Treasury auction of 5 year TIPS coming up....

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Ykcor
Posts: 85
Joined: Mon Nov 26, 2018 7:42 am

Treasury auction of 5 year TIPS coming up....

Post by Ykcor » Wed Oct 09, 2019 9:44 pm

(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?

User avatar
gmaynardkrebs
Posts: 1658
Joined: Sun Feb 10, 2008 11:48 am

Re: Treasury auction of 5 year TIPS coming up....

Post by gmaynardkrebs » Wed Oct 09, 2019 9:55 pm

Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Wed Oct 09, 2019 10:06 pm

gmaynardkrebs wrote:
Wed Oct 09, 2019 9:55 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.
TIPS of all durations are equally adjusted for inflation. Their par values are adjusted by the same amount, and their coupon payouts adjust based on par values.

Longer-term TIPS can be expected to have a greater return over time, just like any longer-term vs. shorter-term bonds, with a tradeoff of higher volatility, but inflation protection is not different.

One could make a point about reinvestment risk, but the opportunities for higher real yields six times over thirty years might or might not be better than locking in a real yield for three decades.

PJW

User avatar
gmaynardkrebs
Posts: 1658
Joined: Sun Feb 10, 2008 11:48 am

Re: Treasury auction of 5 year TIPS coming up....

Post by gmaynardkrebs » Wed Oct 09, 2019 10:31 pm

Phineas J. Whoopee wrote:
Wed Oct 09, 2019 10:06 pm
gmaynardkrebs wrote:
Wed Oct 09, 2019 9:55 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.
TIPS of all durations are equally adjusted for inflation. Their par values are adjusted by the same amount, and their coupon payouts adjust based on par values.

Longer-term TIPS can be expected to have a greater return over time, just like any longer-term vs. shorter-term bonds, with a tradeoff of higher volatility, but inflation protection is not different.

One could make a point about reinvestment risk, but the opportunities for higher real yields six times over thirty years might or might not be better than locking in a real yield for three decades.

PJW
Why is 30 year term life more expensive than 5-year term life? Because the risk that the issuer will actually have to pay off is greater. For the same reason, a 30 year TIPS should cost more, but for some reason which I do not understand, they cost less, despite a greater inflation risk to the issuer, the US Treasury. What you are not seeing is that "reinvestment risk" is simply the form that inflation risk takes in periods of high inflation. Eg., your next 5 year TIPS will be very expensive if there is sudden inflation over the next few years. Inflation risk and reinvestment risk merely two sides of the same coin in the case of TIPS.

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Wed Oct 09, 2019 10:43 pm

gmaynardkrebs wrote:
Wed Oct 09, 2019 10:31 pm
Phineas J. Whoopee wrote:
Wed Oct 09, 2019 10:06 pm
gmaynardkrebs wrote:
Wed Oct 09, 2019 9:55 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.
TIPS of all durations are equally adjusted for inflation. Their par values are adjusted by the same amount, and their coupon payouts adjust based on par values.

Longer-term TIPS can be expected to have a greater return over time, just like any longer-term vs. shorter-term bonds, with a tradeoff of higher volatility, but inflation protection is not different.

One could make a point about reinvestment risk, but the opportunities for higher real yields six times over thirty years might or might not be better than locking in a real yield for three decades.

PJW
Why is 30 year term life more expensive than 5-year term life? Because the risk that the issuer will actually have to pay off is greater. For the same reason, a 30 year TIPS should cost more, but for some reason which I do not understand, they cost less, despite a greater inflation risk to the issuer, the US Treasury.
TIPS are bonds. Treasury bonds. There is term risk, but not, conventionally speaking and I don't want to get into a political or fiscal policy argument, default risk.

Please read about term risk, also sometimes called interest rate risk. Under normal circumstances, which the yield curve has recently departed from, a longer-term Treasury will yield more than a shorter-term one.

Please also read about real yields and nominal yields.

Having done so, if you don't see what's happening, then it's my fault not yours, and I'll gladly undertake to explain further.

PJW

Virus4762
Posts: 109
Joined: Fri Jul 13, 2012 10:53 am

Re: Treasury auction of 5 year TIPS coming up....

Post by Virus4762 » Wed Oct 09, 2019 10:44 pm

Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
How do you know about this offering? How can you buy TIPS?

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Wed Oct 09, 2019 10:57 pm

Virus4762 wrote:
Wed Oct 09, 2019 10:44 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
How do you know about this offering? How can you buy TIPS?
The schedule is published on the https://treasurydirect.gov/ website.

Here's how to go about buying TIPS at primary auction. Many brokerages will facilitate the primary market purchase without any commission.

PJW
Last edited by Phineas J. Whoopee on Wed Oct 09, 2019 11:10 pm, edited 1 time in total.

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Wed Oct 09, 2019 11:04 pm

Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
I use TIPS as a large part of my portfolio because I have evaluated my own situation and concluded inflation is the greatest risk to my plan, but not the only risk. The reason to hold TIPS is not because one can accurately predict inflation and nobody else can, but because one is managing one's own risks.

Sometimes we get posters who write the equivalent of I don't anticipate unanticipated inflation.

Think about that for a minute.

PJW

User avatar
Tyler Aspect
Posts: 1529
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: Treasury auction of 5 year TIPS coming up....

Post by Tyler Aspect » Wed Oct 09, 2019 11:49 pm

A longer time period means greater chance for the consumer price index to become a garbage statistical indicator. There has to be greater financial compensation in response to that factor. Hard to quantify that risk though.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Topic Author
Ykcor
Posts: 85
Joined: Mon Nov 26, 2018 7:42 am

Re: Treasury auction of 5 year TIPS coming up....

Post by Ykcor » Thu Oct 10, 2019 7:22 am

Phineas J. Whoopee wrote:
Wed Oct 09, 2019 11:04 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
I use TIPS as a large part of my portfolio because I have evaluated my own situation and concluded inflation is the greatest risk to my plan, but not the only risk. The reason to hold TIPS is not because one can accurately predict inflation and nobody else can, but because one is managing one's own risks.

Sometimes we get posters who write the equivalent of I don't anticipate unanticipated inflation.

Think about that for a minute.

PJW
I too have used TIPS as a small part of my bond portfolio. Unfortunately in a Treasury auction, especially today as world seeks safety in US debt,it is possible that the bond will cost more than its face value I.e. A negative interest rate.

Haven't decided if I will as Vanguard to buy in the upcoming auction. Probably not.

User avatar
gmaynardkrebs
Posts: 1658
Joined: Sun Feb 10, 2008 11:48 am

Re: Treasury auction of 5 year TIPS coming up....

Post by gmaynardkrebs » Thu Oct 10, 2019 7:33 am

Phineas J. Whoopee wrote:
Wed Oct 09, 2019 10:43 pm
gmaynardkrebs wrote:
Wed Oct 09, 2019 10:31 pm
Phineas J. Whoopee wrote:
Wed Oct 09, 2019 10:06 pm
gmaynardkrebs wrote:
Wed Oct 09, 2019 9:55 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.
TIPS of all durations are equally adjusted for inflation. Their par values are adjusted by the same amount, and their coupon payouts adjust based on par values.

Longer-term TIPS can be expected to have a greater return over time, just like any longer-term vs. shorter-term bonds, with a tradeoff of higher volatility, but inflation protection is not different.

One could make a point about reinvestment risk, but the opportunities for higher real yields six times over thirty years might or might not be better than locking in a real yield for three decades.

PJW
Why is 30 year term life more expensive than 5-year term life? Because the risk that the issuer will actually have to pay off is greater. For the same reason, a 30 year TIPS should cost more, but for some reason which I do not understand, they cost less, despite a greater inflation risk to the issuer, the US Treasury.
TIPS are bonds. Treasury bonds. There is term risk, but not, conventionally speaking and I don't want to get into a political or fiscal policy argument, default risk.

Please read about term risk, also sometimes called interest rate risk. Under normal circumstances, which the yield curve has recently departed from, a longer-term Treasury will yield more than a shorter-term one.

Please also read about real yields and nominal yields.

Having done so, if you don't see what's happening, then it's my fault not yours, and I'll gladly undertake to explain further.

PJW
Hi PJW, and my lack of understanding is definitely not your fault, as I'm from the passbook savings account generation, when only rich people owned bonds, and I was definitely not rich enough (or smart enough) to get in depth knowledge. But, I do understand term risk, reinvestment risk, and real vs. nominal yields. I'm also moderately familiar with the Fisher equation. While I haven't done the research, and wouldn't know how, it seems to me, based on growing up in the 60's and 70s, and just intuitively, that the inflation component is different in a fundamental way ie., far more unpredictable, volatile, and potentially devastating than the real component -- especially over 30 year periods. I view unexpected inflation as an "insurable event," thus my crude analogy to 30 year vs. 5 year term life insurance. I guess the market does not view this risk the same way I do, possibly because the big players in the game have a far greater level of inflation risk tolerance than the individual, possibly because they employ strategies that hedge the inflation risk in ways that individuals like me cannot. I believe that Larry Swedroe has calculated that TIPS actually pay you to lay off the inflation risk to others, but that the premium you receive is small. My feeling is that it's a much bigger free lunch than that, but and it's one of the many reasons virtually all of my bond holdings are in long TIPS. I've been surprised about their lack of popularity among small 401K investors like myself, who really are quite vulnerable to inflation, whether they realize it or not, or whether they think stocks provide better inflation protection anyway, which I fear is a fallacious line of reasoning.
Last edited by gmaynardkrebs on Thu Oct 10, 2019 9:15 am, edited 1 time in total.

Ferdinand2014
Posts: 693
Joined: Mon Dec 17, 2018 6:49 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Ferdinand2014 » Thu Oct 10, 2019 7:45 am

Phineas J. Whoopee wrote:
Wed Oct 09, 2019 10:06 pm
gmaynardkrebs wrote:
Wed Oct 09, 2019 9:55 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.
TIPS of all durations are equally adjusted for inflation. Their par values are adjusted by the same amount, and their coupon payouts adjust based on par values.

Longer-term TIPS can be expected to have a greater return over time, just like any longer-term vs. shorter-term bonds, with a tradeoff of higher volatility, but inflation protection is not different.

One could make a point about reinvestment risk, but the opportunities for higher real yields six times over thirty years might or might not be better than locking in a real yield for three decades.

PJW
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

User avatar
gmaynardkrebs
Posts: 1658
Joined: Sun Feb 10, 2008 11:48 am

Re: Treasury auction of 5 year TIPS coming up....

Post by gmaynardkrebs » Thu Oct 10, 2019 7:50 am

Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Phineas J. Whoopee wrote:
Wed Oct 09, 2019 10:06 pm
gmaynardkrebs wrote:
Wed Oct 09, 2019 9:55 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.
TIPS of all durations are equally adjusted for inflation. Their par values are adjusted by the same amount, and their coupon payouts adjust based on par values.

Longer-term TIPS can be expected to have a greater return over time, just like any longer-term vs. shorter-term bonds, with a tradeoff of higher volatility, but inflation protection is not different.

One could make a point about reinvestment risk, but the opportunities for higher real yields six times over thirty years might or might not be better than locking in a real yield for three decades.

PJW
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
Yes. Let's say you buy a 5-year TIPS. In 5 years, the price could be much higher when it's time to reinvest. The way to avoid that is to buy 30 year TIPS, and lock in whatever the rate is today. But, note, if you think prices will be lower in 5 years, you might be very happy to stay with 5 year terms.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by vineviz » Thu Oct 10, 2019 9:10 am

Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
I'm simplifying a little, but the only way you can avoid reinvestment risk is to avoid the need to reinvest. That means buying bonds that mature as close as possible to the point in time at which you intend to spend the par amount.

As gmaynardkrebs observed, if you buy a 5-year TIPS and hold to maturity you still have reinvestment risk if your spending goal is 25 years after maturity.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Ferdinand2014
Posts: 693
Joined: Mon Dec 17, 2018 6:49 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Ferdinand2014 » Thu Oct 10, 2019 10:50 am

vineviz wrote:
Thu Oct 10, 2019 9:10 am
Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
I'm simplifying a little, but the only way you can avoid reinvestment risk is to avoid the need to reinvest. That means buying bonds that mature as close as possible to the point in time at which you intend to spend the par amount.

As gmaynardkrebs observed, if you buy a 5-year TIPS and hold to maturity you still have reinvestment risk if your spending goal is 25 years after maturity.
Is the reinvestment risk for the nominal rate (established at auction), but not the inflation risk with TIPS? For example, inflation rises during the 5 year period and If you roll a 5 year TIPS at maturity with a fixed rate of say 0.5% into a new 5 year at say 2%, any future inflation will be accounted for by increasing principal applied to the new fixed rate?
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

User avatar
Svensk Anga
Posts: 579
Joined: Sun Dec 23, 2012 5:16 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Svensk Anga » Thu Oct 10, 2019 11:00 am

I-bonds at 0.5% real through the end of the month are a better deal than the 5-year TIPS. On November 1 the real rate for new I bonds will be adjusted, very likely lower.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by vineviz » Thu Oct 10, 2019 2:03 pm

Ferdinand2014 wrote:
Thu Oct 10, 2019 10:50 am
vineviz wrote:
Thu Oct 10, 2019 9:10 am
Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
I'm simplifying a little, but the only way you can avoid reinvestment risk is to avoid the need to reinvest. That means buying bonds that mature as close as possible to the point in time at which you intend to spend the par amount.

As gmaynardkrebs observed, if you buy a 5-year TIPS and hold to maturity you still have reinvestment risk if your spending goal is 25 years after maturity.
Is the reinvestment risk for the nominal rate (established at auction), but not the inflation risk with TIPS?
Yes and no. The inflation adjustment technical has no reinvestment risk, but changes in inflation expectations get transmitted via the real yield so rolling over TIPS does expose implicitly to the same reinvestment risk you'd have with nominal bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
gmaynardkrebs
Posts: 1658
Joined: Sun Feb 10, 2008 11:48 am

Re: Treasury auction of 5 year TIPS coming up....

Post by gmaynardkrebs » Thu Oct 10, 2019 3:01 pm

vineviz wrote:
Thu Oct 10, 2019 2:03 pm
Ferdinand2014 wrote:
Thu Oct 10, 2019 10:50 am
vineviz wrote:
Thu Oct 10, 2019 9:10 am
Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
I'm simplifying a little, but the only way you can avoid reinvestment risk is to avoid the need to reinvest. That means buying bonds that mature as close as possible to the point in time at which you intend to spend the par amount.

As gmaynardkrebs observed, if you buy a 5-year TIPS and hold to maturity you still have reinvestment risk if your spending goal is 25 years after maturity.
Is the reinvestment risk for the nominal rate (established at auction), but not the inflation risk with TIPS?
Yes and no. The inflation adjustment technical has no reinvestment risk, but changes in inflation expectations get transmitted via the real yield so rolling over TIPS does expose implicitly to the same reinvestment risk you'd have with nominal bonds.
Not sure I agree. My understanding of the Fisher equation is that nominal and real yields are independent, in which case neither is transmitted through the other. However, nominal yields do incorporate Inflation expectations and real yields.

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Thu Oct 10, 2019 6:15 pm

Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Phineas J. Whoopee wrote:
Wed Oct 09, 2019 10:06 pm
gmaynardkrebs wrote:
Wed Oct 09, 2019 9:55 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
No because 5 years is too short a time. 30 year TIPS are the way to go, as their is much greater risk to protect against. I've often that they should yield less than 5 year TIPS for that reason, but I guess the market prices them against 30 years T-Bonds.
TIPS of all durations are equally adjusted for inflation. Their par values are adjusted by the same amount, and their coupon payouts adjust based on par values.

Longer-term TIPS can be expected to have a greater return over time, just like any longer-term vs. shorter-term bonds, with a tradeoff of higher volatility, but inflation protection is not different.

One could make a point about reinvestment risk, but the opportunities for higher real yields six times over thirty years might or might not be better than locking in a real yield for three decades.

PJW
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
Yes, because reinvestment risk includes reinvesting the coupons, not just the principal upon maturity.

PJW

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Thu Oct 10, 2019 6:31 pm

Ferdinand2014 wrote:
Thu Oct 10, 2019 10:50 am
vineviz wrote:
Thu Oct 10, 2019 9:10 am
Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
I'm simplifying a little, but the only way you can avoid reinvestment risk is to avoid the need to reinvest. That means buying bonds that mature as close as possible to the point in time at which you intend to spend the par amount.

As gmaynardkrebs observed, if you buy a 5-year TIPS and hold to maturity you still have reinvestment risk if your spending goal is 25 years after maturity.
Is the reinvestment risk for the nominal rate (established at auction), but not the inflation risk with TIPS? For example, inflation rises during the 5 year period and If you roll a 5 year TIPS at maturity with a fixed rate of say 0.5% into a new 5 year at say 2%, any future inflation will be accounted for by increasing principal applied to the new fixed rate?
Reinvestment risk refers to all incoming cash flows, but let's compare TIPS to nominal Treasuries in terms of keeping oneself up with inflation:

Using nominal bonds, to keep the portfolio up with inflation one must reinvest the portion of each coupon that covers inflation that was already realized. One doesn't know the yields that will be available when the money comes in, and sometimes it may not be enough to cover realized inflation. One thing reinvestment risk refers to is yield to maturity, YTM, in which the calculation uses the original yield of the bond for reinvested coupons. Among other aspects, reinvestment risk makes YTM calculations only approximations of the future, albeit very useful ones.

Using TIPS, there are two sources of return. One is the adjustments to par value. The TIPS retains its original real yield, so par value adjustments continue at that yield. The other source, the coupons, still have reinvestment risk.

Please note that TIPS funds pay out the inflation adjustments as dividends, so one must still be careful to reinvest enough if one wants to keep up.

I frequently see posters here believing reinvestment risk is only about the matured principal, but it's about coupons, too. The only nominal bonds without reinvestment risk prior to maturity are zero-coupon bonds, which are constructed by large institutions that break apart cash flows from ordinary bonds and sell each separately.

There was at least one instance in which an institution created zero-coupon TIPS, but they didn't sell well so it discontinued the practice.

PJW

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Thu Oct 10, 2019 7:21 pm

Tyler Aspect wrote:
Wed Oct 09, 2019 11:49 pm
A longer time period means greater chance for the consumer price index to become a garbage statistical indicator. There has to be greater financial compensation in response to that factor. Hard to quantify that risk though.
I'll make two points, without getting political:

1) Many people, at least many who talk loudly and frequently, believe that's already happened.

2) The TIPS regulation says that if CPI-U is discontinued or substantially changed the Secretary of the Treasury is to choose the closest equivalent measure.

Of course some conspiracy theorists will never be satisfied. Moving the goal posts might as well be their middle name.

PJW

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Thu Oct 10, 2019 8:05 pm

Ykcor wrote:
Thu Oct 10, 2019 7:22 am
Phineas J. Whoopee wrote:
Wed Oct 09, 2019 11:04 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
I use TIPS as a large part of my portfolio because I have evaluated my own situation and concluded inflation is the greatest risk to my plan, but not the only risk. The reason to hold TIPS is not because one can accurately predict inflation and nobody else can, but because one is managing one's own risks.

Sometimes we get posters who write the equivalent of I don't anticipate unanticipated inflation.

Think about that for a minute.

PJW
I too have used TIPS as a small part of my bond portfolio. Unfortunately in a Treasury auction, especially today as world seeks safety in US debt,it is possible that the bond will cost more than its face value I.e. A negative interest rate.

Haven't decided if I will as Vanguard to buy in the upcoming auction. Probably not.
What is the expected real yield on newly-auctioned nominal US Treasuries of the same maturity?

PJW

User avatar
FIREchief
Posts: 3545
Joined: Fri Aug 19, 2016 6:40 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by FIREchief » Thu Oct 10, 2019 8:17 pm

Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
What "doesn't exist currently?" :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
Phineas J. Whoopee
Posts: 8629
Joined: Sun Dec 18, 2011 6:18 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Phineas J. Whoopee » Thu Oct 10, 2019 8:26 pm

FIREchief wrote:
Thu Oct 10, 2019 8:17 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
What "doesn't exist currently?" :confused
Good catch. Of course future events don't exist currently. :wink:

PJW

User avatar
FIREchief
Posts: 3545
Joined: Fri Aug 19, 2016 6:40 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by FIREchief » Thu Oct 10, 2019 10:48 pm

Phineas J. Whoopee wrote:
Thu Oct 10, 2019 8:26 pm
FIREchief wrote:
Thu Oct 10, 2019 8:17 pm
Ykcor wrote:
Wed Oct 09, 2019 9:44 pm
(Initial offering) any reason to consider as a hedge against future inflation, which doesn't exist currently?
What "doesn't exist currently?" :confused
Good catch. Of course future events don't exist currently. :wink:

PJW
This is, of course, 100% true; yet it is amazing how often we see posts that suggest otherwise....
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
abuss368
Posts: 15539
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Treasury auction of 5 year TIPS coming up....

Post by abuss368 » Thu Oct 10, 2019 10:57 pm

TIPS of all maturities are equally adjusted for inflation.
John C. Bogle: "Simplicity is the master key to financial success."

User avatar
gmaynardkrebs
Posts: 1658
Joined: Sun Feb 10, 2008 11:48 am

Re: Treasury auction of 5 year TIPS coming up....

Post by gmaynardkrebs » Thu Oct 10, 2019 11:01 pm

It's pretty clear to me that Ycor is asking whether he should be concerned about future inflation, even though inflation is tame at this tine, The answer is yes.

User avatar
FIREchief
Posts: 3545
Joined: Fri Aug 19, 2016 6:40 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by FIREchief » Thu Oct 10, 2019 11:08 pm

gmaynardkrebs wrote:
Thu Oct 10, 2019 11:01 pm
It's pretty clear to me that Ycor is asking whether he should be concerned about future inflation, even though inflation is tame at this tine, The answer is yes.
Yep, my house isn't currently on fire, but I'm still writing that check for fire insurance!! :beer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Ferdinand2014
Posts: 693
Joined: Mon Dec 17, 2018 6:49 pm

Re: Treasury auction of 5 year TIPS coming up....

Post by Ferdinand2014 » Fri Oct 11, 2019 1:08 pm

Phineas J. Whoopee wrote:
Thu Oct 10, 2019 6:31 pm
Ferdinand2014 wrote:
Thu Oct 10, 2019 10:50 am
vineviz wrote:
Thu Oct 10, 2019 9:10 am
Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
I'm simplifying a little, but the only way you can avoid reinvestment risk is to avoid the need to reinvest. That means buying bonds that mature as close as possible to the point in time at which you intend to spend the par amount.

As gmaynardkrebs observed, if you buy a 5-year TIPS and hold to maturity you still have reinvestment risk if your spending goal is 25 years after maturity.
Is the reinvestment risk for the nominal rate (established at auction), but not the inflation risk with TIPS? For example, inflation rises during the 5 year period and If you roll a 5 year TIPS at maturity with a fixed rate of say 0.5% into a new 5 year at say 2%, any future inflation will be accounted for by increasing principal applied to the new fixed rate?
Reinvestment risk refers to all incoming cash flows, but let's compare TIPS to nominal Treasuries in terms of keeping oneself up with inflation:

Using nominal bonds, to keep the portfolio up with inflation one must reinvest the portion of each coupon that covers inflation that was already realized. One doesn't know the yields that will be available when the money comes in, and sometimes it may not be enough to cover realized inflation. One thing reinvestment risk refers to is yield to maturity, YTM, in which the calculation uses the original yield of the bond for reinvested coupons. Among other aspects, reinvestment risk makes YTM calculations only approximations of the future, albeit very useful ones.

Using TIPS, there are two sources of return. One is the adjustments to par value. The TIPS retains its original real yield, so par value adjustments continue at that yield. The other source, the coupons, still have reinvestment risk.

Please note that TIPS funds pay out the inflation adjustments as dividends, so one must still be careful to reinvest enough if one wants to keep up.

I frequently see posters here believing reinvestment risk is only about the matured principal, but it's about coupons, too. The only nominally from bonds without reinvestment risk prior to maturity are zero-coupon bonds, which are constructed by large institutions that break apart cash flows from ordinary bonds and sell each separately.

There was at least one instance in which an institution created zero-coupon TIPS, but they didn't sell well so it discontinued the practice.

PJW
So if I understand you correctly, in a TIPS fund, in order to benefit from the inflation protection fully, all dividends must be reinvested - preferably in tax deferred space? So the dividends from a TIPS fund include interest from the base coupon rate as well as principal added to bonds as inflation adjustment (either as a capital gain from sale before maturity or from return of principal and adjustment at maturity)?
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

User avatar
gmaynardkrebs
Posts: 1658
Joined: Sun Feb 10, 2008 11:48 am

Re: Treasury auction of 5 year TIPS coming up....

Post by gmaynardkrebs » Fri Oct 11, 2019 1:29 pm

Ferdinand2014 wrote:
Fri Oct 11, 2019 1:08 pm
Phineas J. Whoopee wrote:
Thu Oct 10, 2019 6:31 pm
Ferdinand2014 wrote:
Thu Oct 10, 2019 10:50 am
vineviz wrote:
Thu Oct 10, 2019 9:10 am
Ferdinand2014 wrote:
Thu Oct 10, 2019 7:45 am
Is there reinvestment risk with TIPS if you buy at auction and hold to maturity?
I'm simplifying a little, but the only way you can avoid reinvestment risk is to avoid the need to reinvest. That means buying bonds that mature as close as possible to the point in time at which you intend to spend the par amount.

As gmaynardkrebs observed, if you buy a 5-year TIPS and hold to maturity you still have reinvestment risk if your spending goal is 25 years after maturity.
Is the reinvestment risk for the nominal rate (established at auction), but not the inflation risk with TIPS? For example, inflation rises during the 5 year period and If you roll a 5 year TIPS at maturity with a fixed rate of say 0.5% into a new 5 year at say 2%, any future inflation will be accounted for by increasing principal applied to the new fixed rate?
Reinvestment risk refers to all incoming cash flows, but let's compare TIPS to nominal Treasuries in terms of keeping oneself up with inflation:

Using nominal bonds, to keep the portfolio up with inflation one must reinvest the portion of each coupon that covers inflation that was already realized. One doesn't know the yields that will be available when the money comes in, and sometimes it may not be enough to cover realized inflation. One thing reinvestment risk refers to is yield to maturity, YTM, in which the calculation uses the original yield of the bond for reinvested coupons. Among other aspects, reinvestment risk makes YTM calculations only approximations of the future, albeit very useful ones.

Using TIPS, there are two sources of return. One is the adjustments to par value. The TIPS retains its original real yield, so par value adjustments continue at that yield. The other source, the coupons, still have reinvestment risk.

Please note that TIPS funds pay out the inflation adjustments as dividends, so one must still be careful to reinvest enough if one wants to keep up.

I frequently see posters here believing reinvestment risk is only about the matured principal, but it's about coupons, too. The only nominally from bonds without reinvestment risk prior to maturity are zero-coupon bonds, which are constructed by large institutions that break apart cash flows from ordinary bonds and sell each separately.

There was at least one instance in which an institution created zero-coupon TIPS, but they didn't sell well so it discontinued the practice.

PJW
So if I understand you correctly, in a TIPS fund, in order to benefit from the inflation protection fully, all dividends must be reinvested - preferably in tax deferred space? So the dividends from a TIPS fund include interest from the base coupon rate as well as principal added to bonds as inflation adjustment (either as a capital gain from sale before maturity or from return of principal and adjustment at maturity)?
With the TIPS coupon rates as low as they are today, the bonds are pretty close to being strips anyway, so there won't be much in the way of dividends to reinvest anyway, so the reinvestment risk is quite diminished, although not for a very happy reason (small coupon). With a fund, since they pay out the inflation adjustment as OID income, to preserve real purchasing power, you'd want to reinvest all but a small portion of the dividends. Yes, tax deferred preferably.

User avatar
#Cruncher
Posts: 2835
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Treasury auction of 5 year TIPS coming up....

Post by #Cruncher » Sun Oct 13, 2019 5:30 pm

Virus4762 wrote:
Wed Oct 09, 2019 10:44 pm
How do you know about this offering? How can you buy TIPS?
Yes, refer to the Tentative Auction Schedule PDF file mentioned by PJW in this post.Then, about the middle of each month, the official TIPS auction info is shown on the Upcoming Auctions page. Most brokers will accept orders from the "Announcement" date until early the morning of the "Auction" date. For example, orders for the October 5-year are accepted between 10/10 and 10/17.

Currently the Treasury auctions two 10-year, one 30-year, and two 5-year TIPS annually, an initial or reopening auction each month:

Code: Select all

         Jan 10-yr  Feb 30-yr  Apr 5-yr  Jul 10-yr  Oct 5-yr
Jan        Initial
Feb                   Initial
March       Reopen
April                           Initial
May         Reopen
June                             Reopen
July                                       Initial
Aug                    Reopen
Sep                                         Reopen
Oct                                                   Initial
Nov                                         Reopen
Dec                                                    Reopen
Ykcor wrote:
Thu Oct 10, 2019 7:22 am
Unfortunately in a Treasury auction, especially today as [the] world seeks safety in US debt,it is possible that the bond will cost more than its face value I.e. A negative interest rate.
Treasury Notes and Bonds (including all TIPS) are issued with a minimum coupon of 0.125%. If the yield at an initial auction is less than this, the price will be above par, i.e., "more than its face value". What then do we expect the yield to be? This is the first time the Treasury has issued a TIPS maturing in October, so we have no yields of ones already outstanding. The Treasury has issued 5-year TIPS maturing in April for some time. The latest one, the 0.5% coupon maturing 4/15/2024 yielded 0.232% at the market close on Friday according to the WSJ TIPS Quotes. Up to the minute quotes are available on Bloomberg's US Rates & Bonds.

Because of the seasonality of the Consumer Price Index used to adjust TIPS principal, I expect TIPS maturing October 15 to yield about 0.08% points less than TIPS maturing April 15. Therefore, if the April TIPS yield remains at 0.23%, I'd expect the October TIPS to yield about 0.15%. Here is how I make this estimate:
  • Here are the Seasonally Adjusted and Non-Seasonally Adjusted CPI-U for each month of 2018. (Choose US City Average, All Items, Seasonally Adjusted, and Not Seasonally Adjusted on this BLS web page.)

    Code: Select all

     CPI Mo   Sea Adj  Not Adj   Ratio    TIPS  2mo Avg
    2018 Jan  248.884  247.867  0.99591  04/15  0.99720
    2018 Feb  249.369  248.991  0.99848
    2018 Mar  249.498  249.554  1.00022
    2018 Apr  249.956  250.546  1.00236  07/15  1.00306
    2018 May  250.646  251.588  1.00376
    2018 Jun  251.134  251.989  1.00340
    2018 Jul  251.597  252.006  1.00163  10/15  1.00134
    2018 Aug  251.879  252.146  1.00106
    2018 Sep  252.010  252.439  1.00170
    2018 Oct  252.794  252.885  1.00036  01/15  0.99875
    2018 Nov  252.760  252.038  0.99714  02/15  0.99562
    2018 Dec  252.723  251.233  0.99410
  • The CPI for month MM equals the Reference CPI used to index TIPS for the first of month MM + 3. Since all TIPS mature on the 15th of the month, the Ref CPI for maturing date MM/15 will be the average of the CPIs for month MM - 3 and MM - 2. E.g., for 04/15 it will be the average of Jan and Feb.
    0.99720 = (247.867 + 248.991) / (248.884 + 249.369)
  • The market adjusts TIPS yields to compensate for the above seasonal ratios. To convert a yield for a TIPS maturing X to the approximate yield of the same TIPS maturing Y apply the following formula, with an example where Y is October 15, X is April 15, and N is 5 years.

    Code: Select all

    Yld Y = ((1 + Yld X) ^ N * Ratio X / Ratio Y) ^ (1 / N) - 1
    0.15% =  (1.00232    ^ 5 * 0.99720 / 1.00134) ^ (1 / 5) - 1

Jeff Albertson
Posts: 712
Joined: Sat Apr 06, 2013 7:11 pm
Location: Springfield

Re: Treasury auction of 5 year TIPS coming up....

Post by Jeff Albertson » Sun Oct 13, 2019 6:01 pm

Svensk Anga wrote:
Thu Oct 10, 2019 11:00 am
I-bonds at 0.5% real through the end of the month are a better deal than the 5-year TIPS. On November 1 the real rate for new I bonds will be adjusted, very likely lower.
+1

Dudley
Posts: 133
Joined: Tue May 09, 2017 5:34 am

Re: Treasury auction of 5 year TIPS coming up....

Post by Dudley » Fri Oct 18, 2019 6:47 am

wow, that auction result stank. i recall it gave a real yield of something like 0.05%...

User avatar
#Cruncher
Posts: 2835
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Treasury auction of 5 year TIPS coming up....

Post by #Cruncher » Sat Oct 19, 2019 12:28 pm

Dudley wrote:
Fri Oct 18, 2019 6:47 am
i recall it gave a real yield of something like 0.05%...
Yes, the yield came in at only 0.054% as shown on the aucton results PDF. This was lower than the yield of the outstanding April 2024 5-year issue -- partially due to seasonal differences between April 15 and October 15 in the CPI used to adjust TIPS principal. In my previous post I estimated this would cause the new October issue to yield about 0.08% points less than the old April issue. But this accounts for only about half of the difference between them. According to this Friday's WSJ TIPS Quotes, the October 2024 is yielding 0.020% while the April 2024 is yielding 0.174%, a difference of 0.154%.

The red line in the following graph shows this where the old April 2024 matures in 4.50 years and the new October 2024 in 5.00 years. The reported 0.02% yield of the October 2024 TIPS is the bottom point on the curve and clearly seems low compared to nearby maturities. When all TIPS yields are adjusted to have the same seasonal factor as April TIPS (the blue line), the curve becomes less jagged. But the 0.10% adjusted yield of the October 2024 issue still looks like an aberration in the yield curve. I don't know what accounts for this.

Image

Here are the figures behind the graph. I've omitted the three TIPS maturing in less than one year and the five 20-year TIPS maturing January 15 in 2025 to 2029 since there are 10-year TIPS maturing on the same dates.

Code: Select all

                    CPI         ----- Yield -----
Maturity  Coupon   Factor  Life Reported Adjusted

Code: Select all

Jan 2021  1.125%  0.99875  1.25   0.552%   0.677%
Apr 2021  0.125%  0.99720  1.50   0.623%   0.623%
Jul 2021  0.625%  1.00306  1.75   0.192%   0.528%
Jan 2022  0.125%  0.99875  2.25   0.399%   0.468%
Apr 2022  0.125%  0.99720  2.50   0.410%   0.410%
Jul 2022  0.125%  1.00306  2.75   0.165%   0.379%
Jan 2023  0.125%  0.99875  3.25   0.276%   0.324%
Apr 2023  0.625%  0.99720  3.50   0.280%   0.280%
Jul 2023  0.375%  1.00306  3.75   0.134%   0.291%
Jan 2024  0.625%  0.99875  4.25   0.202%   0.239%
Apr 2024  0.500%  0.99720  4.50   0.174%   0.174%
Jul 2024  0.125%  1.00306  4.75   0.082%   0.206%
Oct 2024  0.125%  1.00134  5.00   0.020%   0.103% [*]
Jan 2025  0.250%  0.99875  5.25   0.159%   0.189%
Jul 2025  0.375%  1.00306  5.75   0.098%   0.200%
Jan 2026  0.625%  0.99875  6.25   0.186%   0.211%
Jul 2026  0.125%  1.00306  6.75   0.122%   0.209%
Jan 2027  0.375%  0.99875  7.25   0.191%   0.212%
Jul 2027  0.375%  1.00306  7.75   0.146%   0.222%
Jan 2028  0.500%  0.99875  8.25   0.192%   0.211%
Apr 2028  3.625%  0.99720  8.50   0.243%   0.243%
Jul 2028  0.750%  1.00306  8.75   0.143%   0.210%
Jan 2029  0.875%  0.99875  9.25   0.179%   0.196%
Apr 2029  3.875%  0.99720  9.50   0.225%   0.225%
Jul 2029  0.250%  1.00306  9.75   0.137%   0.197%
Apr 2032  3.375%  0.99720 12.50   0.265%   0.265%
Feb 2040  2.125%  0.99562 20.33   0.487%   0.479%
Feb 2041  2.125%  0.99562 21.33   0.500%   0.493%
Feb 2042  0.750%  0.99562 22.33   0.533%   0.526%
Feb 2043  0.625%  0.99562 23.33   0.551%   0.544%
Feb 2044  1.375%  0.99562 24.33   0.555%   0.548%
Feb 2045  0.750%  0.99562 25.33   0.584%   0.578%
Feb 2046  1.000%  0.99562 26.33   0.581%   0.575%
Feb 2047  0.875%  0.99562 27.33   0.586%   0.580%
Feb 2048  1.000%  0.99562 28.33   0.587%   0.581%
Feb 2049  1.000%  0.99562 29.33   0.574%   0.569%
* Example calculation of adjusted yield for October 2024 maturity. See my previous post for derivation of the CPI factors.
0.103% = (1.0002 ^ 5 * (1.00134 / 0.99720)) ^ (1 / 5) - 1

Post Reply