30 year tips auction-thursday 10/19, yield 0.86%?

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grok87
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30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Sun Oct 15, 2017 10:05 am

Just a heads up that the next 30 year TIPS auction is this thursday. Current yield on the secondary market is 0.87% and I am expecting the auction yield to be slightly lower at 0.86%.

For reference, on average TIPs auction yields have tended to come in a bit *higher* than where the secondary market was trading. When this happens it is said that the auction "tailed". However in the last auction in June the opposite happened and the auction yield was lower. When this happens it is said the the auction "stopped through".

I think this auction will be interesting to see if the "stopping through" phenomenon continues. I am betting that it will, that there is a lot of pent-up demand for long-dated TIPS driven by corporate pension funds who want to de-risk after recent strong equity market performance.

I will be participating in the auction with the money that i have earmarked for my retirement LMP (Liabilty Matching Portfolio) strategy.

TIPS- get them while they're hot!
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Sun Oct 15, 2017 12:32 pm

grok87 wrote:
Sun Oct 15, 2017 10:05 am
TIPS- get them while they're hot!
We have a different definition of "hot".

Image

I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy. What's your thinking for buying thirtys now?
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by garlandwhizzer » Sun Oct 15, 2017 12:38 pm

Doc wrote regarding 30 yr. TIPS:
I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy.
1+

Garland Whizzer

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Mon Oct 16, 2017 6:47 am

Secondary yield now at 0.88%
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Mon Oct 16, 2017 5:38 pm

grok87 wrote:
Mon Oct 16, 2017 6:47 am
Secondary yield now at 0.88%
Up by 2 bps. :shock:

I would like to see the thirty at 2% minimum. Up by at least 100 + bps.

Repeating question. With current real yields way below historical levels why would you commit for 30 years. Why not by a ten now and roll it into a twenty when it matures.

Locking in historically low real yields for 30 years is hard for me to grasp. :?:
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by beardsworth » Mon Oct 16, 2017 5:50 pm

I am very much attracted to both TIPS (inside a retirement account, especially Roth IRA, to avoid the "tax on phantom interest" aspect) and I Bonds (outside retirement accounts).

But I must count myself among those who cannot muster enthusiasm for long-term TIPS at such low real rates. I Bonds are a somewhat different situation, since they are not subject to market price fluctuations and can be redeemed at any time after the first year. I could avoid the market price fluctuation aspect of TIPS by just holding them to maturity, but family history and current age give no reason to believe that my wife or I will still be alive in 30 years.

In both TIPS and I Bonds, I've always viewed the size of the fixed yield component as a sort of margin of safety regarding discrepancies between official government-defined "inflation" and personal Beardsworth-experienced inflation. If the fixed yield component is higher, then the precise accuracy of the inflation component matters less.

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Mon Oct 16, 2017 7:59 pm

beardsworth wrote:
Mon Oct 16, 2017 5:50 pm
I am very much attracted to both TIPS (inside a retirement account, especially Roth IRA, to avoid the "tax on phantom interest" aspect) and I Bonds (outside retirement accounts).

But I must count myself among those who cannot muster enthusiasm for long-term TIPS at such low real rates. I Bonds are a somewhat different situation, since they are not subject to market price fluctuations and can be redeemed at any time after the first year. I could avoid the market price fluctuation aspect of TIPS by just holding them to maturity, but family history and current age give no reason to believe that my wife or I will still be alive in 30 years.

In both TIPS and I Bonds, I've always viewed the size of the fixed yield component as a sort of margin of safety regarding discrepancies between official government-defined "inflation" and personal Beardsworth-experienced inflation. If the fixed yield component is higher, then the precise accuracy of the inflation component matters less.
i always fill up on ibonds. i wish i could buy more than 10k per year.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by alec » Mon Oct 16, 2017 8:04 pm

Doc wrote:
Sun Oct 15, 2017 12:32 pm
grok87 wrote:
Sun Oct 15, 2017 10:05 am
TIPS- get them while they're hot!
We have a different definition of "hot".

Image
Please do the same chart but include the yields from 1997-1998. Then, imagine it's 2007, and you're trying to decide whether to buy LT TIPS when yields were roughly half of what they were in 1997-1998. :idea: I had the same quandry before buying 30 years individual TIPS back then... because, as you're doing now, you're driving forward looking in the rearview mirror. :wink:
I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy. What's your thinking for buying thirtys now?
Please post the 10 yr TIPS and 30 yr TIPS yields fro 1997-1998, and then ask the same question. Is it the same iffy 1% difference b/w 10 and 30 year for taking the term risk?

Of course, if Grok is as good at bond math as i think he is, he's not taking any term risk because he's matching asset to liabilities. :D
Repeating question. With current real yields way below historical levels why would you commit for 30 years. Why not by a ten now and roll it into a twenty when it matures.
Again, you're driving forward looking in the rearview mirror. If you want to wait for 7-10 years before buying 30 yr TIPS, so be it, but you're betting that real yields will go up enough by then to compensate you for waiting. This bet may be backed by excellent and educated financial and economic analysis, but let's face facts - it's a bet.

Now, if you want to take that bet that's fine. But for someone, like possibly Grok, that is using the LT TIPS to form some sort of minimal standard of living in retirement, I don't think he wants to take the chance that this bet won't pay off. Because, that might result in Grok having a lower minimal standard of living in retirement. And that's probably why Grok will be buying the 30 year TIPS.

-Alec
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Mon Oct 16, 2017 8:05 pm

Doc wrote:
Mon Oct 16, 2017 5:38 pm
grok87 wrote:
Mon Oct 16, 2017 6:47 am
Secondary yield now at 0.88%
Up by 2 bps. :shock:

I would like to see the thirty at 2% minimum. Up by at least 100 + bps.

Repeating question. With current real yields way below historical levels why would you commit for 30 years. Why not by a ten now and roll it into a twenty when it matures.

Locking in historically low real yields for 30 years is hard for me to grasp. :?:
i think the historical low yield for 30 year tips was 0.24% in 2012
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Mon Oct 16, 2017 8:41 pm

alec wrote:
Mon Oct 16, 2017 8:04 pm
Doc wrote:
Sun Oct 15, 2017 12:32 pm
grok87 wrote:
Sun Oct 15, 2017 10:05 am
TIPS- get them while they're hot!
We have a different definition of "hot".

Image
Please do the same chart but include the yields from 1997-1998. Then, imagine it's 2007, and you're trying to decide whether to buy LT TIPS when yields were roughly half of what they were in 1997-1998. :idea: I had the same quandry before buying 30 years individual TIPS back then... because, as you're doing now, you're driving forward looking in the rearview mirror. :wink:
I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy. What's your thinking for buying thirtys now?
Please post the 10 yr TIPS and 30 yr TIPS yields fro 1997-1998, and then ask the same question. Is it the same iffy 1% difference b/w 10 and 30 year for taking the term risk?

Of course, if Grok is as good at bond math as i think he is, he's not taking any term risk because he's matching asset to liabilities. :D
Repeating question. With current real yields way below historical levels why would you commit for 30 years. Why not by a ten now and roll it into a twenty when it matures.
Again, you're driving forward looking in the rearview mirror. If you want to wait for 7-10 years before buying 30 yr TIPS, so be it, but you're betting that real yields will go up enough by then to compensate you for waiting. This bet may be backed by excellent and educated financial and economic analysis, but let's face facts - it's a bet.

Now, if you want to take that bet that's fine. But for someone, like possibly Grok, that is using the LT TIPS to form some sort of minimal standard of living in retirement, I don't think he wants to take the chance that this bet won't pay off. Because, that might result in Grok having a lower minimal standard of living in retirement. And that's probably why Grok will be buying the 30 year TIPS.

-Alec
Good post.

Yes as per my original post these are for liability matching portfolio (LMP) strategy. My aim is to create a floor of 40% of my salary using social security and the TIPS ladder.

what worries me is the prospect that 30 year tips yield might drop down to 0.25% or so or even go negative as they are in many european countries.
at that point i would not be a buyer but a seller and i would have to figure out some other retirement income strategy.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Tue Oct 17, 2017 12:08 pm

alec wrote:
Mon Oct 16, 2017 8:04 pm
Please do the same chart but include the yields from 1997-1998.
The early TIPS data is problematic because of their newness and low float. That's why I used only ten years.

Here's my attempt to calculate "TIPS" yields back before TIPS actually existed. I subtracted the annualized "Personalized Consumption Index - PCE" (not the CPI-U) from the ten year constant maturity rate to get the red line which is an estimate of what the TIPS yields would have been minus any insurance or liquidity adjustments.

Image

https://fred.stlouisfed.org/graph/fredgraph.png?g=frma
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Tue Oct 17, 2017 12:17 pm

grok87 wrote:
Mon Oct 16, 2017 8:41 pm
Yes as per my original post these are for liability matching portfolio (LMP) strategy. My aim is to create a floor of 40% of my salary using social security and the TIPS ladder.
I don't have a problem with that. If we take asset allocation to be a trade off among need, ability and willingness to take risk you have little need, adequate ability but absolutely no willingness to take risk. :wink:

I do not have the same need, ability and willingness positions as you do.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Tue Oct 17, 2017 8:50 pm

Doc wrote:
Tue Oct 17, 2017 12:08 pm
alec wrote:
Mon Oct 16, 2017 8:04 pm
Please do the same chart but include the yields from 1997-1998.
The early TIPS data is problematic because of their newness and low float. That's why I used only ten years.

Here's my attempt to calculate "TIPS" yields back before TIPS actually existed. I subtracted the annualized "Personalized Consumption Index - PCE" (not the CPI-U) from the ten year constant maturity rate to get the red line which is an estimate of what the TIPS yields would have been minus any insurance or liquidity adjustments.

Image

https://fred.stlouisfed.org/graph/fredgraph.png?g=frma
Good chart.

Technically the thing you subtract from nominal treasury yields to get estimated tips yields would be "expected future inflation over the bond term". That of course is not available so you are using actual trailing-12-months inflation as a proxy.

It's an interesting question whether it is a reasonable proxy. Since inflation is typically viewed as mean reverting, i think for the 10 year horizon you have plotted the market would probably have factored that in to some extent.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by TheNightsToCome » Tue Oct 17, 2017 9:06 pm

Doc wrote:
Mon Oct 16, 2017 5:38 pm
grok87 wrote:
Mon Oct 16, 2017 6:47 am
Secondary yield now at 0.88%
Up by 2 bps. :shock:

I would like to see the thirty at 2% minimum. Up by at least 100 + bps.

Repeating question. With current real yields way below historical levels why would you commit for 30 years. Why not by a ten now and roll it into a twenty when it matures.

Locking in historically low real yields for 30 years is hard for me to grasp. :?:
The prospective returns are low, but the same is true of the S&P 500. I'm not enthusiastic about 30-year TIPS, but given relative risks and returns one can make a reasonable argument for the TIPS.

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Wed Oct 18, 2017 7:47 am

TheNightsToCome wrote:
Tue Oct 17, 2017 9:06 pm
Doc wrote:
Mon Oct 16, 2017 5:38 pm
grok87 wrote:
Mon Oct 16, 2017 6:47 am
Secondary yield now at 0.88%
Up by 2 bps. :shock:

I would like to see the thirty at 2% minimum. Up by at least 100 + bps.

Repeating question. With current real yields way below historical levels why would you commit for 30 years. Why not by a ten now and roll it into a twenty when it matures.

Locking in historically low real yields for 30 years is hard for me to grasp. :?:
The prospective returns are low, but the same is true of the S&P 500. I'm not enthusiastic about 30-year TIPS, but given relative risks and returns one can make a reasonable argument for the TIPS.
Agree.

We hear a lot of press these days thAt "everything is overpriced"-stocks, bonds, real estate etc.

Imho this is not true. We don't know what risks will materiLize. 10 years from now we'll know what was overpriced and what was cheap, with 20/20 hindsight.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Wed Oct 18, 2017 11:55 am

Last chance to place orders before tomorrow's auction.
Current secondary yield is 0.91% so I'm predicting 0.90% at auction.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Wed Oct 18, 2017 2:35 pm

grok87 wrote:
Wed Oct 18, 2017 11:55 am
Last chance to place orders before tomorrow's auction.
Current secondary yield is 0.91% so I'm predicting 0.90% at auction.
Cutoff is 10:30 AM eastern tommorow. Some brokers might close retail customers a bit earlier.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Wed Oct 18, 2017 2:39 pm

Grok, are you buying several times a year. That would be an accounting nightmare in a taxable account. Trusting our brokers to get the OID correct is scary.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Wed Oct 18, 2017 8:49 pm

Doc wrote:
Wed Oct 18, 2017 2:39 pm
Grok, are you buying several times a year. That would be an accounting nightmare in a taxable account. Trusting our brokers to get the OID correct is scary.
Thanks

No these are in my tax sheltered retirement accounts.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by marshall » Wed Oct 18, 2017 10:03 pm

Just bought for LMP

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Portfolio7 » Thu Oct 19, 2017 12:08 am

[/quote]
We hear a lot of press these days thAt "everything is overpriced"-stocks, bonds, real estate etc.

Imho this is not true. We don't know what risks will materiLize. 10 years from now we'll know what was overpriced and what was cheap, with 20/20 hindsight.
[/quote]

+1 Great comment. I want to thank all the contributors for this fantastic thread, I'm loving these perspectives.
An investment in knowledge pays the best interest.

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by #Cruncher » Thu Oct 19, 2017 12:07 pm

Here is the auction results PDF file showing that the yield came in at 0.908%.
Doc wrote:
Wed Oct 18, 2017 2:39 pm
Grok, are you buying several times a year. That would be an accounting nightmare in a taxable account. Trusting our brokers to get the OID correct is scary.
Tax accounting for a multitude of TIPS in a taxable account would indeed be complicated. Part of this would be verifying the annual inflation adjustment reported on the 1099-OID. But buying the same maturity at all three annual auctions instead of one would not significantly increase this complexity. Only in the first year would the OID differ. Consider for example, the 1-3/8% February 2044 bought at all thee auctions in 2014: 02/28/2014, 06/30/2014, and 10/31/2014. The table below shows the OID per $1,000 of face value for 2014, 2015, and 2016. It differs by auction only in 2014, the year of issue; not in subsequent years.

A bigger difficulty in a taxable account arising from splitting one's purchase over three auctions instead of just one would be the separate accounting for discount or premium. Note in the table below the discount price for the first issue and the premium price for the other two. A taxpayer must account for these either at maturity or year-by-year. [*] If he handles them at maturity, he needs to keep track of three separate prices instead of just one for thirty years. If he amortizes premiums, he needs a separate calculation for each one every year.

Code: Select all

            ------- OID --------
  Issued     2014   2015    2016      Price
----------  -----   ----   -----   ----------
02/28/2014  18.81   1.74   16.69    97.109967
06/30/2014   1.66   1.74   16.69   106.517821
10/31/2014  (1.85)  1.74   16.69   109.901418
* Purchases at an initial Treasury bond auction will always be at par or a de minimis discount which the IRS allows to be reported at maturity. (See this post for more info.) The IRS also allows any premium to be reported only maturity. (This makes sense since premium is a reduction of income and it benefits the government to postpone reporting it.) I'm not sure about IRS requirements for discounts at other than the initial auction that exceed the de minimis amount. If they are considered "market" discounts -- rather than "original issue discounts" -- then I believe the IRS also allows them to be reported at maturity. (See Publication 550 - Market Discount Bonds.)

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Thu Oct 19, 2017 12:34 pm

#Cruncher wrote:
Thu Oct 19, 2017 12:07 pm
Part of this would be verifying the annual inflation adjustment reported on the 1099-OID. But buying the same maturity at all three annual auctions instead of one would not significantly increase this complexity.
Yes but you might be trading the OID for the ABP. And even if you didn't you would still have the basis adjustment for the OID.

I hate these details but the OID is the difference between the inflation factor at EOY and on settlement date so you still would have the OID problem every year I think. :?:

Of course if you could trust the broker's data you have less of a problem. Some day the brokers will get with it. We got 8 corrected 1099's for 2016 - all concerning OID and/or ABP issues. And even then the two brokers were not in agreement on which form the OID was reported. And that could be important if the TIPS OID exceeded the coupon payments.

Opps just noticed your footnote.
* Purchases at an initial Treasury bond auction will always be at par or a de minimis discount which the IRS allows to be reported at maturity.
Not true for negative YTM which we have had at least on the fives for the past year or so because the minimum coupon is 1/8%. At initial auction the discount is always de minimus because they adjust the coupon to make it that way.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Thu Oct 19, 2017 4:17 pm

Here is some color on the auction

" Tsy solid $5B 30Y TIPS reopen: 0.908% rate, good 76.4% indirects, 0.50% directs, leaving only a small 23.1% portion for dealers. "

To translate
"Indirects" = foreign central banks and large us institutional investors (endowments, pension plans, etc)
Directs= you and me
Dealers/aka "primary dealers", us banks who make a market in tips and treasuries and always bid like jp morgan etc.

Reading between the lines the auction was solid and i think came in right on the money where the secondary market had been trading. Ie it neither "tailed" (which means a higher auction yield) nor "stopped through" ( which means a lower auction yield). So my prediction that this auction would "stop through" like the june auction was wrong.

My new theory is that the june auction may be particulary in high demand by foreign banks and us instituions since there is secondary market trading from the february auction. When we get to october folks may just say they'l wait for the new 30 year tip in February.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by jalbert » Thu Oct 19, 2017 4:36 pm

I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy.
In a LMP for real liabilities, you would be matching the duration of TIPs holdings to the duration of real liabilities, and you would not be taking any term risk, as the present value of the assets and liabilities will move in lockstep either way.

If you hold a TIPs portfolio with a shorter duration than real liabilities, then you are taking the risk of underfunding the liabilities if real rates fall and you have to roll the portfolio while real rates are lower.

I’m not saying someone should or shouldn’t buy 30-year TIPs, but if you are basing decisions on term risk, you likely aren’t actually building a LMP.
Risk is not a guarantor of return.

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Thu Oct 19, 2017 5:30 pm

jalbert wrote:
Thu Oct 19, 2017 4:36 pm
I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy.
In a LMP for real liabilities, you would be matching the duration of TIPs holdings to the duration of real liabilities, and you would not be taking any term risk, as the present value of the assets and liabilities will move in lockstep either way.

If you hold a TIPs portfolio with a shorter duration than real liabilities, then you are taking the risk of underfunding the liabilities if real rates fall and you have to roll the portfolio while real rates are lower.

I’m not saying someone should or shouldn’t buy 30-year TIPs, but if you are basing decisions on term risk, you likely aren’t actually building a LMP.
I'm not sure that we have the same definition of term risk. That said if you bought tens instead of thirty's today but bought more to make up the difference in real yield of the two I think you still have your LMP.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Thu Oct 19, 2017 6:16 pm

jalbert wrote:
Thu Oct 19, 2017 4:36 pm
I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy.
In a LMP for real liabilities, you would be matching the duration of TIPs holdings to the duration of real liabilities, and you would not be taking any term risk, as the present value of the assets and liabilities will move in lockstep either way.

If you hold a TIPs portfolio with a shorter duration than real liabilities, then you are taking the risk of underfunding the liabilities if real rates fall and you have to roll the portfolio while real rates are lower.

I’m not saying someone should or shouldn’t buy 30-year TIPs, but if you are basing decisions on term risk, you likely aren’t actually building a LMP.
+1
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Fri Oct 20, 2017 7:06 am

grok87 wrote:
Thu Oct 19, 2017 6:16 pm
jalbert wrote:
Thu Oct 19, 2017 4:36 pm
I would be buying tens or even sevens with the intention of rolling them when they mature to build my 30 year LMP. Taking 30 years of term risk for less than 1% is iffy.
In a LMP for real liabilities, you would be matching the duration of TIPs holdings to the duration of real liabilities, and you would not be taking any term risk, as the present value of the assets and liabilities will move in lockstep either way.

If you hold a TIPs portfolio with a shorter duration than real liabilities, then you are taking the risk of underfunding the liabilities if real rates fall and you have to roll the portfolio while real rates are lower.

I’m not saying someone should or shouldn’t buy 30-year TIPs, but if you are basing decisions on term risk, you likely aren’t actually building a LMP.
+1
I don't understand the "not LMP" argument. Seems to me that buying $20k thirtys or $21k tens with the intent of rolling the tens twice gets you to the same place. Ok given that interest rates are more likely to rise than fall in the future the tens route probably gives you slightly more money in 30 years. Does that make it not a LMP?

In either case what happens to the coupons? Are they considered part of the LMP? We can't buy TIPS zeros.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by jalbert » Fri Oct 20, 2017 11:29 pm

I don't understand the "not LMP" argument. Seems to me that buying $20k thirtys or $21k tens with the intent of rolling the tens twice gets you to the same place.
A liability matching portfolio is a fixed income portfolio with duration matching the duration of liabilities. By matching the durations, if interest rates rise, the portfolio value will decline, but the present value of liabilities falls by the same amount, which is why you aren’t taking term risk.

If the duration of the portfolio is longer than the duration of liabilities, then you are taking term risk, as rising rates will lower the value of the portfolio more than it will lower the present value of liabilities.

If the duration of the portfolio is shorter than the duration of liabilities, then you are taking reinvestment risk. If rates fall, the present value of liabilities increases more than the value of the portfolio, and you may have to reinvest the proceeds of maturing bonds at lower rates while the present value of liabilities increases from falling rates.

Many investors hold fixed income to offset the risk of growth assets like equities and/or real estate. This might be called a risk management fixed income portfolio and matching the duration to the duration of liabilities may not offer attractive risk management properties.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Sat Oct 21, 2017 6:25 am

jalbert wrote:
Fri Oct 20, 2017 11:29 pm
I don't understand the "not LMP" argument. Seems to me that buying $20k thirtys or $21k tens with the intent of rolling the tens twice gets you to the same place.
A liability matching portfolio is a fixed income portfolio with duration matching the duration of liabilities. By matching the durations, if interest rates rise, the portfolio value will decline, but the present value of liabilities falls by the same amount, which is why you aren’t taking term risk.

If the duration of the portfolio is longer than the duration of liabilities, then you are taking term risk, as rising rates will lower the value of the portfolio more than it will lower the present value of liabilities.

If the duration of the portfolio is shorter than the duration of liabilities, then you are taking reinvestment risk. If rates fall, the present value of liabilities increases more than the value of the portfolio, and you may have to reinvest the proceeds of maturing bonds at lower rates while the present value of liabilities increases from falling rates.

Many investors hold fixed income to offset the risk of growth assets like equities and/or real estate. This might be called a risk management fixed income portfolio and matching the duration to the duration of liabilities may not offer attractive risk management properties.
So you are defining a LMP as a zero risk portfolio that will provide a fixed known cash flow over some time period in the future. OK but I cannot buy that LMP today if I also require the real return restriction. :(

Second question remains. What do the coupon reinvestments do to your definition? If you reinvest them you no longer have a LMP by your definition because the future annual cash flow is unknown.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Sat Oct 21, 2017 8:30 am

Just for kicks I created an all TIPS ladder with one bond for each TIPS issue. Here's the cash flow chart. I think coupons are an important part as they are about 18% of the total but they could be ignored if that's the way you want to set up your LMP.

Image

(This ladder has 31 securities not 30.)
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by #Cruncher » Sat Oct 21, 2017 1:57 pm

Doc wrote:
Sat Oct 21, 2017 8:30 am
I created an all TIPS ladder with one bond for each TIPS issue. ... (This ladder has 31 securities not 30.)
Nice graph, Doc; but there are 38 TIPS maturing from 2019 through 2047, not 31. Here they are [1], showing that the interest collected is about 12% of the total.

Code: Select all

Year  Count   Principal   Interest       Total

Code: Select all

2019      3    3,337.35     522.00    3,859.35
2020      3    3,305.76     479.23    3,784.99
2021      3    3,243.86     449.77    3,693.63
2022      3    3,158.31     434.71    3,593.02
2023      2    2,116.23     431.40    2,547.63
2024      2    2,083.82     423.50    2,507.32
2025      3    3,370.52     402.18    3,772.70
2026      3    3,290.76     365.98    3,656.74
2027      3    3,233.80     332.77    3,566.57
2028      2    2,686.82     274.95    2,961.77
2029      2    2,633.98     194.04    2,828.02
2030      -        -        150.86      150.86
2031      -        -        150.86      150.86
2032      1    1,381.61     127.55    1,509.16
2033      -        -        104.23      104.23
2034      -        -        104.23      104.23
2035      -        -        104.23      104.23
2036      -        -        104.23      104.23
2037      -        -        104.23      104.23
2038      -        -        104.23      104.23
2039      -        -        104.23      104.23
2040      1    1,134.62      92.18    1,226.80
2041      1    1,119.84      68.22    1,188.06
2042      1    1,085.30      52.25    1,137.55
2043      1    1,066.65      44.85    1,111.50
2044      1    1,052.25      34.28    1,086.53
2045      1    1,041.42      23.14    1,064.56 [2]
2046      1    1,034.99      14.06    1,049.05
2047      1    1,015.92       4.44    1,020.36
         --   ---------   --------   ---------
Sum      38   42,393.81   5,802.86   48,196.67
But buying one of each maturity is hardly a good way to build a TIPS ladder. The $30,000 per year 30-year ladder shown on the Ladder sheet of my 7/25/2017 TIPS Ladder Builder spreadsheet shows $215,000 interest is collected over the years 2018 through 2047. This is 24% of the $900,000 total.
  1. Principal value based on index ratios 10/20/2017 as shown here.
  2. Example calculation of interest collected in 2045:

    Code: Select all

    2045  1,041.42 X 0.750% / 2 =  3.90 (only Feb pmt)
    2046  1,034.99 X 1.000%     = 10.35 (Feb & Aug)
    2047  1,015.92 X 0.875%     =  8.89 (Feb & Aug)
                                  -----
    Total collected in 2045       23.14

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Sat Oct 21, 2017 2:33 pm

#Cruncher wrote:
Sat Oct 21, 2017 1:57 pm
Nice graph, Doc; but there are 38 TIPS maturing from 2019 through 2047, not 31. Here they are [1], showing that the interest collected is about 14% of the principal.
:oops: My bad
Image
  • Presentation Overview
    Total principal $46,699.93
    Total accrued interest $101.23
    Total commision —
    Total net money $46,801.16
    First year cash flow $2,748.99
    Second year cash flow $3,859.55
    Total par value $39,000.00
    Total securities in portfolio 39
    Average coupon 1.163%
    Average maturity 10.30 years
    Average modified duration 9.23
    Average price $106.17
    Average yield to worst 0.373%
    Average yield to maturity 0.373%
    Average current yield 1.025%
#Cruncher wrote:
Sat Oct 21, 2017 1:57 pm
But buying one of each maturity is hardly a good way to build a TIPS ladder.
Agreed. I used Vanguard's Ladder Builder and just put qty=1 as a default. I took the easy way and just used all the issues not just one per year. (I started out with a 5+ maturity to avoid negative yields and then screwed it up somehow when I tried to add the 1-5) But putting in some extra's at the shorter duration is needed to fill in the gaps assuming one is building their ladder all at one time not auction by auction over many years like Grok is doing. Depends whether you are building your LMP during accumulation or all at once when you retire.

A possible problem with Grok's approach is when it come time to buy the 30 in 2027 the Treasury might no longer be offering a thirty. But that's a nitpick.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by aj76er » Sat Oct 21, 2017 3:13 pm

Doc wrote:
Sat Oct 21, 2017 6:25 am
Second question remains. What do the coupon reinvestments do to your definition? If you reinvest them you no longer have a LMP by your definition because the future annual cash flow is unknown.
This is one reason why IBonds are nice vehicles, because they automatically reinvest interest payments and compound over time. The purchase limits make it difficult to liability match however.

Would be interesting to construct a combo TIPS+IBonds LMP over time where IBonds take care of the first $10k of each rung. I believe this would help minimize the problem of reinvestment of TIPS coupons.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Sat Oct 21, 2017 3:47 pm

aj76er wrote:
Sat Oct 21, 2017 3:13 pm
Would be interesting to construct a combo TIPS+IBonds LMP over time where IBonds take care of the first $10k of each rung. I believe this would help minimize the problem of reinvestment of TIPS coupons
Just put $3k in a TIPS fund and put your coupons in there. Reinvest in actual note when you get enough or just leave it until you start cashing in your LMP and then withdraw from the fund each year on a declining balance amortization. (1/30th in first year, 1/29th in second year ...)
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by jalbert » Sun Oct 22, 2017 1:02 am

So you are defining a LMP as a zero risk portfolio that will provide a fixed known cash flow over some time period in the future.
It is not my definition. Matching the duration of liabilities to assets, whether nominal or real is a long established principle in the insurance industry, and the concept was appropriated for retirement portfolios. The notion that an LMP is just some arbitrary TIPs ladder is just a watered down version of the concept that does not generally achieve the duration matching objective.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Sun Oct 22, 2017 5:57 am

jalbert wrote:
Sun Oct 22, 2017 1:02 am
So you are defining a LMP as a zero risk portfolio that will provide a fixed known cash flow over some time period in the future.
It is not my definition. Matching the duration of liabilities to assets, whether nominal or real is a long established principle in the insurance industry, and the concept was appropriated for retirement portfolios. The notion that an LMP is just some arbitrary TIPs ladder is just a watered down version of the concept that does not generally achieve the duration matching objective.
I'm not being clear with my question. Say I have a $30k obligation in 10 years. To have a LMP do I need to buy a $30k zero coupon bond or can I buy a $28k coupon bond that will have coupons of $2k over the 10 years?

Or if I spend the coupons do I need a $30k face coupon bond?

The glitch I see in the definition is that if you are going to reinvest coupons you cannot guarantee you will meet the obligation unless you assume a zero reinvestment rate. Or are you "allowed" to assume a reinvestment rate that is the same as the original coupon and still have a LMP?

I guess the key question is do you have to have a guaranteed return to call it a LMP?

In the current context we guarantee the real return of the par value but not the coupon portion.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by #Cruncher » Sun Oct 22, 2017 7:11 am

jalbert wrote:
Fri Oct 20, 2017 11:29 pm
A liability matching portfolio is a fixed income portfolio with duration matching the duration of liabilities. By matching the durations, if interest rates rise, the portfolio value will decline, but the present value of liabilities falls by the same amount, which is why you aren’t taking term risk. (underline added)
I don't think it's enough to just match the average duration, jalbert. Say you have two $10,000 liabilities, one due in 10 years and another in 30 years. To cover these you buy a $20,000 zero coupon bond maturing in 20 years that is currently yielding 0%. You now have a "portfolio" with a duration of 20 years and two liabilities with an average duration also of 20 years.

Now assume that yields immediately rise to 2% and stay there for the next 10 years. The following table shows that the decline in present value of the liabilities does not exactly match the decline in present value of the portfolio. [*] To avoid risk entirely it's necessary to have a portfolio cash flow that exactly matches the liabilities year-by-year.

Code: Select all

Value year                             2017     2017      2027
Yield                                   0%       2%        2%
                    Amt Due  Yr Due         Present Value
                    -------  ------  ---------------------------	
10 year liability   (10,000)   2027  (10,000)  (8,203)  (10,000)
30 year liability   (10,000)   2047  (10,000)  (5,521)   (6,730)
Bond due in 20 yr    20,000    2037   20,000   13,459    16,407
                     ------           ------   -------  --------
Net amount                0                0     (265)     (323)

Doc wrote:
Sun Oct 22, 2017 5:57 am
Say I have a $30k obligation in 10 years. To have a LMP [Liability Matching Portfolio] ... can I buy a $28k coupon bond that will have coupons of $2k over the 10 years?
Even that may not be enough, Doc, if the coupons can only be reinvested at a negative real rate. One can be reasonably sure of meeting the obligation by assuming a low reinvestment rate, say 0%, but one can't be certain.

The only way to be certain is to assume that the coupons are not reinvested; but instead are used to meet the obligations. Say one has has a $10,900 liability due in one year and an $11,000 liability due in two years. Also assume one can buy one or two year bonds with 10% coupons at par. One can then meet the two liabilities by purchasing 9 one-year bonds and 10 two-year bonds. The first year one will receive $9,000 in principal and $1,900 in interest on both bonds. In the second year one will receive $10,000 in principal and $1,000 in interest on the two-year bond.

One can't structure a TIPS ladder this way when it is purchased year-by-year the way Grok is doing. However, one can do it if one buys the ladder all at once. That's how my TIPS Ladder Builder spreadsheet works.

* The situation could be much worse if yields don't move uniformly. For example assume in 2017 yields only rise to 2% on 20 and 30 year terms but remain at 0% on 10 year terms. The present value of the 10-year liability then remains at $10,000. Combining this with the $5,521 present value of the 30-year liability now exceeds the $13,459 present value of the portfolio by $2,062 instead of just $265 when all yields rose 2% points.

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Sun Oct 22, 2017 8:43 am

#Cruncher wrote:
Sun Oct 22, 2017 7:11 am
Doc wrote: ↑Sun Oct 22, 2017 5:57 am
Say I have a $30k obligation in 10 years. To have a LMP [Liability Matching Portfolio] ... can I buy a $28k coupon bond that will have coupons of $2k over the 10 years?

Even that may not be enough, Doc, if the coupons can only be reinvested at a negative real rate. One can be reasonably sure of meeting the obligation by assuming a low reinvestment rate, say 0%, but one can't be certain.

The only way to be certain is to assume that the coupons are not reinvested; but instead are used to meet the obligations. ...
I understand your point and don't disagree.

The reason I got onto this track is that someone implied that you could meet a 30 year obligation by buying a 30 yr TIPS and this would be a LMP but buying a ten year TIPS and rolling it twice would not be a LMP. I guess that the reasoning here is the reinvestment risk of the Ten means that it is not a LMP. But as #Cruncher suggests the only way to get there is "to assume that the coupons are not reinvested; but instead are used to meet the obligation" or just spend them and don't consider the coupons as part of the LMP at all. By spending the TIPS coupons you essentially turn that TIPS into a zero coupon inflation protected bond with a zero real yield. And now you have your perfect TIPS LMP. And now that we have concocted a zero real instrument we can get our 30 year LMP by buying a 30 or buying a ten and rolling it twice. We can just take all the coupons and donate them to Puerto Rico charities.
#Cruncher wrote:
Sun Oct 22, 2017 7:11 am
One can't structure a TIPS ladder this way when it is purchased year-by-year the way Grok is doing
That's a second problem with Grok's approach. But that said Grok's method is likely good enough if you take a few steps to to alleviate the coupon and the "can't buy a thirty anymore" problems.

If I wanted a 30 year inflation protected LMP for retirement I would put my annual contributions in a balanced mutual fund and when I retired take that money and buy my ladder all at once using #Cruncher's spreadsheet or Vanguard's ladder tool. (While probably not as flexible as #Cruncher's spread sheet Vanguard's tool has the advantage of being able to just press the "buy" button when you get it set up. :beer )
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by #Cruncher » Sun Oct 22, 2017 3:44 pm

Doc wrote:
Sun Oct 22, 2017 8:43 am
... someone implied that you could meet a 30 year obligation by buying a 30 yr TIPS and this would be a LMP but buying a ten year TIPS and rolling it twice would not be a LMP. I guess that the reasoning here is the reinvestment risk of the Ten means that it is not a LMP.
In my previous post I discussed the reinvestment risk with coupons. But the magnitude of this risk (particularly with the low coupons TIPS currently have) is much less than the risk of reinvesting principal that your 10-10-10 plan is subject to.

To illustrate, assume one has a $26,957 real (i.e., in 2017 purchasing power) liability in 30 years. Also assume that 30-year TIPS with a 1% coupon and 10-year TIPS with a 0.5% coupon are both currently selling at par. Assume one has only $20,000 available to invest and wants to come as close as possible to meeting the obligation. One could buy twenty 30-year TIPS and will meet the obligation if the coupons can be reinvested at 1% [1] or more. But if real interest rates immediately dropped to 0% and stay there, one will end up with only $26,000 after 30 years [20000 + 30 * (20000 * 1%)]. This is $957 short of meeting the obligation.

Now assume we instead use the $20,000 to buy twenty 10-year TIPS, hoping that real rates will rise enough in ten and twenty years that the coupons and, more importantly, the principal can be reinvested so as to produce $26,957 after 30 years. But if real rates immediately fall to 0% and stay there, one will end up with only $21,000 [20000 + (20000 * 0.5% * 10)]. This is $5,957 short of the obligation, six times the magnitude of the $957 shortfall when buying a 30-year TIPS.
Doc in same post wrote:And now that we have concocted a zero real instrument we can get our 30 year LMP by buying a 30 or buying a ten and rolling it twice. We can just take all the coupons and donate them to Puerto Rico charities.
Ignoring the coupons doesn't eliminate the reinvestment risk on the principal. Let the obligation in 30 years be $20,000. Buying $20,000 of a 30-year guarantees having that amount in 30 years even if coupons are ignored. But using it to buy $20,000 of a 10-year will not guarantee having $20,000 in 30 years. Say in ten years yields are -1% . The $20,000 will buy only $17,900 of principal. If ten years later yields are still -1%, that will buy only $16,000 of principal. [2] After thirty years one will be $4,000 short of meeting the obligation.
  1. One can calculate the result two ways, one using the Excel FV function:

    Code: Select all

    26,957 = 20000 * 1.01 ^ 30
    26,957 = 20000 + FV(1%, 30, -200, 0, 0)
  2. TIPS have a minimum coupon of 0.125%. This means that to have a -1% yield, a 10-year TIPS will sell at 111.9% (calculated with the Excel PV function):

    Code: Select all

    111.9% = -PV(-1%, 10, 0.125%, 1, 0)
    17,900 =  20000 / 111.9%
    16,000 =  17900 / 111.9%

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by jalbert » Sun Oct 22, 2017 6:39 pm

These are to the point that it is very difficult for an individual to manage a LMP, a not-often discussed weakness of lifecycle retirement investing. An insurance company has lots of positive and negative cash flows in a given year and can regularly adjust the portfolio so that the duration of the portfolio is managed to the changing duration of liabilities.

I agree that not being able to control the schedule of cash flows from coupon payments makes it difficult to maintain the precise duration of the portfolio. And liquidity issues and transaction costs create friction for selling a bond to generate income cash flows.

My original point was that if you match the duration of the portfolio to the duration of the liabilities you aren’t generally taking term risk, difficulties of precisely managing such a portfolio aside. By significantly shortening portfolio duration you are in fact making a bet on rates rising (real rates in this case) and reducing the present value of liabilities more than portfolio value is reduced. Falling rates may look like a win, as portfolio value increases, but the present value cost of funding liabilities rose even more.

This is an often overlooked benefit of annuities— the insurance company manages the portfolio and absorbs term and reinvestment risk. They are able to do that because they can match the duration of the portfolio to the duration of the aggregate liabilities of the actuarial pool.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Mon Oct 23, 2017 9:49 am

#Cruncher wrote:
Sun Oct 22, 2017 3:44 pm
Now assume we instead use the $20,000 to buy twenty 10-year TIPS, hoping that real rates will rise enough in ten and twenty years that the coupons and, more importantly, the principal can be reinvested so as to produce $26,957 after 30 years. But if real rates immediately fall to 0% and stay there, one will end up with only $21,000 [20000 + (20000 * 0.5% * 10)]. This is $5,957 short of the obligation, six times the magnitude of the $957 shortfall when buying a 30-year TIPS.
I think that's convoluted reasoning but that doesn't make it wrong. :D

It is just another way to look at the risk aspects of the question. Current real yields are below historic levels. That makes 30 year TIPS "expensive" by historic standards. If real rates rise in the next ten years one would be better to buy tens. If real rates fall one would be better off buying the thirty. It's a risk question.

Grok's buying the thirty. He is choosing the zero risk path even if it's expensive. He has no need to take risk and presumably does not have the willingness to take risk either. That's fine. It's just not what I would do. I'm not that risk adverse.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Mon Oct 23, 2017 9:51 am

@ jalbert

Good summary.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Mon Oct 23, 2017 11:12 am

jalbert wrote:
Sun Oct 22, 2017 6:39 pm
These are to the point that it is very difficult for an individual to manage a LMP, a not-often discussed weakness of lifecycle retirement investing. An insurance company has lots of positive and negative cash flows in a given year and can regularly adjust the portfolio so that the duration of the portfolio is managed to the changing duration of liabilities.

I agree that not being able to control the schedule of cash flows from coupon payments makes it difficult to maintain the precise duration of the portfolio. And liquidity issues and transaction costs create friction for selling a bond to generate income cash flows.

My original point was that if you match the duration of the portfolio to the duration of the liabilities you aren’t generally taking term risk, difficulties of precisely managing such a portfolio aside. By significantly shortening portfolio duration you are in fact making a bet on rates rising (real rates in this case) and reducing the present value of liabilities more than portfolio value is reduced. Falling rates may look like a win, as portfolio value increases, but the present value cost of funding liabilities rose even more.

This is an often overlooked benefit of annuities— the insurance company manages the portfolio and absorbs term and reinvestment risk. They are able to do that because they can match the duration of the portfolio to the duration of the aggregate liabilities of the actuarial pool.
All good points.

My own view is that the precision aspect of this ("difficult to maintain the precise duration of the portfolio") is not something i worry about. You just want to be in the ballpark.

Most pre-retiree investors have no idea of the risks they are taking. They'll be like ready to retire next year and have like a 70/30 equity/bond portfolio in say total-stock market/total-bond-market. That is not going to be a pretty place to be if some of those 1970-1980 stagflation scenarios repeat. In those scenarios real returns for both stocks and bonds are poor due to weak economy/rising-rates/rising-inflation. And those poor returns go on for a number of years...

We saw a mini-version of this in 2007-2009 when many pre-retiree investors were blindsided by the 40% stock market drop. Folks were panicked, had to delay retirement and some folks sold at the worst time.

I know that sometimes on this forum i come off as fairly risk averse. I do have a risk-portfolio is allocated 70% to equities and real estate. It's really about the sizing. My aim is to generate 1/3 of my retirement income from social security, 1/3 from my tips LMP portfolio and 1/3 from drawdowns on my risk portfolio (using 4% safe withdrawal rate).

Hope that helps.
All this discussion is really useful i think.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Mon Oct 23, 2017 11:22 am

Doc wrote:
Mon Oct 23, 2017 9:49 am
If real rates rise in the next ten years one would be better to buy tens. If real rates fall one would be better off buying the thirty. It's a risk question.
Slight quibble, real rates actually have to rise by a certain amount to be better off buying tens. If they rise by just say 10 bps then the "buy 30s" strategy still wins.

Let's say the 10 year real rate is 0.45% and the 30 year is 0.95%. Then simplisically you want the average(0.45%,x,x) = 0.95%
Where the two x's are the real rates for the 2nd 10 year and the 3rd 10 year that you buy sequentially. If you solve for x you get 1.20%. Ie the 10 year real rate needs to rise by 75 bps for you to break even. And of course stay there for 10 years.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by Doc » Mon Oct 23, 2017 11:25 am

grok87 wrote:
Mon Oct 23, 2017 11:12 am
Hope that helps.
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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by #Cruncher » Mon Oct 23, 2017 12:54 pm

grok87 wrote:
Mon Oct 23, 2017 11:22 am
Let's say the 10 year real rate is 0.45% and the 30 year is 0.95%. Then [simplistically] you want the average (0.45%,x,x) = 0.95% Where the two x's are the real rates for the 2nd 10 year and the 3rd 10 year ... If you solve for x you get 1.20%.
I also get 1.20% as the breakeven, Grok, except I used 0.52% for the initial 10-year rate instead of 0.45%. (See 10/20/2017 Daily Treasury Real Yield Curve Rates.) I made the following simplifying assumptions:
  • Coupons are same as yield so bonds sell at par.
  • Interest is paid once at the end of each year.
  • Interest is reinvested at the current 10-year yield.
  • The 10-year yield jumps all at once in ten years and stays there for the remaining twenty years.
This way both the 30-year and 3 X 10-year scenarios end up with the same principal after 30 years. The difference between them will then be the difference in what the coupon interest grows to. When the 10-year yield jumps to 1.19885% after ten years, these amounts come out the same. Here they are for an investment of $10,000:

Code: Select all

                     Coupons Grow to
                   -------------------
Year   Reinvest    3 X 10yr      30yr

Code: Select all

   1   0.52000%       52.00      95.00
   2   0.52000%      104.27     190.49
   3   0.52000%      156.81     286.48
   4   0.52000%      209.63     382.97
   5   0.52000%      262.72     479.97
   6   0.52000%      316.08     577.46
   7   0.52000%      369.73     675.46
   8   0.52000%      423.65     773.98
   9   0.52000%      477.85     873.00
  10   0.52000%      532.34     972.54
  11   1.19885%      658.61   1,079.20
  12   1.19885%      786.39   1,187.14
  13   1.19885%      915.70   1,296.37
  14   1.19885%    1,046.56   1,406.91
  15   1.19885%    1,178.99   1,518.78
  16   1.19885%    1,313.01   1,631.99
  17   1.19885%    1,448.64   1,746.55
  18   1.19885%    1,585.89   1,862.49
  19   1.19885%    1,724.79   1,979.82
  20   1.19885%    1,865.35   2,098.55
  21   1.19885%    2,007.60   2,218.71
  22   1.19885%    2,151.55   2,340.31
  23   1.19885%    2,297.23   2,463.37
  24   1.19885%    2,444.66   2,587.90
  25   1.19885%    2,593.85   2,713.93
  26   1.19885%    2,744.83   2,841.46
  27   1.19885%    2,897.63   2,970.53
  28   1.19885%    3,052.25   3,101.14
  29   1.19885%    3,208.73   3,233.32
  30   1.19885%    3,367.08   3,367.08
If one assumes that 10-year yields jump again in twenty years by the same amount they jump in ten years, the breakeven rates are 0.98% after 10 years and 1.44% after 20 years:

Code: Select all

                     Coupons Grow to
                   -------------------
Year   Reinvest    3 X 10yr      30yr

Code: Select all

   1   0.52000%       52.00      95.00
   2   0.52000%      104.27     190.49
   3   0.52000%      156.81     286.48
   4   0.52000%      209.63     382.97
   5   0.52000%      262.72     479.97
   6   0.52000%      316.08     577.46
   7   0.52000%      369.73     675.46
   8   0.52000%      423.65     773.98
   9   0.52000%      477.85     873.00
  10   0.52000%      532.34     972.54
  11   0.98022%      635.58   1,077.07
  12   0.98022%      739.83   1,182.63
  13   0.98022%      845.10   1,289.22
  14   0.98022%      951.41   1,396.86
  15   0.98022%    1,058.76   1,505.55
  16   0.98022%    1,167.16   1,615.31
  17   0.98022%    1,276.62   1,726.14
  18   0.98022%    1,387.16   1,838.06
  19   0.98022%    1,498.77   1,951.08
  20   0.98022%    1,611.49   2,065.21
  21   1.44044%    1,778.74   2,189.95
  22   1.44044%    1,948.41   2,316.50
  23   1.44044%    2,120.52   2,444.87
  24   1.44044%    2,295.11   2,575.08
  25   1.44044%    2,472.21   2,707.18
  26   1.44044%    2,651.86   2,841.17
  27   1.44044%    2,834.11   2,977.10
  28   1.44044%    3,018.97   3,114.98
  29   1.44044%    3,206.50   3,254.85
  30   1.44044%    3,396.73   3,396.73

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Re: 30 year tips auction-thursday 10/19, yield 0.86%?

Post by grok87 » Mon Oct 23, 2017 1:11 pm

Thanks #cruncher. It's very helpful to have a more detailed estimate.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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