23,083,234
U.S. Treasury Inflation-Indexed Notes:
0.125% 4/15/18 53,175,908 53,668,199
0.125% 4/15/19 52,672,454 53,338,153
0.125% 4/15/20 52,714,954 53,271,079
0.125% 4/15/21 45,835,205 46,120,440
0.125% 1/15/22 42,308,544 42,406,553
0.125% 7/15/22 43,637,856 43,775,606
0.125% 1/15/23 43,839,980 43,543,670
0.125% 7/15/24 42,631,443 41,907,636
0.125% 7/15/26 36,050,428 34,873,102
0.25% 1/15/25 42,737,808 42,048,826
0.375% 7/15/23 43,484,974 43,901,570
0.375% 7/15/25 42,685,882 42,467,550
0.625% 7/15/21 38,330,792 39,574,511
0.625% 1/15/24 43,383,117 44,172,532
0.625% 1/15/26 38,445,918 38,796,147
1.125% 1/15/21 36,110,170 37,901,849
1.25% 7/15/20 31,569,734 33,351,869
1.375% 7/15/18 16,024,409 16,632,161
1.375% 1/15/20 20,543,664 21,612,310
1.625% 1/15/18 16,246,349 16,673,352
1.875% 7/15/19 16,938,779 18,041,347
2.125% 1/15/19 14,907,909 15,755,134
TOTAL U.S. TREASURY INFLATION-PROTECTED OBLIGATIONS
(Cost $1,106,909,611) 1,106,431,827
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby #Cruncher » Sun Jul 16, 2017 9:24 am

mitchmcc in this post wrote:Is the return for a TIPS bond just "adjusted" (i.e., increased) for inflation as the years go by?
I'm not sure what you mean by "adjusting" the "return", mitchmcc. If you're asking, "does the principal value increase over the years in line with the Consumer Price Index", the answer (as nisiprius points out in the previous post) is "Yes". However, TIPS funds are required each year to distribute this increase for all the TIPS they hold. They include it in dividends along with their TIPS' interest income.

nisiprius in previous post wrote:Here's what's in the fund as of the end of last year:
Here are Nisi's figures from the FSIYX 12/31/2016 Annual Report. (To see, click [Annual Report] at the top of this web page.) I've added columns showing how many years until each issue matures and the percent that each bond is of the total market value. For comparison I also show the allocation to each issue for the index that the fund is supposed to track.

Code: Select all

                                             ------ Percent of Total -------
  Matures     Years   Coupon     Mkt Value   FSIYX   Index    Diff  Cum Diff

Code: Select all

Jan 15 2018    1.04   1.625%    16,673,352    1.5%    1.6%   (0.1%)   (0.1%)
Apr 15 2018    1.29   0.125%    53,668,199    4.9%    4.3%    0.5%     0.4%
Jul 15 2018    1.54   1.375%    16,632,161    1.5%    1.4%    0.1%     0.5%
Jan 15 2019    2.04   2.125%    15,755,134    1.4%    1.4%   (0.0%)    0.5%
Apr 15 2019    2.29   0.125%    53,338,153    4.8%    4.3%    0.5%     1.0%
Jul 15 2019    2.54   1.875%    18,041,347    1.6%    1.5%    0.1%     1.2%
Jan 15 2020    3.04   1.375%    21,612,310    2.0%    1.8%    0.1%     1.3%
Apr 15 2020    3.29   0.125%    53,271,079    4.8%    4.3%    0.5%     1.8%
Jul 15 2020    3.54   1.250%    33,351,869    3.0%    3.1%   (0.1%)    1.7%
Jan 15 2021    4.04   1.125%    37,901,849    3.4%    3.5%   (0.1%)    1.7%
Apr 15 2021    4.29   0.125%    46,120,440    4.2%    3.8%    0.4%     2.1%
Jul 15 2021    4.54   0.625%    39,574,511    3.6%    3.3%    0.3%     2.4%
Jan 15 2022    5.04   0.125%    42,406,553    3.8%    3.6%    0.2%     2.6%
Jul 15 2022    5.54   0.125%    43,775,606    4.0%    3.5%    0.4%     3.0%
Jan 15 2023    6.04   0.125%    43,543,670    3.9%    3.5%    0.4%     3.5%
Jul 15 2023    6.54   0.375%    43,901,570    4.0%    3.5%    0.4%     3.9%
Jan 15 2024    7.04   0.625%    44,172,532    4.0%    3.5%    0.4%     4.4%
Jul 15 2024    7.54   0.125%    41,907,636    3.8%    3.4%    0.4%     4.8%
Jan 15 2025    8.04   2.375%    32,235,549    2.9%    3.4%   (0.5%)    4.3%
Jan 15 2025    8.04   0.250%    42,048,826    3.8%    3.4%    0.4%     4.7%
Jul 15 2025    8.54   0.375%    42,467,550    3.8%    3.4%    0.4%     5.2% <===
Jan 15 2026    9.04   2.000%    23,041,579    2.1%    2.3%   (0.2%)    5.0%
Jan 15 2026    9.04   0.625%    38,796,147    3.5%    3.6%   (0.1%)    4.9%
Jul 15 2026    9.54   0.125%    34,873,102    3.2%    2.9%    0.2%     5.1%
Jan 15 2027   10.04   2.375%    19,278,027    1.7%    1.9%   (0.2%)    5.0%
Jan 15 2028   11.04   1.750%    18,330,139    1.7%    1.7%    0.0%     5.0%
Apr 15 2028   11.29   3.625%    18,243,814    1.6%    2.7%   (1.1%)    3.9%
Jan 15 2029   12.04   2.500%    19,176,758    1.7%    1.6%    0.2%     4.1%
Apr 15 2029   12.29   3.875%    23,083,234    2.1%    3.3%   (1.2%)    2.9%
Apr 15 2032   15.29   3.375%     8,867,642    0.8%    0.8%    0.0%     3.0%
Feb 15 2040   23.12   2.125%    10,765,749    1.0%    1.7%   (0.7%)    2.2%
Feb 15 2041   24.13   2.125%    13,763,280    1.2%    2.7%   (1.5%)    0.7%
Feb 15 2042   25.13   0.750%    18,420,159    1.7%    1.9%   (0.3%)    0.5%
Feb 15 2043   26.12   0.625%    13,148,803    1.2%    1.8%   (0.6%)   (0.1%)
Feb 15 2044   27.12   1.375%    23,722,141    2.1%    2.1%    0.0%    (0.1%)
Feb 15 2045   28.13   0.750%    22,722,167    2.1%    1.8%    0.2%     0.1%
Feb 15 2046   29.13   1.000%    17,799,190    1.6%    1.7%   (0.1%)    0.0%
                             -------------  ------  ------    ----
Total                        1,106,431,827  100.0%  100.0%    0.0%
As shown in the far right column, FSIYX weights shorter maturities more than the index it is supposed to track. For example, it has 5.2% more in maturities 2025 and earlier than does the index. This causes its average maturity to be less than that of the index: 8.25 years versus 8.96 years. (The latter figure agrees with that shown in my 12/30/2016 post, Re: Consistent Yield & Duration to Help Choose TIPS Fund for the "1+" index.)

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FIREchief
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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby FIREchief » Sun Jul 16, 2017 2:41 pm

#Cruncher wrote:
mitchmcc in this post wrote:Is the return for a TIPS bond just "adjusted" (i.e., increased) for inflation as the years go by?
I'm not sure what you mean by "adjusting" the "return", mitchmcc. If you're asking, "does the principal value increase over the years in line with the Consumer Price Index", the answer (as nisiprius points out in the previous post) is "Yes". However, TIPS funds are required each year to distribute this increase for all the TIPS they hold. They include it in dividends along with their TIPS' interest income.



Is this why FSIYX's duration is so much less than average maturity?

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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby #Cruncher » Mon Jul 17, 2017 5:56 am

FIREchief in previous post wrote:
#Cruncher wrote:... However, TIPS funds are required each year to distribute this increase for all the TIPS they hold. They include it in dividends along with their TIPS' interest income.
Is this why FSIYX's duration is so much less than average maturity?
No, this has nothing to do with it. I assume you're referring to the difference between the 8.50 years Weighted Average Maturity and the 5.60 Duration reported as of 6/30/2017 on the FSIYX web page. 8.50 years is 0.67 years less than the 9.17 I calculate for the 1+ index on the 6/30/2017 update of my Consistent Yield & Duration thread. Therefore I'd guess that the fund's duration is also 0.67 less than that of the 1+ index. This would make it about 7.7 (8.36 less 0.67).

I would ignore the 5.60 that Fidelity reports for duration. It may be an attempt to show the fund's price sensitivity to a change in nominal interest rates rather than in TIPS interest rates. If so, it isn't meaningful in my opinion.

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Re: Fidelity Inflation-Protected Bond Index Fund (FSIYX)

Postby Valuethinker » Mon Jul 17, 2017 4:59 pm

#Cruncher wrote:
FIREchief in previous post wrote:
#Cruncher wrote:... However, TIPS funds are required each year to distribute this increase for all the TIPS they hold. They include it in dividends along with their TIPS' interest income.
Is this why FSIYX's duration is so much less than average maturity?
No, this has nothing to do with it. I assume you're referring to the difference between the 8.50 years Weighted Average Maturity and the 5.60 Duration reported as of 6/30/2017 on the FSIYX web page. 8.50 years is 0.67 years less than the 9.17 I calculate for the 1+ index on the 6/30/2017 update of my Consistent Yield & Duration thread. Therefore I'd guess that the fund's duration is also 0.67 less than that of the 1+ index. This would make it about 7.7 (8.36 less 0.67).

I would ignore the 5.60 that Fidelity reports for duration. It may be an attempt to show the fund's price sensitivity to a change in nominal interest rates rather than in TIPS interest rates. If so, it isn't meaningful in my opinion.


Thank you, that's important.

Duration of TIPS should be measured as sensitivity to *real* interest rates, not nominal.

Real interest rates have actually been amazingly volatile, particularly around the time of the financial crisis. But say 4-4.5% at the max, when TIPS were invented in 1998, and down to say -1% at their peak? Usual moves are only c. 1-2%.


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