TIPS Yield Curve & Changing Inflation Expectations

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TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Mon Mar 09, 2020 7:21 pm

It's been interesting over the past 10 days to observe the Treasury real yield curve (beyond the data glitch it had).

For all of last week, longer-term TIPS yields fell the most with 1) the spread of the coronavirus, 2) the decline of GDP growth forecasts worldwide, and 3) the lowered expectations for unexpected inflation. However, with the collapse of oil prices over the weekend, the bond market has repriced the risk of shorter-term unexpected inflation today (in purple), dramatically flattening the yield curve.
Is this the correct interpretation of these changes in inflation expectations? Appreciate your insights.
Last edited by SimpleGift on Mon Mar 09, 2020 7:47 pm, edited 2 times in total.

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Re: TIPS Yield Curve & Inflation Expectations

Post by FIREchief » Mon Mar 09, 2020 7:27 pm

Similar thread here:

viewtopic.php?f=10&t=306503
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: TIPS Yield Curve & Inflation Expectations

Post by SimpleGift » Mon Mar 09, 2020 7:33 pm

FIREchief wrote:
Mon Mar 09, 2020 7:27 pm
Similar thread here:

viewtopic.php?f=10&t=306503
Thanks, FIREchief. I'm fine if the moderators want to combine our two threads, as the discussion topics are similar.

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Re: TIPS Yield Curve & Inflation Expectations

Post by Angst » Mon Mar 09, 2020 7:37 pm

And considering today's TIPS market prices as well, I think you could extend the purple curve's negative slope all the way back to 3 months.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Mon Mar 09, 2020 8:59 pm

Angst wrote:
Mon Mar 09, 2020 7:37 pm
And considering today's TIPS market prices as well, I think you could extend the purple curve's negative slope all the way back to 3 months.
Thanks, Angst. Per your suggestion, the chart below plots today's TIPS yields from the WSJ web page, which captures more of the shorter term section of the TIPS yield curve.
What does it mean when the real Treasury yield curve inverts? All I can surmise is that, with the collapse in oil prices over the weekend, the risk of unexpected inflation in the short term is much less than the risk of unexpected inflation in the longer term. But I'm no expert on this, which is the reason for posting this topic.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Noobvestor » Mon Mar 09, 2020 9:18 pm

Just a follow-up: how about the shorter-term TIPS? I always wonder why they don't show data for those here (and am guessing that's why they're not in your chart): https://www.treasury.gov/resource-cente ... =realyield
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Mon Mar 09, 2020 9:22 pm

Noobvestor wrote:
Mon Mar 09, 2020 9:18 pm
Just a follow-up: how about the shorter-term TIPS? I always wonder why they don't show data for those here (and am guessing that's why they're not in your chart)...
The chart posted just above captures more of the short-term TIPS yield curve, from today's WSJ web page. Don't know why the Treasury web page doesn't include the short-term TIPS yields — their data feels a little truncated without them.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Noobvestor » Mon Mar 09, 2020 9:28 pm

SimpleGift wrote:
Mon Mar 09, 2020 9:22 pm
Noobvestor wrote:
Mon Mar 09, 2020 9:18 pm
Just a follow-up: how about the shorter-term TIPS? I always wonder why they don't show data for those here (and am guessing that's why they're not in your chart)...
The chart posted just above captures more of the short-term TIPS yield curve, from today's WSJ web page. Don't know why the Treasury web page doesn't include the short-term TIPS yields — their data feels a little truncated without them.
Yeah I find their omission fairly annoying as someone with some funds in Vanguard's Short-Term TIPS fund (very much a first-world problem tho).
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by garlandwhizzer » Mon Mar 09, 2020 9:53 pm

I'm not sure what it means and I sometimes the markets make little or no sense to me but I think it may mean:

1) Most believe the risk of long term unexpected inflation is exceptionally low. The dominant economic concern at present is in the other direction: recession/xero or negative rates/even possible deflation with the oil price decline.

2) A lot of investment dollars are moving from risk assets due to the current scare into the safest of all assets, LMP TIPS ladders stretching out into long duration (Grok87's goal). So much money now chases after so few quality assets that it distorts yields in Treasuries and TIPS greatly. When fear/uncertainty/risk-off behavior dominates like now, the longer the duration of these risk-free assets the better. Guaranteed safety of principal in real terms over longer duration may be viewed by the market as more valuable when fear is in the air than shorter term security. After all if unexpected inflation does occur at some point in the future, investors will rush into TIPS, prices will be bid up and hence their yields will fall, probably lower than today's yields. There are a lot of investors with long time horizons, huge amounts of money to invest, and very low risk tolerance who want guaranteed real purchasing power over a long time frame regardless of what happens until then including the thing which no one expects now, inflation. I might add that at current rates 10 year Treasuries and 30 year Treasuries are also likely to yield less than the cumulative inflation rate over their entire durations going forward. Never in history has the bond market been this distorted and offered such laughable yields IMO. On the other hand, bonds are still the only really safe port in severe equity storms and are IMO a portfolio must for most of us.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Mon Mar 09, 2020 10:32 pm

SimpleGift wrote:
Mon Mar 09, 2020 9:22 pm
Noobvestor wrote:
Mon Mar 09, 2020 9:18 pm
Just a follow-up: how about the shorter-term TIPS? I always wonder why they don't show data for those here (and am guessing that's why they're not in your chart)...
The chart posted just above captures more of the short-term TIPS yield curve, from today's WSJ web page. Don't know why the Treasury web page doesn't include the short-term TIPS yields — their data feels a little truncated without them.
(Thank you Simplegift for pulling the additional data into your graph!)

TIPS don't get no respect. They're the hand-me-down, minor league, step-child afterthought of government finance. It's a wonder Treasury doesn't just discontinue them. Do you think the media would even notice? They didn't notice when 4 days in a row last week Treasury posted erroneous data for the 20 and 30-year real yields. What a shame though. TIPS are a unique tool in the investor's and the economist's toolbox and they deserve parallel attention - at least in terms of published data - with nominal treasuries. There's a wealth of information that might be informing us, if only it was there alongside the nominal data. Alright... I'll get off my soap box. What I'd give though to be able to look back on 50 or more years of TIPS data alongside nominal Treasuries.

As interesting as it is, I don't make too much of today's real yield curve. Today was exceptional for what the Saudi's did in the context of CoVid-19, but we need more data, more passage of time is what I mean. But thank you Simplegift! It's very interesting. I wish I had more insight as to what the apparent shift may mean or portend.

I do agree with garlandwhizzer's notion that there appears to be little expectation of inflation these days. But I also can easily imagine our world shifting to where conventional fiscal spending coupled with mid-20th century levels of taxation comes back into fashion, and inflation returns. Who knows?

One last thought: Has anyone ever heard discussed the possibility of nominal rates staying low while real rates plummet to significantly negative levels, such that significant inflation co-exists with low nominal rates? Is that just economic science fiction or is it at all worthy of serious speculation?

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Ping Pong » Mon Mar 09, 2020 10:49 pm

Angst wrote:
Mon Mar 09, 2020 10:32 pm
One last thought: Has anyone ever heard discussed the possibility of nominal rates staying low while real rates plummet to significant negative levels, such that significant inflation co-exists with low nominal rates? Is that just economic science fiction or is it at all worthy of serious speculation?
I would assume negative real rates go hand in hand with inflation. They are both symptoms of overprinting.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SJIRon » Mon Mar 09, 2020 11:13 pm

Some time ago, I read an excellent paper on TIPS that I'm not able to locate at the moment.

I recall the author of the paper used a TIPS pricing model that included a liquidity factor to account for buyer preference for nominal treasury bonds due to better liquidity than TIPS. So the TIPS yield would be:

TIPS Yield = Nominal Yield - Expected Inflation + Liquidity Factor

Using that model, it could be that today's increase in TIPS Yield (even with decreasing nominal yield) is due in part to a decrease in expected inflation (due to oil price drop) but also due in part to an increase in the Liquidity Factor (due to fear).

I do think that model makes more sense in explaining today's TIPS action than attributing it all to a change in expected inflation. For those of us planning to hold TIPS to maturity as part of a LMP strategy, all the price swings along the way don't matter. Still, it's interesting to watch.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by RubyTuesday » Mon Mar 09, 2020 11:17 pm

SJIRon wrote:
Mon Mar 09, 2020 11:13 pm
Some time ago, I read an excellent paper on TIPS that I'm not able to locate at the moment.

I recall the author of the paper used a TIPS pricing model that included a liquidity factor to account for buyer preference for nominal treasury bonds due to better liquidity than TIPS. So the TIPS yield would be:

TIPS Yield = Nominal Yield - Expected Inflation + Liquidity Factor

Using that model, it could be that today's increase in TIPS Yield (even with decreasing nominal yield) is due in part to a decrease in expected inflation (due to oil price drop) but also due in part to an increase in the Liquidity Factor (due to fear).

I do think that model makes more sense in explaining today's TIPS action than attributing it all to a change in expected inflation. For those of us planning to hold TIPS to maturity as part of a LMP strategy, all the price swings along the way don't matter. Still, it's interesting to watch.
Could the article be one of the articles found on the Cleveland Fed site?

https://www.clevelandfed.org/our-resear ... tions.aspx
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SJIRon » Mon Mar 09, 2020 11:29 pm

RubyTuesday wrote:
Mon Mar 09, 2020 11:17 pm

Could the article be one of the articles found on the Cleveland Fed site?

https://www.clevelandfed.org/our-resear ... tions.aspx
Cool, those guys even have two fudge factors instead of one!

That's not the source of the paper I was trying to find, but thanks for pointing me to it. It's a more academic way of presenting what I was trying to convey in my post. There are "uncertainties" that come into play in TIPS pricing, and those uncertainties get bigger when people are afraid.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Tue Mar 10, 2020 1:03 am

SJIRon wrote:
Mon Mar 09, 2020 11:13 pm
TIPS Yield = Nominal Yield - Expected Inflation + Liquidity Factor

Using that model, it could be that today's increase in TIPS Yield (even with decreasing nominal yield) is due in part to a decrease in expected inflation (due to oil price drop) but also due in part to an increase in the Liquidity Factor (due to fear).
You could be right. As unlikely as it sounds, even the market for nominal Treasuries was apparently experiencing liquidity problems on Monday:
CNBC on 3/9/20 wrote:Liquidity issues in which buyers and sellers are having a hard time coming together on prices are just part of the problem, Michele, the firm’s chief investment officer and head of global fixed income, said Monday...

“I’ve been doing this 40 years. I’ve never seen that before,” Michele told CNBC’s Steve Liesman, who inquired about half-point difference in what buyers were willing to pay and sellers were willing to sell for, referred to as the bid-ask spread.

In fact, Michele said that at one point he received a call from JP Morgan Asset Management’s London office to say that there were no offers on the 30-year bond.
If this was the case, we might expect to see TIPS yields adjust further and "normalize" to the market in the days ahead.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Tue Mar 10, 2020 5:01 pm

Just to update this thread. The real Treasury yield curve is still inverted today (in purple, chart below).

After inverting for the first time yesterday (in green) with the collapse of oil prices over the weekend, the yield curve made a mostly parallel move higher today, with short-term TIPS yields still higher than the 10-year TIPS yield.

What explains short-term TIPS yields higher than the 10-year?
If it was a market liquidity problem yesterday (as some surmised in this thread), one would think those would be resolved today. All I can imagine is, with the drop in oil prices, the risk of unexpected inflation is much less in the short term than it is down the road 10 years?

Any other ideas why the real yield curve has inverted? And what it might mean?

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by GAAP » Tue Mar 10, 2020 6:01 pm

My guess is that with all of the talk about recession, most folks aren't worried at all about inflation -- especially short term.
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Tue Mar 10, 2020 6:06 pm

SimpleGift wrote:
Tue Mar 10, 2020 5:01 pm
...with the drop in oil prices, the risk of unexpected inflation is much less in the short term than it is down the road 10 years?
I imagine this too, but also because of the various and presumably short-term Corona-related economic issues such as cutbacks in travel, shutdowns in convention business and other meetings and commerce, entertainment, etc. The short end of TIPS was barely beginning to climb already (pre-Saudi oil announcement) as of last Friday, just barely.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by #Cruncher » Thu Mar 12, 2020 5:02 pm

SimpleGift wrote:
Mon Mar 09, 2020 8:59 pm
… the chart below plots today's [Monday 3/9/2020] TIPS yields from the WSJ web page, which captures more of the shorter term section of the TIPS yield curve.
What does it mean when the real Treasury yield curve inverts? All I can surmise is that, with the collapse in oil prices over the weekend, the risk of unexpected inflation in the short term is much less than the risk of unexpected inflation in the longer term. But I'm no expert on this, which is the reason for posting this topic.
Nice graph, SimpleGift. Here's an update for selected maturities using today's [Thursday 3/12/2020] closing WSJ TIPS Quotes. The shape is similar to yours from Monday but all yields are shifted up about 0.5% points.

Code: Select all

 Matures  Coupon  Ask Price    Yield
Jan 2022  0.125%   99.37500   0.471%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2023  0.125%   99.21875   0.399%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2024  0.625%  101.56250   0.218%             |XXXXXXXXXXXXXXXXXXXXXX
Jan 2025  0.250%  100.56250   0.137%             |XXXXXXXXXXXXXX
Jan 2026  0.625%  102.37500   0.213%             |XXXXXXXXXXXXXXXXXXXXX
Jan 2027  0.375%  101.68750   0.128%             |XXXXXXXXXXXXX
Jan 2028  0.500%  102.90625   0.127%             |XXXXXXXXXXXXX
Jan 2029  0.875%  107.40625   0.037%             |XXXX
Jan 2030  0.125%  102.21875  (0.099%)  XXXXXXXXXX|
Apr 2032  3.375%  140.81250   0.000%             |
Feb 2040  2.125%  137.50000   0.204%             |XXXXXXXXXXXXXXXXXXXX
Feb 2041  2.125%  136.21875   0.332%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2042  0.750%  107.00000   0.415%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2043  0.625%  105.87500   0.358%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2044  1.375%  123.68750   0.343%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2045  0.750%  110.62500   0.307%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2046  1.000%  117.40625   0.302%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2047  0.875%  114.87500   0.300%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2048  1.000%  119.15625   0.286%             |XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2049  1.000%  120.53125   0.262%             |XXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2050  0.250%  101.93750   0.184%             |XXXXXXXXXXXXXXXXXX
I presume the inversion from Jan 2022 to Jan 2030 is due to low inflation expectations short term. The market tends to make TIPS real yields equal Treasury nominal yields after expected inflation is taken into account. For example, the 2.5% coupon Jan 15 2022 nominal Treasury Note yielded 0.539% at the close today (see this WSJ web page). Comparing this to the 0.479% TIPS yield for the issue maturing on the same date, I conclude the market expects only about a 0.1% annual increase in the CPI between now and then.

I don't know what causes the slight inversion from Feb 2042 to Feb 2050.

Note the interesting anomaly of the April 2032 issue yielding exactly 0%. This means that the sum of the coupon payments (12 X 3.375 = 41) plus the 100 principal redemption at maturity exactly equals todays price of 141.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by 209south » Fri Mar 13, 2020 4:02 am

I don't know what causes the slight inversion from Feb 2042 to Feb 2050.

This certainly caught my eye. I rebalanced out of some of my TIPs a few days ago and might come back in this morning - if I do I hope that inefficiency will still be there!

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by #Cruncher » Fri Mar 13, 2020 4:26 pm

209south wrote:
Fri Mar 13, 2020 4:02 am
#Cruncher wrote:
Thu Mar 12, 2020 5:02 pm
I don't know what causes the slight inversion from Feb 2042 to Feb 2050.
This certainly caught my eye. I rebalanced out of some of my TIPs a few days ago and might come back in this morning - if I do I hope that inefficiency will still be there!
The inversion is now smaller. The excess yield of the Feb 2042 issue over the Feb 2050 issue fell from 0.23% points yesterday to 0.18% today.

Code: Select all

            Feb 2042  Feb 2050     Diff
            --------  --------   -------
03/12/2020    0.415%    0.184%   -0.231%
03/13/2020    0.559%    0.379%   -0.180%
             -------   -------   -------
Change       +0.144%   +0.195%   +0.051%
Here is an update of yesterday's graph with today's (3/13/2020) closing WSJ TIPS Quotes. The shape is roughly the same with yields falling from Jan 2022 to Jan 2030; rising to Feb 2042; and then falling slightly to Feb 2050. But all the yields are about 0.15% to 0.20% points higher. The Feb 2050 yield rose the most, from 0.184% to 0.379%, causing a tremendous 5+9/16 one day fall in its ask price from 101+15/16 to 95+3/8. It was only this Monday 3/9/2020 that the Feb 2050 was yielding about -0.25%! (See SimpleGift's post.)

Code: Select all

 Matures  Coupon  Ask Price    Yield   Graph
Jan 2022  0.125%   99.09375   0.623%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2023  0.125%   98.81250   0.548%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2024  0.625%  100.81250   0.407%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2025  0.250%   99.71875   0.307%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2026  0.625%  101.43750   0.374%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2027  0.375%  100.75000   0.267%   XXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2028  0.500%  101.65625   0.285%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Jan 2029  0.875%  106.12500   0.178%   XXXXXXXXXXXXXXXXXX
Jan 2030  0.125%  100.65625   0.058%   XXXXXX
Apr 2032  3.375%  138.31250   0.170%   XXXXXXXXXXXXXXXXX
Feb 2040  2.125%  134.34375   0.340%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2041  2.125%  132.84375   0.474%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2042  0.750%  103.93750   0.559%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2043  0.625%  102.81250   0.494%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2044  1.375%  120.34375   0.475%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2045  0.750%  107.18750   0.444%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2046  1.000%  113.53125   0.447%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2047  0.875%  110.93750   0.444%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2048  1.000%  114.62500   0.443%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2049  1.000%  115.90625   0.416%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Feb 2050  0.250%   96.37500   0.379%   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Breakeven inflation rates are quite low now. Here they are for four of the above TIPS versus today's yields of four nominal issues maturing on about the same date:.

Code: Select all

    Nominal Treasury         BE Infl               TIPS
-------------------------     Inflat    -------------------------
 Matures   Coupon   Yield      Rate      Yield   Matures   Coupon
---------  ------  ------    -------    ------  ---------  ------
1/15/2022  2.500%  0.548%    -0.075%    0.623%  1/15/2022  0.125%
2/15/2030  1.500%  0.952%    +0.894%    0.058%  1/15/2030  0.125%
2/15/2040  4.625%  1.255%    +0.915%    0.340%  2/15/2040  2.125%
2/15/2050  2.000%  1.551%    +1.172%    0.379%  2/15/2050  0.250%

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by FIREchief » Fri Mar 13, 2020 5:21 pm

Those breakeven inflation rates are very interesting, especially considering that the last CPI-U data I checked showed a 12 month increase of 2.5%.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Fri Mar 13, 2020 5:22 pm

#Cruncher wrote:
Fri Mar 13, 2020 4:26 pm
It was only this Monday 3/9/2020 that the Feb 2050 was yielding about -0.25%!
Yes, in just five trading days since Monday, the TIPS yield curve has gone from entirely negative yields across all maturities (in purple below), to positive yields all across the board today (in green, using your data). The curve is still inverted on the shorter end (up to 10-years), then a modest inversion beyond the 20-year, as you described.
  • Image
Perhaps the flight-to-quality in Treasuries was overdone on Monday, and the bond market has spent this week repricing the risk of unexpected inflation in a more sober manner, causing TIPS yields to bounce back — but now with inversions and a MUCH flatter yield curve than just two weeks ago? Just my amateur speculation.
Last edited by SimpleGift on Fri Mar 13, 2020 5:25 pm, edited 1 time in total.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Noobvestor » Fri Mar 13, 2020 5:25 pm

Thanks, SimpleGift and #Cruncher - I've been sort of half-tracking this on the Treasury Real Yield site, but these graphics and thoughts are great!
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by bberris » Sat Mar 14, 2020 8:10 am

Long term tips prices have indeed crashed this week. I agree that the (perceived) risk of inflation is lower now. Looking at TIPS as an ordinary treasury bond overlaid with an inflation futures bet, this makes sense.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by #Cruncher » Tue Mar 17, 2020 8:22 pm

#Cruncher wrote:
Fri Mar 13, 2020 4:26 pm
Breakeven inflation rates [as of Friday 3/13/2020] are quite low now. Here they are for four of the above TIPS versus today's yields of four nominal issues maturing on about the same date ...
I've refined, expanded, and updated the breakeven calculation to cover 21 TIPS maturing from Jan 2021 to Feb 2050 using today's (Tuesday 3/17/2020) WSJ TIPS and nominal Treasury quotes. They range from -2.4% for the Jan 2021 TIPS maturing in about ten months, to 0% for the Jan 2025 five years from now, to +0.6% for the Jan 2030 in ten years [1], to +0.8% for the Feb 2040 in 20 years, to +1.0% for the Feb 2050 maturing 30 years from now.

Code: Select all

               Date        CPI
Settlement  03/18/2020  257.52074
Last known  05/01/2020  258.67800 (0.120 years)

----------- TIPS ---------    --------- Nominal --------                   BrkEven
 Matures    Coupon   Yield      Matures   Coupon   Yield   Years    CPI     Inflat

Code: Select all

01/15/2021  1.125%  2.005%    01/15/2021  2.000%  0.446%   0.830  254.251  (2.40%) <== [2]
01/15/2022  0.125%  1.104%    01/15/2022  2.500%  0.517%   1.829  254.793  (0.88%)
01/15/2023  0.125%  0.919%    01/15/2023  1.500%  0.587%   2.828  255.132  (0.51%)
01/15/2024  0.625%  0.708%    12/31/2023  2.625%  0.657%   3.828  257.022  (0.17%)
01/15/2025  0.250%  0.587%    12/31/2024  2.250%  0.699%   4.830  258.909   0.02% 
01/15/2026  0.625%  0.665%    12/31/2025  2.625%  0.833%   5.829  260.036   0.09% 
01/15/2027  0.375%  0.576%    12/31/2026  1.750%  0.873%   6.828  262.758   0.23% 
01/15/2028  0.500%  0.605%    11/15/2027  6.125%  0.884%   7.828  263.164   0.22% 
01/15/2029  0.875%  0.473%    11/15/2028  5.250%  0.948%   8.830  268.472   0.43% 
01/15/2030  0.125%  0.332%    11/15/2029  1.750%  0.973%   9.829  274.155   0.60%  <==
02/15/2040  2.125%  0.545%    02/15/2040  4.625%  1.347%  19.912  301.660   0.78%  <==
02/15/2041  2.125%  0.678%    02/15/2041  4.750%  1.395%  20.914  298.724   0.69% 
02/15/2042  0.750%  0.752%    02/15/2042  3.125%  1.465%  21.914  300.556   0.69% 
02/15/2043  0.625%  0.689%    02/15/2043  3.125%  1.498%  22.913  309.347   0.79% 
02/15/2044  1.375%  0.666%    02/15/2044  3.625%  1.523%  23.912  315.391   0.84% 
02/15/2045  0.750%  0.629%    02/15/2045  2.500%  1.569%  24.914  324.651   0.92% 
02/15/2046  1.000%  0.633%    02/15/2046  2.500%  1.602%  25.914  330.112   0.95% 
02/15/2047  0.875%  0.629%    02/15/2047  3.000%  1.572%  26.913  331.004   0.92% 
02/15/2048  1.000%  0.633%    02/15/2048  3.000%  1.600%  27.912  336.310   0.95% 
02/15/2049  1.000%  0.598%    02/15/2049  3.000%  1.602%  28.914  343.177   0.99% 
02/15/2050  0.250%  0.562%    02/15/2050  2.000%  1.581%  29.914  348.171   1.00%  <===
From the above figures we can back into the implicit breakeven inflation rates for specific periods. For the two years Jan 2021 to Jan 2023 the CPI can only increase about 0.2% annually to produce the breakeven inflation rates for the corresponding TIPS. For the seventeen years from 1/15/2023 to 2/15/2040 it can only increase at an annual rate of about 1.0%.

Code: Select all

  Matures    Years    CPI    Inflat
01/15/2021   0.709  254.251  (2.40%)
01/15/2023   1.999  255.132   0.17%  = (255.132 / 254.251) ^ (1 / 1.999) - 1
01/15/2030   7.001  274.155   1.03% 
02/15/2040  10.084  301.660   0.95% 
02/15/2050  10.001  348.171   1.44% 
  1. The 0.125% January 2030 TIPS is being re-auctioned this Thursday.
  2. Calculation notes with example for the 1/15/2021 maturity:
    • For simplicity I assume both the TIPS and the regular Treasury bonds are zero-coupon bonds with an annual growth rate equal to their yields.
    • My calculation uses the "Reference CPI" both on the settlement date (the business day after the trade date) and on 5/1/2020 which equals the latest Not seasonally adjusted CPI released by the BLS for February 2020.
    • First step is to calculate the Reference CPI at maturity that would give each TIPS the same nominal yield as the regular Treasury maturing on or about the same date. The Ref CPI on the 3/18/2020 settlement date is 257.52074 (from this webpage). Here's the calculation for the 1/15/2021 maturity where 0.830 is the fraction of a year from 3/18/2020 to 1/15/2021:
      254.251 = 257.52074 * ((1 + 0.00446) / (1 + 0.02005)) ^ 0.830
    • The Ref CPI for 5/1/2020 is 258.678 (also from this webpage). Over the 0.709 fraction of a year from 5/1/2020 to 1/15/2021 here is how we determine the annual rate of change needed to make the Ref CPI equal 254.294 on 1/15/2021. This is what I'm defining as the breakeven inflation rate.
      -2.40% = (254.251 / 258.678) ^ (1 / 0.709) - 1
    • For simplicity I'm making no adjustment for seasonal effects in the monthly CPI values used to index TIPS.
Edited to remove duplicate rows in first table.
Last edited by #Cruncher on Tue Mar 17, 2020 9:28 pm, edited 1 time in total.

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SimpleGift
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Tue Mar 17, 2020 8:51 pm

#Cruncher wrote:
Tue Mar 17, 2020 8:22 pm
I've refined, expanded, and updated the breakeven calculation to cover 21 TIPS maturing from Jan 2021 to Feb 2050 using today's (Tuesday 3/17/2020) WSJ TIPS and nominal Treasury quotes.
And here's a chart of #Cruncher's excellent work:
  • Image
Essentially, the bond market is expecting deflation over the next four years — gradually decreasing out to 2024 — then inflation rates under 1.0% for the next 26 years. Remarkable changes in inflation expectations in just one month!

Thesaints
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Thesaints » Tue Mar 17, 2020 9:02 pm

Doesn't it reinforces the concept that it is not possible to forecast inflation (and currency exchange rates) with any degree of accuracy ?
We can insure against those, but never tell what they will be in advance.
Current breakeven inflation is simply telling that, if you want to insure yourself against future inflation it currently doesn't cost that much.

Angst
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Tue Mar 17, 2020 9:25 pm

SimpleGift wrote:
Tue Mar 17, 2020 8:51 pm
#Cruncher wrote:
Tue Mar 17, 2020 8:22 pm
I've refined, expanded, and updated the breakeven calculation to cover 21 TIPS maturing from Jan 2021 to Feb 2050 using today's (Tuesday 3/17/2020) WSJ TIPS and nominal Treasury quotes.
And here's a chart of #Cruncher's excellent work:
  • Image
Essentially, the bond market is expecting deflation over the next four years — gradually decreasing out to 2024 — then inflation rates under 1.0% for the next 26 years. Remarkable changes in inflation expectations in just one month!
Thank you SimpleGift and #Cruncher. What a combination of resources we have in you! I have to like the apparent odds on TIPS these days, not that I would try timing the market. :twisted: I'm a long term, LMP kind of investor, of course, but I just think the expectations are awfully depressed. I think it's human nature to overshoot these things... stock market crashes, depression, pandemics. Of course, I could be wrong.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by marky2kk » Tue Mar 17, 2020 10:52 pm

Do note that TIPs have been experiencing some heavy liquidity issues which may distort yields. Even in normal times they are less liquid than treasuries (the Fed has a note on that). In other words, in times when BND trades at a 5% discount it seems hard to imagine that TIPs yields do not contain a sizable liquidity premium.

You may want to back out the break inflation rates from inflation swaps and see whether they materially differ. I do believe though that any term structure model would attribute the sizable decline in yields recently to a drop in expected inflation.. but not sure about the magnitude.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by watchnerd » Wed Mar 18, 2020 12:07 am

FWIW:

Yesterday my LTT AA exceeded their absolute rebalance band of 5%.

Sold back down to 15% (from 20%), split the proceeds between global equities and short TIPS.

New FI contributions will be going into short TIPS & cash.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Dudley » Wed Mar 18, 2020 8:44 am

At what yield/term are fellow TIPS fans tempted to start buying ?

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by watchnerd » Wed Mar 18, 2020 9:39 am

Dudley wrote:
Wed Mar 18, 2020 8:44 am
At what yield/term are fellow TIPS fans tempted to start buying ?
For short TIPS, I don't have any hesitation for anything better than -0.25%.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Angst
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Wed Mar 18, 2020 10:52 am

watchnerd wrote:
Wed Mar 18, 2020 9:39 am
Dudley wrote:
Wed Mar 18, 2020 8:44 am
At what yield/term are fellow TIPS fans tempted to start buying ?
For short TIPS, I don't have any hesitation for anything better than -0.25%.
Regardless of duration, anyone in the secondary market for TIPS will want to pay close attention to bid/ask spreads which are much worse than for nominal Treasury bills, notes and bonds. Liquidity is a big issue.

Looking about an hour ago, some of the shortest TIPS had spreads in the .2 to .5% range, but many were higher, definitely rising above 1%. I noted the Apr 2023 at 3.7%, but looking out at 10 years and up to 30, bid/ask spreads were almost all over 5%, a few over 6%. That's nothing like the 20% spread I found on the Feb 2049 TIPS yesterday, but it's still really big. I would never try to buy TIPS as such.

Note there is a TIPS auction tomorrow, a re-opening of the Jan 2030 and of course you won't pay any spread at all for it. For those interested, its indicative yield was about 0.45% the last time I looked. I believe that is a very good yield for a 10 yr TIPS and I will be buying. However, I will wait until tonight after markets have closed to place my order. The world is a bit crazy these days and all things equal, waiting seems prudent. :)

I do know watchnerd doesn't have to worry about spreads, you're in VTAPX, right?

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by jeffyscott » Wed Mar 18, 2020 10:57 am

watchnerd wrote:
Wed Mar 18, 2020 9:39 am
Dudley wrote:
Wed Mar 18, 2020 8:44 am
At what yield/term are fellow TIPS fans tempted to start buying ?
For short TIPS, I don't have any hesitation for anything better than -0.25%.
Well, we are a long way from that. The ones maturing in 2-3 years are around 0.8 to 1.1% and almost all maturities are above 0.5%, based on WSJ quotes page: https://www.wsj.com/market-data/bonds/tips

Not sure how to account for the, at least short term, probable deflation, though?
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by grayfox » Wed Mar 18, 2020 1:16 pm

Wednesday 20200318 14:15 EDT VG shows

Code: Select all

MATURITY	COUPON	BID	ASKED	YTM-BID	YTM-ASK
01/15/2030	0.125	90.734	96.968	1.124	0.441
The auction of 1/15/2030 TIPS is showing Indicative Yield = 0.545. The auction cut-off is 3/19/2020 9:30am ET

Does anyone think there is a risk of high inflation at this time? If so, this might be a good time to buy inflation bonds.
Sic transit gloria mundi. [STGM]

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by jeffyscott » Wed Mar 18, 2020 1:31 pm

grayfox wrote:
Wed Mar 18, 2020 1:16 pm
Wednesday 20200318 14:15 EDT VG shows

Code: Select all

MATURITY	COUPON	BID	ASKED	YTM-BID	YTM-ASK
01/15/2030	0.125	90.734	96.968	1.124	0.441
BTW, the auction cut-off is 3/19/2020 9:30am ET

Does anyone think there is a risk of high inflation at this time? If so, this might be a good time to buy inflation bonds.
Bid/ask spread is over $6, or nearly 7%. :shock:

I think that is the one that can be bought at tomorrow's auction. I'm not sure how that works at brokerage as far when you must submit your order and when you must have the funds to cover it.

I'm starting to dribble into TIPS, bought a couple short-term ones and going to add to TIPS index fund as cash becomes available from a couple maturing CDs and TIPS over the next month, assuming yield remains favorable. Transitioning to using the fund, since YTMs seem pretty good across the board.

But it seems the bigger risk is deflation (along with illness and death) right now. I am already inoculated from deflation risk by a pension that can not be reduced, though.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by GettingCloser » Wed Mar 18, 2020 3:17 pm

Of all the outstanding TIPS bonds that have been issued, what percentage are held by the various TIPS funds and ETFs?
Of all the daily volume of TIPS traded on the secondary market, what percentage is done by the various TIPS funds and ETFs?

I have a suspicion that TIPS bond prices on the secondary market are driven primarily by TIP, SCHP, VTIP et al. When investors perceive an increased risk of inflation, they buy more shares of those funds, which 1) causes the prices of those funds to rise due to supply and demand, and 2) forces the managers of those funds to buy additional TIPS bonds to cover the inflows, which in turn raises the prices of those bonds on the secondary market.

The opposite would be true when investors perceive a decreased risk of inflation, as is currently the case. It should not be surprising that the share prices of VTIP et al have dipped in recent weeks, with corresponding dips in TIPS bond prices on the secondary market. Any yield curve inversions we're seeing may have more to do with the overall mix of duration profiles of the TIPS funds/ETFs that are experiencing outflows, than any sort of rational decisions by "the market".

I would submit that the share prices of VTIP et al are driven more by the public's changing attitudes towards the need for inflation protection, than they are by the characteristics of the underlying bonds that they hold.

In any event, now's not a bad time to be a buyer of TIPS bonds to be held to maturity ;-)

- GettingCloser

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Wed Mar 18, 2020 4:15 pm

GettingCloser wrote:
Wed Mar 18, 2020 3:17 pm
In any event, now's not a bad time to be a buyer of TIPS bonds to be held to maturity ;-)

- GettingCloser
Yes and no. Yes, b/c real rates have risen significantly over the last 9 days and therefor the price of TIPS has dropped. No, b/c the spreads in the secondary markets are huge. There's a liquidity problem going on now with TIPS. However, there's a re-opening of the Jan 2030 TIPS which will auction tomorrow morning, and you pay no fee, no spread, and you get the high yield. But get your order in to Vanguard before 9:00am ET tomorrow: viewtopic.php?f=10&t=308260

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by grok87 » Sat Mar 28, 2020 12:55 pm

garlandwhizzer wrote:
Mon Mar 09, 2020 9:53 pm
I'm not sure what it means and I sometimes the markets make little or no sense to me but I think it may mean:

1) Most believe the risk of long term unexpected inflation is exceptionally low. The dominant economic concern at present is in the other direction: recession/xero or negative rates/even possible deflation with the oil price decline.

2) A lot of investment dollars are moving from risk assets due to the current scare into the safest of all assets, LMP TIPS ladders stretching out into long duration (Grok87's goal). So much money now chases after so few quality assets that it distorts yields in Treasuries and TIPS greatly. When fear/uncertainty/risk-off behavior dominates like now, the longer the duration of these risk-free assets the better. Guaranteed safety of principal in real terms over longer duration may be viewed by the market as more valuable when fear is in the air than shorter term security. After all if unexpected inflation does occur at some point in the future, investors will rush into TIPS, prices will be bid up and hence their yields will fall, probably lower than today's yields. There are a lot of investors with long time horizons, huge amounts of money to invest, and very low risk tolerance who want guaranteed real purchasing power over a long time frame regardless of what happens until then including the thing which no one expects now, inflation. I might add that at current rates 10 year Treasuries and 30 year Treasuries are also likely to yield less than the cumulative inflation rate over their entire durations going forward. Never in history has the bond market been this distorted and offered such laughable yields IMO. On the other hand, bonds are still the only really safe port in severe equity storms and are IMO a portfolio must for most of us.

Garland Whizzer
since march 9th 30 year tips have been on a wild ride
from -0.20% on march 9th to +0.78% on march 19th to -0.11% yesterday evening (march 27th).
in price terms, given the real duration of about 25, those 100 bps moves are about 25% price moves, down and up.

since i view my long term tips as pat of my liability matching portfolio, i did not rebalance but let them ride. if one sold and bought those price moves perfectly that would have been a nice gain.
RIP Mr. Bogle.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Sat Mar 28, 2020 1:39 pm

grok87 wrote:
Sat Mar 28, 2020 12:55 pm
since march 9th 30 year tips have been on a wild ride
from -0.20% on march 9th to +0.78% on march 19th to -0.11% yesterday evening (march 27th).
in price terms, given the real duration of about 25, those 100 bps moves are about 25% price moves, down and up.
Yes, it was quite a dramatic price swing all across the real yield curve. From March 9 (in blue, chart below) when the entire TIPS curve was negative, yields jumped up sharply into positive territory around March 19 (in green), and have now all slumped back down into negative territory again (in orange) — just about where they were 18 days ago!
All I can think of is there was massive panic selling of TIPS around the March 19 period, which has now subsided?

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by grok87 » Sat Mar 28, 2020 1:49 pm

SimpleGift wrote:
Sat Mar 28, 2020 1:39 pm
grok87 wrote:
Sat Mar 28, 2020 12:55 pm
since march 9th 30 year tips have been on a wild ride
from -0.20% on march 9th to +0.78% on march 19th to -0.11% yesterday evening (march 27th).
in price terms, given the real duration of about 25, those 100 bps moves are about 25% price moves, down and up.
Yes, it was quite a dramatic price swing all across the real yield curve. From March 9 (in blue, chart below) when the entire TIPS curve was negative, yields jumped up sharply into positive territory around March 19 (in green), and have now all slumped back down into negative territory again (in orange) — just about where they were 18 days ago!
All I can think of is there was massive panic selling of TIPS around the March 19 period, which has now subsided?
my guess is the fed unlimited quantitative easing is what brought the yields back down
RIP Mr. Bogle.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Sat Mar 28, 2020 2:17 pm

grok87 wrote:
Sat Mar 28, 2020 1:49 pm
since march 9th 30 year tips have been on a wild ride
from -0.20% on march 9th to +0.78% on march 19th to -0.11% yesterday evening (march 27th).
in price terms, given the real duration of about 25, those 100 bps moves are about 25% price moves, down and up.
grok, I really wanted to buy the Feb 2050 TIPS in the secondary market back on the 19th but couldn't bring myself to do it with the bid/ask price spread at something like 7%. That seemed so absurd, I couldn't bring myself to pay the ask and I just waited, and then rates plummeted.
:oops:

Did you buy at all in the secondary market then?

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by grok87 » Sat Mar 28, 2020 3:03 pm

Angst wrote:
Sat Mar 28, 2020 2:17 pm
grok87 wrote:
Sat Mar 28, 2020 1:49 pm
since march 9th 30 year tips have been on a wild ride
from -0.20% on march 9th to +0.78% on march 19th to -0.11% yesterday evening (march 27th).
in price terms, given the real duration of about 25, those 100 bps moves are about 25% price moves, down and up.
grok, I really wanted to buy the Feb 2050 TIPS in the secondary market back on the 19th but couldn't bring myself to do it with the bid/ask price spread at something like 7%. That seemed so absurd, I couldn't bring myself to pay the ask and I just waited, and then rates plummeted.
:oops:

Did you buy at all in the secondary market then?
Hi Angst,
no, as per my post above i just let my tips ride through this period- didn't buy or sell.
thanks for the info on what the spreads were back then. given that, i wonder if, in retrospect, buying LTPZ (pimco fund) would have been easier to execute.
RIP Mr. Bogle.

Angst
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Sat Mar 28, 2020 3:30 pm

As I recall, LTPZ did have a large spread. Then again, many other bond funds did too.

grok87
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by grok87 » Sat Mar 28, 2020 4:43 pm

Angst wrote:
Sat Mar 28, 2020 3:30 pm
As I recall, LTPZ did have a large spread. Then again, many other bond funds did too.
right but it was also trading at a large discount to NAV
RIP Mr. Bogle.

Angst
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Angst » Sat Mar 28, 2020 6:51 pm

grok87 wrote:
Sat Mar 28, 2020 4:43 pm
Angst wrote:
Sat Mar 28, 2020 3:30 pm
As I recall, LTPZ did have a large spread. Then again, many other bond funds did too.
right but it was also trading at a large discount to NAV
Oh yes, indeed. That's right! My mind is so stuck on secondary market TIPS spreads, not funds.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Hector » Sun Mar 29, 2020 3:25 pm

Angst wrote:
Sat Mar 28, 2020 2:17 pm
grok87 wrote:
Sat Mar 28, 2020 1:49 pm
since march 9th 30 year tips have been on a wild ride
from -0.20% on march 9th to +0.78% on march 19th to -0.11% yesterday evening (march 27th).
in price terms, given the real duration of about 25, those 100 bps moves are about 25% price moves, down and up.
grok, I really wanted to buy the Feb 2050 TIPS in the secondary market back on the 19th but couldn't bring myself to do it with the bid/ask price spread at something like 7%. That seemed so absurd, I couldn't bring myself to pay the ask and I just waited, and then rates plummeted.
:oops:

Did you buy at all in the secondary market then?
7% spread is insane! Maybe even with this kind of spread, it might be beneficial to pull the trigger since we are going to see something like this for a handful of days only in times like this.

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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by #Cruncher » Sat Apr 18, 2020 3:00 pm

I've updated the breakeven calculation in this post [*] from Tuesday 3/17/2020 to Friday 4/17/2020 to cover 21 TIPS maturing from Jan 2021 to Feb 2050 using Friday's WSJ TIPS and nominal Treasury quotes. They range from -2.1% for the Jan 2021 TIPS maturing in about nine months, to +0.6% for the Jan 2025 five years from now, to +1.0% for the Jan 2030 in ten years, to +1.2% for the Feb 2040 in 20 years, to +1.4% for the Feb 2050 maturing 30 years from now.

Code: Select all

               Date        CPI
Settlement  04/20/2020  258.41877
Last known  06/01/2020  258.11500 (0.115 years)
----------- TIPS ---------    --------- Nominal --------                   BrkEven
 Matures    Coupon   Yield      Matures   Coupon   Yield   Years    CPI     Inflat

Code: Select all

01/15/2021  1.125%  2.048%    01/15/2021  2.000%  0.089%   0.739  254.742  (2.08%) <==
01/15/2022  0.125%  0.619%    01/15/2022  2.500%  0.196%   1.739  256.533  (0.38%)
01/15/2023  0.125%  0.248%    01/15/2023  1.500%  0.242%   2.738  258.376   0.04% 
01/15/2024  0.625% (0.033%)   12/31/2023  2.625%  0.289%   3.737  261.543   0.36% 
01/15/2025  0.250% (0.177%)   12/31/2024  2.250%  0.346%   4.739  264.898   0.56%  <==
01/15/2026  0.625% (0.218%)   12/31/2025  2.625%  0.446%   5.739  268.444   0.70% 
01/15/2027  0.375% (0.244%)   12/31/2026  1.750%  0.509%   6.738  271.850   0.79% 
01/15/2028  0.500% (0.248%)   11/15/2027  6.125%  0.511%   7.737  274.028   0.79% 
01/15/2029  0.875% (0.313%)   11/15/2028  5.250%  0.571%   8.739  279.147   0.91% 
01/15/2030  0.125% (0.353%)   11/15/2029  1.750%  0.635%   9.739  284.480   1.02%  <==
02/15/2040  2.125% (0.099%)   02/15/2040  4.625%  1.075%  19.822  325.761   1.19%  <==
02/15/2041  2.125% (0.051%)   02/15/2041  4.750%  1.110%  20.824  328.678   1.17% 
02/15/2042  0.750% (0.028%)   02/15/2042  3.125%  1.166%  21.823  334.850   1.21% 
02/15/2043  0.625% (0.035%)   02/15/2043  3.125%  1.214%  22.823  343.082   1.26% 
02/15/2044  1.375% (0.056%)   02/15/2044  3.625%  1.222%  23.822  349.767   1.29% 
02/15/2045  0.750% (0.063%)   02/15/2045  2.500%  1.254%  24.824  357.660   1.33% 
02/15/2046  1.000% (0.064%)   02/15/2046  2.500%  1.265%  25.823  363.482   1.34% 
02/15/2047  0.875% (0.074%)   02/15/2047  3.000%  1.245%  26.823  367.351   1.33% 
02/15/2048  1.000% (0.072%)   02/15/2048  3.000%  1.268%  27.822  374.348   1.35% 
02/15/2049  1.000% (0.086%)   02/15/2049  3.000%  1.257%  28.824  379.723   1.35% 
02/15/2050  0.250% (0.083%)   02/15/2050  2.000%  1.274%  29.823  386.409   1.37%  <===
From the above figures we can back into the implicit breakeven inflation rates for specific periods. For the two years Jan 2021 to Jan 2023 the CPI can only increase about 0.7% annually to produce the breakeven inflation rates for the corresponding TIPS. For the seventeen years from 1/15/2023 to 2/15/2040 it can only increase at an annual rate of about 1.4%. And for the ten years from 2/15/2040 to 2/15/2050 it can only increase 1.7% annually.

Code: Select all

  Matures    Years    CPI    Inflat
01/15/2021   0.624  254.742  (2.08%)
01/15/2023   1.999  258.376   0.71%  = (258.376 / 254.742) ^ (1 / 1.999) - 1
01/15/2030   7.001  284.480   1.38% 
02/15/2040  10.084  325.761   1.35% 
02/15/2050  10.001  386.409   1.72%
To save SimpleGift the need to build a graph, I've done it myself. :wink: Breakeven inflation rates (BEI) are still low, but not nearly so low as they were a month ago. (To improve the scale of the graph, I've omitted the BEI for the Jan 2021 maturity which is included in the table above -- -2.08% 4/17 vs -2.40% 3/17.)
Image

And here is a graph of the yields, which are much lower than they were a month ago. Part of this is because of the higher BEI, but part is because yields on nominal Treasuries have themselves fallen. E.g., the 2/15/2050 bond yielded 1.6% on March 17, but only 1.3% this past Friday. That 0.3% point decrease coupled with a 0.4% point increase in the BEI from 1.0% 3/17 to 1.4% 4/17 accounts for the 0.7% decrease in the yield from +0.6% to -0.1%.
Image

* See footnote 2 from that post for the calculation method.

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SimpleGift
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by SimpleGift » Sat Apr 18, 2020 3:15 pm

#Cruncher wrote:
Sat Apr 18, 2020 3:00 pm
To save SimpleGift the need to build a graph, I've done it myself. :wink: Breakeven inflation rates (BEI) are still low, but not nearly so low as they were a month ago.
Appreciate your excellent work on this, #Cruncher (plus the snazzy new charts!). It'll be interesting to see how long-term inflation expectations evolve during this crisis, in response to the various fiscal and monetary measures, current and future. My sense is inflation expectations will continue to stay low throughout.

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