U.S. Treasury Inflation Protected Securities (TIPS) ETF

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Aw0k3n
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U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Aw0k3n »

I am intrigued by TIPS securities. I used portfoliovisualizer to compare performance of the different common TIPS ETFshttps://www.portfoliovisualizer.com/bac ... ion3_3=100. The data was limited to a look back starting 2013 to current.

Initial balance (10K)
name//Final Balance// CAGR //Stdev //Best Year //Worst Year //Inf adj
VTIP// $10,478// 0.65%// 1.77%// 4.86%// -1.53%// $9,300//
TIP// $10,853// 1.14%// 4.35%// 8.35%// -8.49%// $9,633//
SCHP// $10,909// 1.21%// 4.34%// 8.52%// -8.90%// $9,683//
STIP// $10,502// 0.68%// 1.65%// 4.89%// -1.75%// $9,322//


Looking at the performance of a TIPS only portfolio VTIP, TIP, SCHP and STIP (as benchmark) all have seemingly positive returns with a CAGR ranging from 0.65 to 1.21% from 2013 to 2020. When adjusted for inflation (check box under graph), the funds are losing their value (last column in table above)!

According to this site (cannot verify if accurate but seems so) https://www.in2013dollars.com/us/inflat ... 3?amount=1, The U.S. dollar experienced an average inflation rate of 1.48% per year during this period, meaning the real value of a dollar decreased and their chart (title: buying power of 1$ over time 2013 to 2020) shows a reduced buying power of dollar from 1 to 0.89.

so shouldn't these funds have kept their value? or are we seeing the effect fees causing attrition of capital? or something else - such as effect of falling interest rates?

could someone clarify this? Also I read elsewhere and here that short term TIPS are good for unexpected inflation while long term tips for expected inflation,so does this make holding the former (short tips) a better proposition?

thank you in advance.

abbreviations and other details:
VTIP: Vanguard Short-Term Inflation-Protected Securities ETF (fee: 0.05%), Benchmark: Bloomberg Barclays U.S. TIPS 0-5 Years Index
TIP: iShares TIPS Bond ETF(fee: 0.19%) Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index
SCHP: Schwab U.S. TIPS ETF (fee: 0.05%) Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index
STIP: iShares 0-5 Year TIPS Bond ETF (fee:0.06%)Bloomberg Barclays U.S. TIPS 0-5 Years Index
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Dude2 »

I'm sorry, but you aren't going to get much love on the forum because there is a TIPS thread almost daily nowadays. My advice is to use the search box and read the 100s of other posts that discuss all of these things in great detail, or you can Google it.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by jeffyscott »

TIPS are not guaranteed to have a positive real return. Based on the treasury yield curve all of them are currently offering negative real returns: https://www.treasury.gov/resource-cente ... =realyield

And based on WSJ quotes all of them with maturities longer than about 3 years have negative real yields at current (Friday's) prices: https://www.wsj.com/market-data/bonds/tips
Strange things can happen with very short term ones, so the positive real yields in the quotes may be due to known deflation that has yet to be accounted for in the accrued principle (and maybe additional expected deflation), seasonality of inflation, and yields on nominal T-bills and other Treasurys.

There were also negative real yields in years past, including 2013, as can be seen at the treasury yield curve site.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by vineviz »

Aw0k3n wrote: Sat Apr 18, 2020 12:02 am so shouldn't these funds have kept their value? or are we seeing the effect fees causing attrition of capital? or something else - such as effect of falling interest rates?
It's something else. Really, just a natural consequence of managing a portfolio of bonds that are continuously being sold and purchased.

Because a TIPS mutual fund has its holdings marked to market every day, and maintains a fixed duration (rather than that fixed maturity date), it's not possible for at TIPS fund to maintain 100% complete protection against contemporaneously measured inflation. But it will provide very good protection against inflation over longer periods of time.

If you need perfect protection from inflation, buying individual TIPS is the best solution. But a TIPS fund, held over a long period of time, with dividends reinvested, will very closely keep its real inflation-adjusted value: more than close enough for most investors.
Aw0k3n wrote: Sat Apr 18, 2020 12:02 amcould someone clarify this? Also I read elsewhere and here that short term TIPS are good for unexpected inflation while long term tips for expected inflation,so does this make holding the former (short tips) a better proposition?
All TIPS provide protection from both expected and unexpected inflation. Short-term TIPS are best for money you will spend in the next five years. Long-term TIPS are best for money you will spend in 10+ years. Intermediate-term TIPS are good for the middle years or as a "good-enough" single solution for many investors.
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Aw0k3n
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Aw0k3n »

jeffyscott wrote: Sat Apr 18, 2020 7:00 am TIPS are not guaranteed to have a positive real return. Based on the treasury yield curve all of them are currently offering negative real returns: https://www.treasury.gov/resource-cente ... =realyield

And based on WSJ quotes all of them with maturities longer than about 3 years have negative real yields at current (Friday's) prices: https://www.wsj.com/market-data/bonds/tips
Strange things can happen with very short term ones, so the positive real yields in the quotes may be due to known deflation that has yet to be accounted for in the accrued principle (and maybe additional expected deflation), seasonality of inflation, and yields on nominal T-bills and other Treasurys.

There were also negative real yields in years past, including 2013, as can be seen at the treasury yield curve site.
Thank you for the excellent treasury.gov link. Appreciate the additional information.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Aw0k3n »

vineviz wrote: Sat Apr 18, 2020 7:44 am
Aw0k3n wrote: Sat Apr 18, 2020 12:02 am so shouldn't these funds have kept their value? or are we seeing the effect fees causing attrition of capital? or something else - such as effect of falling interest rates?
It's something else. Really, just a natural consequence of managing a portfolio of bonds that are continuously being sold and purchased.

Because a TIPS mutual fund has its holdings marked to market every day, and maintains a fixed duration (rather than that fixed maturity date), it's not possible for at TIPS fund to maintain 100% complete protection against contemporaneously measured inflation. But it will provide very good protection against inflation over longer periods of time.

If you need perfect protection from inflation, buying individual TIPS is the best solution. But a TIPS fund, held over a long period of time, with dividends reinvested, will very closely keep its real inflation-adjusted value: more than close enough for most investors.
Aw0k3n wrote: Sat Apr 18, 2020 12:02 amcould someone clarify this? Also I read elsewhere and here that short term TIPS are good for unexpected inflation while long term tips for expected inflation,so does this make holding the former (short tips) a better proposition?
All TIPS provide protection from both expected and unexpected inflation. Short-term TIPS are best for money you will spend in the next five years. Long-term TIPS are best for money you will spend in 10+ years. Intermediate-term TIPS are good for the middle years or as a "good-enough" single solution for many investors.
Fantastic! Succinct and clear. Appreciate the detail
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by jeffyscott »

vineviz wrote: Sat Apr 18, 2020 7:44 amIf you need perfect protection from inflation, buying individual TIPS is the best solution.
7 years ago, based on Treasury real yield curve rate, a 7 year TIPS would've offered close to about -1% real. I don't know about you, but I'd not consider $10,000 becoming worth about $9300 over a 7 year period to be perfect protection from inflation. It is certainly no better than using a fund would've been, being virtually identical to or worse than the results one would've gotten from VTAPX or the short term TIPS ETFs.

VTAPX from 3/29/13 to today, $10,000 grew to $10,557 and that has a value of about $9500. Would've need to grow to about $11,100 to keep up with inflation, so value declined about 5% in real terms.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by rustymutt »

These investment instrument are merely an algorithm of US intent. They are manipulated by the math. Housing cost isn't even considered when houses are priced beyond most. That's right TIPs don't use that data. Seems the people engineering these leave out some mighty important sectors to make it in their interest.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by vineviz »

jeffyscott wrote: Sat Apr 18, 2020 8:52 am
vineviz wrote: Sat Apr 18, 2020 7:44 amIf you need perfect protection from inflation, buying individual TIPS is the best solution.
7 years ago, based on Treasury real yield curve rate, a 7 year TIPS would've offered close to about -1% real. I don't know about you, but I'd not consider $10,000 becoming worth about $9300 over a 7 year period to be perfect protection from inflation. It is certainly no better than using a fund would've been, being virtually identical to or worse than the results one would've gotten from VTAPX or the short term TIPS ETFs.

VTAPX from 3/29/13 to today, $10,000 grew to $10,557 and that has a value of about $9500. Would've need to grow to about $11,100 to keep up with inflation, so value declined about 5% in real terms.
The terminology is easy to confuse, but don't mix up a negative real yield with a lack of inflation protection.

If, in April 2013, you wanted to ensure you had $10,000 in real (aka 2013) dollars then you knew EXACTLY* how much to invest in 7-year TIPS. The negative real yield was negative, but it was known at the time of purchase.

Negative real Treasury yields have been a frequent occurrence in US history. In fact, before 1981 they were more the norm rather than the exception.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

vineviz wrote: Sat Apr 18, 2020 9:09 am
jeffyscott wrote: Sat Apr 18, 2020 8:52 am
vineviz wrote: Sat Apr 18, 2020 7:44 amIf you need perfect protection from inflation, buying individual TIPS is the best solution.
7 years ago, based on Treasury real yield curve rate, a 7 year TIPS would've offered close to about -1% real. I don't know about you, but I'd not consider $10,000 becoming worth about $9300 over a 7 year period to be perfect protection from inflation. It is certainly no better than using a fund would've been, being virtually identical to or worse than the results one would've gotten from VTAPX or the short term TIPS ETFs.

VTAPX from 3/29/13 to today, $10,000 grew to $10,557 and that has a value of about $9500. Would've need to grow to about $11,100 to keep up with inflation, so value declined about 5% in real terms.
The terminology is easy to confuse, but don't mix up a negative real yield with a lack of inflation protection.

If, in April 2013, you wanted to ensure you had $10,000 in real (aka 2013) dollars then you knew EXACTLY* how much to invest in 7-year TIPS. The negative real yield was negative, but it was known at the time of purchase.

Negative real Treasury yields have been a frequent occurrence in US history. In fact, before 1981 they were more the norm rather than the exception.
There seems to be continuous confusion regarding the significance of an investment value being continually adjusted for inflation, an investment having interest rate risk, and an investment having some real yield in particular, including negative.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by jeffyscott »

vineviz wrote: Sat Apr 18, 2020 9:09 am
jeffyscott wrote: Sat Apr 18, 2020 8:52 am
vineviz wrote: Sat Apr 18, 2020 7:44 amIf you need perfect protection from inflation, buying individual TIPS is the best solution.
7 years ago, based on Treasury real yield curve rate, a 7 year TIPS would've offered close to about -1% real. I don't know about you, but I'd not consider $10,000 becoming worth about $9300 over a 7 year period to be perfect protection from inflation. It is certainly no better than using a fund would've been, being virtually identical to or worse than the results one would've gotten from VTAPX or the short term TIPS ETFs.

VTAPX from 3/29/13 to today, $10,000 grew to $10,557 and that has a value of about $9500. Would've need to grow to about $11,100 to keep up with inflation, so value declined about 5% in real terms.
The terminology is easy to confuse, but don't mix up a negative real yield with a lack of inflation protection.

If, in April 2013, you wanted to ensure you had $10,000 in real (aka 2013) dollars then you knew EXACTLY* how much to invest in 7-year TIPS. The negative real yield was negative, but it was known at the time of purchase.

Negative real Treasury yields have been a frequent occurrence in US history. In fact, before 1981 they were more the norm rather than the exception.
Good point, I guess that I have been erroneously thinking of "inflation protection" as "inflation hedge". If at that time in 2013 you knew that you needed $10,000 inflation adjusted in 7 years, then you just needed to buy about $10,500 in TIPS that matured in 7 years. (Of course, if that was all the inflation protection that you needed/wanted, a cheaper way to get it would've been $10,000 in I-bonds.)
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Blueskies123 »

Aw0k3n wrote: Sat Apr 18, 2020 12:02 amcould someone clarify this? Also I read elsewhere and here that short term TIPS are good for unexpected inflation while long term tips for expected inflation,so does this make holding the former (short tips) a better proposition?
All TIPS provide protection from both expected and unexpected inflation. Short-term TIPS are best for money you will spend in the next five years. Long-term TIPS are best for money you will spend in 10+ years. Intermediate-term TIPS are good for the middle years or as a "good-enough" single solution for many investors.
Will you explain how TIPS provide protection from expected inflation? Or to be more precise, how TIPS provide protection from expected inflation any better than non-TIPS bonds (because expected inflation is already priced into all bonds)?
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

Blueskies123 wrote: Sat Apr 18, 2020 11:14 am
Will you explain how TIPS provide protection from expected inflation? Or to be more precise, how TIPS provide protection from expected inflation any better than non-TIPS bonds (because expected inflation is already priced into all bonds)?
This is a point of great confusions. Obviously if expected inflation is priced into nominal bonds then both kinds of bonds have no expected inflation risk. That includes that the statement that short TIPS have no inflation risk expected or unexpected is true. It is also true that to the extent nominal bonds are properly priced with respect to expected inflation that there would be no advantage regarding this risk to own TIPS. I am not sure I understand what reason one would have to own short TIPS other than that one can be certain the inflation adjustment is there.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by vineviz »

dbr wrote: Sat Apr 18, 2020 11:23 am
Blueskies123 wrote: Sat Apr 18, 2020 11:14 am
Will you explain how TIPS provide protection from expected inflation? Or to be more precise, how TIPS provide protection from expected inflation any better than non-TIPS bonds (because expected inflation is already priced into all bonds)?
This is a point of great confusions. Obviously if expected inflation is priced into nominal bonds then both kinds of bonds have no expected inflation risk.
+1

TIPS provide protection from both expected and unexpected inflation, but little/no protection from deflation.

Nominal bonds provide protection from both expected inflation and unexpected deflation, but little/no protection from unexpected inflation.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Eagle33 »

vineviz wrote: Sat Apr 18, 2020 12:11 pm
dbr wrote: Sat Apr 18, 2020 11:23 am
Blueskies123 wrote: Sat Apr 18, 2020 11:14 am
Will you explain how TIPS provide protection from expected inflation? Or to be more precise, how TIPS provide protection from expected inflation any better than non-TIPS bonds (because expected inflation is already priced into all bonds)?
This is a point of great confusions. Obviously if expected inflation is priced into nominal bonds then both kinds of bonds have no expected inflation risk.
+1

TIPS provide protection from both expected and unexpected inflation, but little/no protection from deflation.

Nominal bonds provide protection from both expected inflation and unexpected deflation, but little/no protection from unexpected inflation.
Ahh, my light bulb has gone on! Thanks for this clarifying tidbit.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Blue456 »

vineviz wrote: Sat Apr 18, 2020 12:11 pm
dbr wrote: Sat Apr 18, 2020 11:23 am
Blueskies123 wrote: Sat Apr 18, 2020 11:14 am
Will you explain how TIPS provide protection from expected inflation? Or to be more precise, how TIPS provide protection from expected inflation any better than non-TIPS bonds (because expected inflation is already priced into all bonds)?
This is a point of great confusions. Obviously if expected inflation is priced into nominal bonds then both kinds of bonds have no expected inflation risk.
+1

TIPS provide protection from both expected and unexpected inflation, but little/no protection from deflation.

Nominal bonds provide protection from both expected inflation and unexpected deflation, but little/no protection from unexpected inflation.
That is not true according to United States Treasury:
At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation.
https://www.treasurydirect.gov/indiv/re ... s_tips.htm
But this does not apply to ETFs and Mutual Funds so you are partially correct.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Dominic »

Blue456 wrote: Sat Apr 18, 2020 6:46 pm
vineviz wrote: Sat Apr 18, 2020 12:11 pm
dbr wrote: Sat Apr 18, 2020 11:23 am
Blueskies123 wrote: Sat Apr 18, 2020 11:14 am
Will you explain how TIPS provide protection from expected inflation? Or to be more precise, how TIPS provide protection from expected inflation any better than non-TIPS bonds (because expected inflation is already priced into all bonds)?
This is a point of great confusions. Obviously if expected inflation is priced into nominal bonds then both kinds of bonds have no expected inflation risk.
+1

TIPS provide protection from both expected and unexpected inflation, but little/no protection from deflation.

Nominal bonds provide protection from both expected inflation and unexpected deflation, but little/no protection from unexpected inflation.
That is not true according to United States Treasury:
At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation.
https://www.treasurydirect.gov/indiv/re ... s_tips.htm
But this does not apply to ETFs and Mutual Funds so you are partially correct.
Does deflation protection also apply to all-term/short-term TIPS funds, since those hold to maturity? Granted, if you sell the fund, you're selling bonds which have yet to realize their deflation feature.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Blue456 »

Dominic wrote: Sat Apr 18, 2020 7:48 pm Does deflation protection also apply to all-term/short-term TIPS funds, since those hold to maturity? Granted, if you sell the fund, you're selling bonds which have yet to realize their deflation feature.
As long as they are held to maturity and they are not mutual funds or ETFs but actual securities.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by grabiner »

Dominic wrote: Sat Apr 18, 2020 7:48 pm Does deflation protection also apply to all-term/short-term TIPS funds, since those hold to maturity? Granted, if you sell the fund, you're selling bonds which have yet to realize their deflation feature.
Only if the bonds were bought at initial issue. If there is inflation from 2015-2020 and deflation from 2020-2025, a short-term TIPS fund buying a TIPS in 2020 which was originally issued as a 10-year bond in 2015 could lose nominal value to deflation. And the bond will always lose real value because it is currently trading at a premium to par which gives it a negative yield; thus, if inflation is zero, the bond will lose nominal value.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Dominic »

grabiner wrote: Sat Apr 18, 2020 10:01 pm
Dominic wrote: Sat Apr 18, 2020 7:48 pm Does deflation protection also apply to all-term/short-term TIPS funds, since those hold to maturity? Granted, if you sell the fund, you're selling bonds which have yet to realize their deflation feature.
Only if the bonds were bought at initial issue. If there is inflation from 2015-2020 and deflation from 2020-2025, a short-term TIPS fund buying a TIPS in 2020 which was originally issued as a 10-year bond in 2015 could lose nominal value to deflation. And the bond will always lose real value because it is currently trading at a premium to par which gives it a negative yield; thus, if inflation is zero, the bond will lose nominal value.
Ah, so the only way to avoid this is to buy them at auction and hold to maturity, or hold one of the few all-term TIPS index funds and never sell.

For something that's relatively popular, TIPS are a weird asset class.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by grabiner »

Dominic wrote: Sun Apr 19, 2020 1:29 am
grabiner wrote: Sat Apr 18, 2020 10:01 pm
Dominic wrote: Sat Apr 18, 2020 7:48 pm Does deflation protection also apply to all-term/short-term TIPS funds, since those hold to maturity? Granted, if you sell the fund, you're selling bonds which have yet to realize their deflation feature.
Only if the bonds were bought at initial issue. If there is inflation from 2015-2020 and deflation from 2020-2025, a short-term TIPS fund buying a TIPS in 2020 which was originally issued as a 10-year bond in 2015 could lose nominal value to deflation. And the bond will always lose real value because it is currently trading at a premium to par which gives it a negative yield; thus, if inflation is zero, the bond will lose nominal value.
Ah, so the only way to avoid this is to buy them at auction and hold to maturity, or hold one of the few all-term TIPS index funds and never sell.

For something that's relatively popular, TIPS are a weird asset class.
But the deflation rule isn't that important. For the deflation rule to come into play, the US would need to have deflation over a 10-year or 30-year period, which is extremely unlikely. Therefore, as an investor, you can likely assume that a TIPS provides a guaranteed yield over (or, these days, under) inflation or deflation.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Aw0k3n »

I feel silly to say that I was wrong in looking back only as far as 2013 (that's the earliest date for some of the TIPS ETFs on portfoliovisualizer as noted on the original post). When using asset class function, I can see that TIPS have done remarkably well over the last 20 years.
For example, with starting balance of 10K, cash only final balance is $13,165 (Unadjusted) but inflation adjusted value is $8,856. On the other hand TIPS fund for the same period returned a final balance of $25,193 with inflated adjusted value of $16,946. I feel a lot better about this class of investment since my initial impression was it was a money losing class (which it was but only 2013 to current).


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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by raven15 »

Aw0k3n wrote: Tue Apr 21, 2020 8:59 pm I feel silly to say that I was wrong in looking back only as far as 2013 (that's the earliest date for some of the TIPS ETFs on portfoliovisualizer as noted on the original post). When using asset class function, I can see that TIPS have done remarkably well over the last 20 years.
For example, with starting balance of 10K, cash only final balance is $13,165 (Unadjusted) but inflation adjusted value is $8,856. On the other hand TIPS fund for the same period returned a final balance of $25,193 with inflated adjusted value of $16,946. I feel a lot better about this class of investment since my initial impression was it was a money losing class (which it was but only 2013 to current).


https://www.portfoliovisualizer.com/bac ... ion2_2=100
Yes but you need to be careful with this. TIPS probably had yields in the 3% to 5% range in 2000, but have -0.2% yields now. You should not expect the next 20 years to look like the last 20 years.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by mmortal03 »

raven15 wrote: Tue Apr 21, 2020 9:24 pm Yes but you need to be careful with this. TIPS probably had yields in the 3% to 5% range in 2000, but have -0.2% yields now. You should not expect the next 20 years to look like the last 20 years.
Agreed, but since it has underperformed the total bond fund in the last 20 years, my question is, would it be possible that increases in inflation over the *next* 20 years add to the chances that it *does* look different, and*outperforms* the total bond fund over these next two decades?
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Valuethinker »

mmortal03 wrote: Wed Jul 08, 2020 11:15 am
raven15 wrote: Tue Apr 21, 2020 9:24 pm Yes but you need to be careful with this. TIPS probably had yields in the 3% to 5% range in 2000, but have -0.2% yields now. You should not expect the next 20 years to look like the last 20 years.
Agreed, but since it has underperformed the total bond fund in the last 20 years, my question is, would it be possible that increases in inflation over the *next* 20 years add to the chances that it *does* look different, and*outperforms* the total bond fund over these next two decades?
Market expectations of inflation are baked into the "break even inflation rate" the gap in yield between a TIPS bond and a conventional US Treasury bond of the same maturity.

If inflation averages below that you were better off in the nominal US Treasury.

If higher ie unexpected inflation you were better off in the TIPS bond.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

I have never thought that whether or not TIPS would "outperform" a total bond fund would have anything to do with choosing one rather than the other. That is aside that trying to predict what would happen would be futile even if one cared. Holding TIPS is partly motivated by just precisely not having to predict things, inflation in particular.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Robot Monster »

Valuethinker wrote: Wed Jul 08, 2020 11:32 am
mmortal03 wrote: Wed Jul 08, 2020 11:15 am
raven15 wrote: Tue Apr 21, 2020 9:24 pm Yes but you need to be careful with this. TIPS probably had yields in the 3% to 5% range in 2000, but have -0.2% yields now. You should not expect the next 20 years to look like the last 20 years.
Agreed, but since it has underperformed the total bond fund in the last 20 years, my question is, would it be possible that increases in inflation over the *next* 20 years add to the chances that it *does* look different, and*outperforms* the total bond fund over these next two decades?
Market expectations of inflation are baked into the "break even inflation rate" the gap in yield between a TIPS bond and a conventional US Treasury bond of the same maturity.

If inflation averages below that you were better off in the nominal US Treasury.

If higher ie unexpected inflation you were better off in the TIPS bond.
Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Northern Flicker »

There is no difference between expected or unexpected inflation or actual inflation in a historical sample because the outcome is already known.

Saying TIPS protect against unexpected inflation is a statement about their future return in comparison to that of nominal treasuries.

The issue was that real yields were negative for much of the period of the backtest (strongly so in 2013):

https://www.treasury.gov/resource-cente ... &year=2013

https://www.treasury.gov/resource-cente ... &year=2014

https://www.treasury.gov/resource-cente ... &year=2015

https://www.treasury.gov/resource-cente ... &year=2016

https://www.treasury.gov/resource-cente ... &year=2017

https://www.treasury.gov/resource-cente ... &year=2018

https://www.treasury.gov/resource-cente ... &year=2019

https://www.treasury.gov/resource-cente ... &year=2020

The interest earned on a TIPS is the inflation rate plus the real yield. When real yields are negative, these sum to a yield that is less than the inflation rate. They should be expected to return less than the inflation rate in that scenario, which is the likely current scenario as well:

https://www.treasury.gov/resource-cente ... =realyield
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by jeffyscott »

dbr wrote: Wed Jul 08, 2020 12:40 pm
Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
If inflation is above the break even rate, 1.26% in this case, it means the total return from a TIPS would be greater than that for a nominal bond.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Robot Monster »

dbr wrote: Wed Jul 08, 2020 12:40 pm
Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
Okay, but won't the price increase more if expected inflation rises? And...it won't decrease in value of expected inflation expectations decrease? Oh man, I don't understand this shirt.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by BJJ_GUY »

Robot Monster wrote: Wed Jul 08, 2020 12:48 pm
dbr wrote: Wed Jul 08, 2020 12:40 pm
Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
Okay, but won't the price increase more if expected inflation rises? And...it won't decrease in value of expected inflation expectations decrease? Oh man, I don't understand this shirt.
Stop worrying about expected and unexpected inflation. It doesn't figure into the actual current payment for TIPS.

TIPS principal or par value goes up or down based off of CPI (proxy for actual inflation). The interest rate is fixed, but the dollar amount paid twice a year is determined by par * CPI.

If you hold to maturity you get paid back at par, even if deflation has reduced the principal used as the coupon multiplier. (In other words, you'll get your principal back at the end in the worst case scenario.)
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by jeffyscott »

Robot Monster wrote: Wed Jul 08, 2020 12:48 pm
dbr wrote: Wed Jul 08, 2020 12:40 pm
Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
Okay, but won't the price increase more if expected inflation rises? And...it won't decrease in value of expected inflation expectations decrease? Oh man, I don't understand this shirt.
There might be some confusion due to using the term "price", when what may actually be meant is the principle value of the bond.

(The) principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.
https://www.treasurydirect.gov/indiv/re ... s_tips.htm

If you buy a 5 year TIPS and a 5 year nominal, hold both to maturity and inflation is exactly at the break-even rate your total return from each will be the same (aside from maybe some variation due to the specifics of the coupon payments).
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Robot Monster »

BJJ_GUY wrote: Wed Jul 08, 2020 1:43 pm
Robot Monster wrote: Wed Jul 08, 2020 12:48 pm
dbr wrote: Wed Jul 08, 2020 12:40 pm
Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
Okay, but won't the price increase more if expected inflation rises? And...it won't decrease in value of expected inflation expectations decrease? Oh man, I don't understand this shirt.
Stop worrying about expected and unexpected inflation. It doesn't figure into the actual current payment for TIPS.
I actually have 5-yr TIPS bonds. Every day the price changes, which is the money I could get it I wanted to sell the TIPS before maturity. The price is in sync with my TIPS fund, so I figured if I could understand the price action on the TIPS bonds, I could understand them on the TIPS fund.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Angst »

Robot Monster wrote: Wed Jul 08, 2020 12:48 pm
dbr wrote: Wed Jul 08, 2020 12:40 pm
Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
Okay, but won't the price increase more if expected inflation rises? And...it won't decrease in value of expected inflation expectations decrease? Oh man, I don't understand this shirt.
An increase in expectations of future inflation, i.e. as defined by an increase in the spread between rates for nominal bonds and TIPS, can be achieved by a drop in TIPS rates, a rise in nominal rates, or any combination of rates changes such that the net spread still increases. So there is no absolute answer to your question. The price of TIPS could rise or fall, but TIPS should gain more (or lose less) value than nominals as such. I think...

Btw, here are what I consider the two most comprehensive Treasury links for easily viewing historic yield curve rates:

Real rates 2003 - present:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll

Nominal rates 1990 - present:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll
Last edited by Angst on Wed Jul 08, 2020 5:09 pm, edited 2 times in total.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by BJJ_GUY »

Robot Monster wrote: Wed Jul 08, 2020 4:24 pm I actually have 5-yr TIPS bonds. Every day the price changes, which is the money I could get it I wanted to sell the TIPS before maturity. The price is in sync with my TIPS fund, so I figured if I could understand the price action on the TIPS bonds, I could understand them on the TIPS fund.
Trading price or current market value is different than par value, just like with any bonds. TIPS are only different in that the par value can increase (decrease) based on CPI, but you won't ever get back less than principal.

I honestly don't know all that much about how mutual fund/ETF yields are calculated, and frankly, depending on who is writing and what their background is, we often use the same terms to mean different things.

I'd just make sure you get the difference between buying a single TIPS and holding to maturity. In this scenario your YTM is what's important.

I think some of the other things people look at daily can end up with a stale numerator and a current denominator, so even if they are quoting the SEC yield, I have no idea if that is current daily (I don't think it is). Either way, the NAV of a fund can certainly change based on daily trading, but now you know the mechanics behind each underlying piece of paper.

FYI... I've commented before about this, so I won't go into too much detail again, but there are some structural inefficiencies that diminish the theoretical benefits of TIPS when looking on paper. This goes from fund flows, portfolio management (trading), the TIPS market being far less liquid than nominals, and the fact that CPI-U may not be all that great at capturing actual inflation (not to mention the fact that the government has every incentive to artificially suppress the number)
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

Robot Monster wrote: Wed Jul 08, 2020 12:48 pm
dbr wrote: Wed Jul 08, 2020 12:40 pm
Robot Monster wrote: Wed Jul 08, 2020 12:04 pm

Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
No, if inflation is greater than 0% your TIPS bond price will increase.
Okay, but won't the price increase more if expected inflation rises? And...it won't decrease in value of expected inflation expectations decrease? Oh man, I don't understand this shirt.
I'll address the understand part in the third paragraph below, meanwhile understand that TIPS face value is periodically adjusted to actual inflation exactly. Expected and unexpected have nothing to do with it. That is why someone who wants a bond that has no inflation risk period buys TIPS. That purchase may be at the expense of having to pay a premium for the bond which results in a negative real return after the return from the coupon and the cost of the premium are combined.

The discussion about expected vs unexpected is for people who are trying to guess whether or not they will in future have made a better bet to have bought TIPS or nominal bonds of otherwise similar characteristics. That is just exactly taking risk with inflation rather than eliminating risk from inflation. A person who wants to eliminate inflation risk should buy TIPS and a person who wants to take chances should not be looking at TIPS and should not be playing games with what will be the unexpected inflation.

Explanations. Understand that there are two issues here. One issue is what is the value of the bond, especially what is the value of the bond when it matures. The second issue is what return one will have gotten from buying a bond and holding it to maturity. Note the connection is that return is the gain in value from beginning to end relative to the initial outlay. So the value of the bond at the end will be the face value incremented by the amount of inflation occurring over the time the bond is held. As explained, that is the actual inflation whether expected or not. (I am ignoring deflation scenarios for the moment). Now the return arises from three sources. First is the increase in the face value of the bond. Second are the coupon payments periodically made. Note those payments are always positive. TIPS are not sold with negative coupons. Note also the coupon payment is increasing because a fixed rate is being applied to an increasing face value. Third is the gain or loss between what was paid and what the face value is. If you pay $1050 for a $1000 bond you are $50 negative the day you buy the bond and you never get that money back. Roll all those together and you get the return at maturity with a complication that you have to decide if you imagine the coupon payments to be reinvested though in fact they are not. If you include the inflation increments you get the nominal yield on the bond and if you ignore them and index the coupon payments for inflation you get the real yield. My explanation is an explanation and probably not exactly accurate as to formulas to compute the various returns. Someone else can perhaps refer to those formulas somewhere.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by mmortal03 »

dbr wrote: Wed Jul 08, 2020 11:35 am I have never thought that whether or not TIPS would "outperform" a total bond fund would have anything to do with choosing one rather than the other. That is aside that trying to predict what would happen would be futile even if one cared. Holding TIPS is partly motivated by just precisely not having to predict things, inflation in particular.
That probably makes sense from the Bogleheads perspective. I guess not having to try to predict unexpected inflation by, instead, just insuring yourself against it with a TIPS fund is probably the right sort of set it and forget it attitude... as long as there's a fair chance that it is, indeed, the best solution for that. That's the tricky thing with this stuff; assumptions (predictions?) must still be made about what is the best way of not having to predict these things. :)

To provide context, I'm learning that there are common market conditions where even in real terms traditional bonds will beat their comparable TIPS in total return. The market already even prices traditional bonds around getting a return that exceeds expected inflation. So, TIPS are apparently not even always going to be the best bond investment for beating any level of inflation.

Some people suggest holding 50% of your bonds in the TIPS fund, and 50% in the Total Bond Market fund, and rebalancing every so often, which I guess would be a way to not predict which one will outperform the other. But is this really the best strategy on average?
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Robot Monster »

Hi dbr,

Thank you for the very in-depth answer, but, looking back, seems it was a failure on my part not to give more context about what I was asking.

I own both 5-yr TIPS bonds, as well as Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX). When I look at my online account at the end of the day, the prices for these investments will have changed; e.g. VAIPX was -.18% yesterday. (Additionally, I monitor the TIPS etf whose price changes throughout the day.) My line of questioning is solely about trying to understand these price changes.

I have observed a link between the 5-year Breakeven and TIPS prices. If you look at the graph, you'll see the Breakeven plummeted in March.

https://fred.stlouisfed.org/series/T5YIE

The TIPS prices got hammered during this time, too. (Again, by prices I mean what my online account shows.) So, by casual observation, it does appear to me that changes to TIPS prices are linked to changes in expected inflation (which is what the 5-Year Breakeven Inflation Rate shows). But so far, I haven't gotten anyone to agree with me that yes, these two are in fact linked. I have to spend more time reading other people's responses within this thread...so maybe the answer is in there already.
dbr wrote: Wed Jul 08, 2020 8:47 pm I'll address the understand part in the third paragraph below, meanwhile understand that TIPS face value is periodically adjusted to actual inflation exactly. Expected and unexpected have nothing to do with it...Understand that there are two issues here. One issue is what is the value of the bond, especially what is the value of the bond when it matures. The second issue is what return one will have gotten from buying a bond and holding it to maturity.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

Robot Monster wrote: Thu Jul 09, 2020 8:59 am Hi dbr,

Thank you for the very in-depth answer, but, looking back, seems it was a failure on my part not to give more context about what I was asking.

I own both 5-yr TIPS bonds, as well as Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX). When I look at my online account at the end of the day, the prices for these investments will have changed; e.g. VAIPX was -.18% yesterday. (Additionally, I monitor the TIPS etf whose price changes throughout the day.) My line of questioning is solely about trying to understand these price changes.

I have observed a link between the 5-year Breakeven and TIPS prices. If you look at the graph, you'll see the Breakeven plummeted in March.

https://fred.stlouisfed.org/series/T5YIE

The TIPS prices got hammered during this time, too. (Again, by prices I mean what my online account shows.) So, by casual observation, it does appear to me that changes to TIPS prices are linked to changes in expected inflation (which is what the 5-Year Breakeven Inflation Rate shows). But so far, I haven't gotten anyone to agree with me that yes, these two are in fact linked. I have to spend more time reading other people's responses within this thread...so maybe the answer is in there already.
dbr wrote: Wed Jul 08, 2020 8:47 pm I'll address the understand part in the third paragraph below, meanwhile understand that TIPS face value is periodically adjusted to actual inflation exactly. Expected and unexpected have nothing to do with it...Understand that there are two issues here. One issue is what is the value of the bond, especially what is the value of the bond when it matures. The second issue is what return one will have gotten from buying a bond and holding it to maturity.
OK I can't help you with that. I have no idea why the market price of TIPS changes at any moment in time.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by vineviz »

Robot Monster wrote: Thu Jul 09, 2020 8:59 am The TIPS prices got hammered during this time, too. (Again, by prices I mean what my online account shows.) So, by casual observation, it does appear to me that changes to TIPS prices are linked to changes in expected inflation (which is what the 5-Year Breakeven Inflation Rate shows). But so far, I haven't gotten anyone to agree with me that yes, these two are in fact linked. I have to spend more time reading other people's responses within this thread...so maybe the answer is in there already.
You are correct: they are definitely linked.

The change in price for a TIPS from one moment to the next is the sum of several components: the actual realized inflation over the period + the change in future expected inflation + the change in the real interest rate.

By the time the bond matures, all the inflation piece has (effectively) moved from the 2nd component into the first. But during the life of the bond, those first two components can (and sometimes do) move independently.

Thus, for a TIPS that matures in 2025 you might see current inflation spike up without seeing the price of the bond move up by the same amount. This would be the case if investors thought the rise in prices in 2020 might trigger an increased chance of recession (or, at least, disinflation) in 2021.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Angst »

Robot Monster wrote: Thu Jul 09, 2020 8:59 am Hi dbr,

Thank you for the very in-depth answer, but, looking back, seems it was a failure on my part not to give more context about what I was asking.

I own both 5-yr TIPS bonds, as well as Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX). When I look at my online account at the end of the day, the prices for these investments will have changed; e.g. VAIPX was -.18% yesterday. (Additionally, I monitor the TIPS etf whose price changes throughout the day.) My line of questioning is solely about trying to understand these price changes.

I have observed a link between the 5-year Breakeven and TIPS prices. If you look at the graph, you'll see the Breakeven plummeted in March.

https://fred.stlouisfed.org/series/T5YIE

The TIPS prices got hammered during this time, too. (Again, by prices I mean what my online account shows.) So, by casual observation, it does appear to me that changes to TIPS prices are linked to changes in expected inflation (which is what the 5-Year Breakeven Inflation Rate shows). But so far, I haven't gotten anyone to agree with me that yes, these two are in fact linked. I have to spend more time reading other people's responses within this thread...so maybe the answer is in there already.
dbr wrote: Wed Jul 08, 2020 8:47 pm I'll address the understand part in the third paragraph below, meanwhile understand that TIPS face value is periodically adjusted to actual inflation exactly. Expected and unexpected have nothing to do with it...Understand that there are two issues here. One issue is what is the value of the bond, especially what is the value of the bond when it matures. The second issue is what return one will have gotten from buying a bond and holding it to maturity.
Daily price changes in TIPS are typically a function of how much people are willing to pay for what yield. You're not going to get many to agree with you in regards to prices and the BEI rate specifically because it's not at simple as "these two are in fact linked". It goes beyond casual observation. Perhaps start by breaking apart the breakeven inflation rate into its components, and then consider additional factors such as what was going on in markets last March. There were multiple threads back then speculating about TIPS pricing, but they weren't all-consumed with the break-even rate as if it was the phenomena. It was the TIPS pricing that was the phenomena; the resulting aberration in the BEI rate was an effect, not the cause. Here's a more focused and insightful presentation of fred data with respect to last March:

https://fred.stlouisfed.org/graph/fredgraph.png?g=sMwm
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Robot Monster »

vineviz wrote: Thu Jul 09, 2020 10:11 am
Robot Monster wrote: Thu Jul 09, 2020 8:59 am The TIPS prices got hammered during this time, too. (Again, by prices I mean what my online account shows.) So, by casual observation, it does appear to me that changes to TIPS prices are linked to changes in expected inflation (which is what the 5-Year Breakeven Inflation Rate shows). But so far, I haven't gotten anyone to agree with me that yes, these two are in fact linked. I have to spend more time reading other people's responses within this thread...so maybe the answer is in there already.
You are correct: they are definitely linked.

The change in price for a TIPS from one moment to the next is the sum of several components: the actual realized inflation over the period + the change in future expected inflation + the change in the real interest rate.

By the time the bond matures, all the inflation piece has (effectively) moved from the 2nd component into the first. But during the life of the bond, those first two components can (and sometimes do) move independently.

Thus, for a TIPS that matures in 2025 you might see current inflation spike up without seeing the price of the bond move up by the same amount. This would be the case if investors thought the rise in prices in 2020 might trigger an increased chance of recession (or, at least, disinflation) in 2021.
Thank you so much!
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by jeffyscott »

Angst wrote: Thu Jul 09, 2020 10:37 amIt was the TIPS pricing that was the phenomena; the resulting aberration in the BEI rate was an effect, not the cause.
Right, the BEI (or in other words changes to real and/or nominal interest rates) is a result of the change to the prices investors are willing to pay. To me this sort of thing is often presented backwards, as if interest rates are some sort of independent variable that just appears on the scene and determines resulting prices for bonds. But maybe I'm wrong and that independent variable is the Fed, at least at this time when they are doing things that they normally do not.

Interest rates (and in the case of TIPS, real interest rates) change based on the prices that investors (and the Fed :?: ) are willing to pay for bonds. When there is more demand, the prices decline and as a result of the lower prices the yield (YTM) is now higher. When there is more demand prices increase and YTM is now lower.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

jeffyscott wrote: Thu Jul 09, 2020 12:47 pm
Angst wrote: Thu Jul 09, 2020 10:37 amIt was the TIPS pricing that was the phenomena; the resulting aberration in the BEI rate was an effect, not the cause.
Right, the BEI (or in other words changes to real and/or nominal interest rates) is a result of the change to the prices investors are willing to pay. To me this sort of thing is often presented backwards, as if interest rates are some sort of independent variable that just appears on the scene and determines resulting prices for bonds. But maybe I'm wrong and that independent variable is the Fed, at least at this time when they are doing things that they normally do not.

Interest rates (and in the case of TIPS, real interest rates) change based on the prices that investors (and the Fed :?: ) are willing to pay for bonds. When there is more demand, the prices decline and as a result of the lower prices the yield (YTM) is now higher. When there is more demand prices increase and YTM is now lower.
The question then becomes to independently explain either prices or yields without using one to explain the other. Supposing it to actually be so, the FED would be such an independent cause for interest rates and then you turn over the coin and see the prices on the other face. But I really have little idea why prices/yields are what they are at any moment in time. Of course you can just say that it is the market, how buyers and sellers arrive at an agreement on what price to pay at any moment. But that too is a fiction because it is just a name for a very large but still very black box that we have yet to see opened for examination.
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by vineviz »

dbr wrote: Thu Jul 09, 2020 1:30 pm The question then becomes to independently explain either prices or yields without using one to explain the other. Supposing it to actually be so, the FED would be such an independent cause for interest rates and then you turn over the coin and see the prices on the other face. But I really have little idea why prices/yields are what they are at any moment in time.
It's arguably always foolish to think we know why the prices of anything in a financial market are what they are at any given point in time.

But the broad stroke of Treasury bond yields aren't that hard to parse out. There are two pieces, essentially: the expected rate of inflation (which is closely linked to expectations around GDP growth) and the real rate of interest (which is basically just the supply/demand equilibrium price for the time-value of money).
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dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by dbr »

vineviz wrote: Thu Jul 09, 2020 2:16 pm
dbr wrote: Thu Jul 09, 2020 1:30 pm The question then becomes to independently explain either prices or yields without using one to explain the other. Supposing it to actually be so, the FED would be such an independent cause for interest rates and then you turn over the coin and see the prices on the other face. But I really have little idea why prices/yields are what they are at any moment in time.
It's arguably always foolish to think we know why the prices of anything in a financial market are what they are at any given point in time.

But the broad stroke of Treasury bond yields aren't that hard to parse out. There are two pieces, essentially: the expected rate of inflation (which is closely linked to expectations around GDP growth) and the real rate of interest (which is basically just the supply/demand equilibrium price for the time-value of money).
Right. I would class expected inflation/GDP growth as "economics" parameters that might have meaningful explanations from those that understand those things -- or maybe they don't. Supply/demand equilibrium price is a way station along a path to whatever determines the supply and the demand, I suppose. But I read Samuelson once on my own and after that claim no understanding of economics.

I think my point is that at some point the quicksand has to run out and one finds oneself on bedrock before one drowns. I personally am willing to invest by observing investing empirically rather than by having a fundamental underlayment for what might happen. That might be called analogous to somehow swimming constantly to stay afloat.

It might be interesting to see how many of these suggestions can be turned into hints for investors: https://www.bing.com/videos/search?q=ho ... 3A5D599C6E

I do know one that applies: 1. Don't panic.
Angst
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Angst »

vineviz wrote: Thu Jul 09, 2020 2:16 pm
dbr wrote: Thu Jul 09, 2020 1:30 pm The question then becomes to independently explain either prices or yields without using one to explain the other. Supposing it to actually be so, the FED would be such an independent cause for interest rates and then you turn over the coin and see the prices on the other face. But I really have little idea why prices/yields are what they are at any moment in time.
It's arguably always foolish to think we know why the prices of anything in a financial market are what they are at any given point in time.

But the broad stroke of Treasury bond yields aren't that hard to parse out. There are two pieces, essentially: the expected rate of inflation (which is closely linked to expectations around GDP growth) and the real rate of interest (which is basically just the supply/demand equilibrium price for the time-value of money).
I agree re the broad stroke although I think that Robot Monster was tending to conclude that the BEI rate as calculated by the spread between nominal and real treasuries could be used to explain the sudden drop in prices of TIPS this past March, maybe even the TIPS drop back in in the last days of Lehman. In either case, that would be putting the cart in front of the horse.
Valuethinker
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Valuethinker »

Robot Monster wrote: Wed Jul 08, 2020 12:04 pm
Valuethinker wrote: Wed Jul 08, 2020 11:32 am
mmortal03 wrote: Wed Jul 08, 2020 11:15 am
raven15 wrote: Tue Apr 21, 2020 9:24 pm Yes but you need to be careful with this. TIPS probably had yields in the 3% to 5% range in 2000, but have -0.2% yields now. You should not expect the next 20 years to look like the last 20 years.
Agreed, but since it has underperformed the total bond fund in the last 20 years, my question is, would it be possible that increases in inflation over the *next* 20 years add to the chances that it *does* look different, and*outperforms* the total bond fund over these next two decades?
Market expectations of inflation are baked into the "break even inflation rate" the gap in yield between a TIPS bond and a conventional US Treasury bond of the same maturity.

If inflation averages below that you were better off in the nominal US Treasury.

If higher ie unexpected inflation you were better off in the TIPS bond.
Thank you for that concise explanation. Just want to make sure I got this...Right now inflation expectations for the next five years is 1.26% (going by the 5-year breakeven). If you have a five-year TIPS bond currently, if expected inflation goes up above 1.26%, your TIPS bond's price will increase, correct?
Not quite.

If you hold to maturity (5 years) and inflation was higher than 1.26% you were better off in the TIPS bonds. If it was lower than 1.26% you were better off in the 5 year straight nominal US Treasury bond (they have to estimate if there is not one with exactly the same maturity).

The price of the TIPS bond will inevitably rise with inflation. Even if say 1% inflation, each year the redemption value of the bond will rise by 1%, and the coupon will increase by 1%.

A really cool thing with TIPS is that if there is deflation, the money at redemption can never drop back below the $100 face value of the bond. That's a low risk proposition in any case, that much sustained deflation, but it makes TIPS that little bit more attractive than the inflation-linked bonds of other countries (that lack that feature).
Valuethinker
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Re: U.S. Treasury Inflation Protected Securities (TIPS) ETF

Post by Valuethinker »

Robot Monster wrote: Thu Jul 09, 2020 8:59 am Hi dbr,

Thank you for the very in-depth answer, but, looking back, seems it was a failure on my part not to give more context about what I was asking.

I own both 5-yr TIPS bonds, as well as Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX). When I look at my online account at the end of the day, the prices for these investments will have changed; e.g. VAIPX was -.18% yesterday. (Additionally, I monitor the TIPS etf whose price changes throughout the day.) My line of questioning is solely about trying to understand these price changes.

I have observed a link between the 5-year Breakeven and TIPS prices. If you look at the graph, you'll see the Breakeven plummeted in March.

https://fred.stlouisfed.org/series/T5YIE

The TIPS prices got hammered during this time, too. (Again, by prices I mean what my online account shows.) So, by casual observation, it does appear to me that changes to TIPS prices are linked to changes in expected inflation (which is what the 5-Year Breakeven Inflation Rate shows). But so far, I haven't gotten anyone to agree with me that yes, these two are in fact linked. I have to spend more time reading other people's responses within this thread...so maybe the answer is in there already.
dbr wrote: Wed Jul 08, 2020 8:47 pm I'll address the understand part in the third paragraph below, meanwhile understand that TIPS face value is periodically adjusted to actual inflation exactly. Expected and unexpected have nothing to do with it...Understand that there are two issues here. One issue is what is the value of the bond, especially what is the value of the bond when it matures. The second issue is what return one will have gotten from buying a bond and holding it to maturity.
Your are running the train of cause & effect the wrong way.

What happens is the TIPS price moves, up or down, to a different amount than the comparable US Treasury bond (nominal, same maturity). And so the BEI rate changes.

So price => yield => BEI

Why did the price of the TIPS fund move? There are many factors re supply and demand that could do that, also the payment of a coupon shifts the price (when buyers no longer get the next coupon, they no longer have to pay the sellers for the accrued interest on the next coupon that the seller is giving up).

Specifically in March you saw a "flight to liquidity". Various funds needed to raise cash very quickly, to meet investor redemptions and for other reasons (short covering for hedge funds, margin calls etc). And so they did that by selling what they had to hand that they could sell - cash equities for one, but also US Treasury bonds.

Now the TIPS market is relatively illiquid. A lot of buyers of TIPS then hold to maturity - pension funds and insurance companies, chiefly. So a sale of TIPS of a given size tends to have a bigger impact on price (driving it down) than an equivalent sale of US Treasury bonds (nominal). The US Treasury bond market for nominal bonds is much deeper and more liquid - it's easier to buy or sell in large size without moving the price.

We saw a similar pattern in 2008 after Lehman went broke. In retrospect it was a tremendous opportunity to buy TIPS bonds at the cheapest they have been since - over 10 years.
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