Behavior of TIPS versus Treasuries in March

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lvswts
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Behavior of TIPS versus Treasuries in March

Post by lvswts »

Hello,

I'm wondering if someone could explain to me the behavior we saw in TIPS versus treasuries when the market went down in March?

I would think both TIPs and treasuries both have the backing of the US and I guess I thought they should be reasonably similar in safety. If I look at TIPs funds versus treasury funds with approximately the same duration I'm curious why the TIPS funds were down so much while the treasuries were largely unaffected.

If I compare SCHP versus VGIT during March you see the pretty pronounced drop in SCHP.
https://ibb.co/pnqFhQT

Similar results in STIP versus SCHO
https://ibb.co/DPBxHNy

Now they both have pretty much ended back at around the same spot (as of today) but the TIPS sure took a drop for a while.

I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.

Any insight into this? Thanks.
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Re: Behavior of TIPS versus Treasuries in March

Post by Robot Monster »

Yeah, also look at the behavior of Vanguard Inflation-Protected Secs Adm (VAIPX) vs Vanguard Total Bond Market ETF (BND) during 2008. VAIPX max downdraw was -12.43% vs -3.88% for BND!

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AzRunner
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Re: Behavior of TIPS versus Treasuries in March

Post by AzRunner »

From what I have read, Treasuries are far more liquid than TIPS. When there is a flight to safety, the most liquid product in a given domain will dominant. As you say, things corrected soon enough, so that was probably a good buying opportunity for TIPS in retrospect.
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vineviz
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
Two things were going on in March that you're seeing in these charts.

One was a liquidity shock that manifested across virtually all classes of bonds in one way or another. A liquidity crisis like this is rare (happens maybe a few days per decade, on average), unpredictable, and idiosyncratic.

The second thing that happened was a huge surge in economic uncertainty. Remember that the market price of TIPS moves on three factors: the real yield, realized inflation, and changes in expected inflation. With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.

I suggest setting your bond allocation based on YOUR actual needs, though, and not a horse race between bond classes or any impulse to try to out predict the market on future inflation.

If your future expenses will rise or fall with the general level of inflation, then TIPS will be a lower risk investment than nominal Treasuries. How "large" a part of your portfolio to allocate to TIPS depends on your circumstances, but I typically suggest that investors try to cover their bare minimum retirement spending with a combination of Social Security, an investment in TIPS, and/or a SPIA with a cost-of-living adjustment. Then you can safely put the rest of your portfolio in a mix of stocks, nominal bonds, deferred income annuities/longevity insurance, etc.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Behavior of TIPS versus Treasuries in March

Post by FIREchief »

vineviz wrote: Wed Jul 15, 2020 5:44 pm With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.
I think this was the main driver. I haven't seen much evidence of liquidity problems.
If your future expenses will rise or fall with the general level of inflation, then TIPS will be a lower risk investment than nominal Treasuries. How "large" a part of your portfolio to allocate to TIPS depends on your circumstances, but I typically suggest that investors try to cover their bare minimum retirement spending with a combination of Social Security, an investment in TIPS, and/or a SPIA with a cost-of-living adjustment. Then you can safely put the rest of your portfolio in a mix of stocks, nominal bonds, deferred income annuities/longevity insurance, etc.
Yep. Only problem is that nobody sells SPIA's with true COLA for a married couple.
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Re: Behavior of TIPS versus Treasuries in March

Post by Angst »

FIREchief wrote: Wed Jul 15, 2020 6:38 pm
vineviz wrote: Wed Jul 15, 2020 5:44 pm With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.
I think this was the main driver. I haven't seen much evidence of liquidity problems.
I dunno... but what I do know is that the b/a spread for long term TIPS skyrocketed in late March, the 3rd week I think. I saw the Feb 2050 spread once as high as 7% of the ask price, right in the middle of the day. That's crazy! Actually, I think that was the name of one of the many TIPS/bond ETF threads back then, something like "TIPS gone crazy!" :D

Anyhow, if those spreads weren't caused by a lack of liquidity, they nonetheless were a manifestation of it. I didn't dare buy the 30 year TIPS on the secondary market with that kind of spread showing - the only safe and effective way was to call the bond desk at Vanguard where they stated pretty much the same thing. I think the market was so uncertain that buyers and sellers were scared to buy and sell.


[EDIT] For the OP, here are a couple busy threads, or just search on TIPS and pick the threads dated in mid to later March:
viewtopic.php?t=308094
viewtopic.php?t=307493
Last edited by Angst on Wed Jul 15, 2020 8:23 pm, edited 1 time in total.
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Re: Behavior of TIPS versus Treasuries in March

Post by Robot Monster »

vineviz wrote: Wed Jul 15, 2020 5:44 pm
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
Two things were going on in March that you're seeing in these charts.

One was a liquidity shock that manifested across virtually all classes of bonds in one way or another. A liquidity crisis like this is rare (happens maybe a few days per decade, on average), unpredictable, and idiosyncratic.

The second thing that happened was a huge surge in economic uncertainty. Remember that the market price of TIPS moves on three factors: the real yield, realized inflation, and changes in expected inflation. With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.

I suggest setting your bond allocation based on YOUR actual needs, though, and not a horse race between bond classes or any impulse to try to out predict the market on future inflation.

If your future expenses will rise or fall with the general level of inflation, then TIPS will be a lower risk investment than nominal Treasuries. How "large" a part of your portfolio to allocate to TIPS depends on your circumstances, but I typically suggest that investors try to cover their bare minimum retirement spending with a combination of Social Security, an investment in TIPS, and/or a SPIA with a cost-of-living adjustment. Then you can safely put the rest of your portfolio in a mix of stocks, nominal bonds, deferred income annuities/longevity insurance, etc.
Thank you for clarifying that. I was curious as to the answer, myself. Question...If we had deflation, like Switzerland has (-1.3%) how would that impact the market price of a TIPS fund, given the fact that individual TIPS bonds protect against deflation?
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Re: Behavior of TIPS versus Treasuries in March

Post by Angst »

Robot Monster wrote: Wed Jul 15, 2020 8:00 pmQuestion...If we had deflation, like Switzerland has (-1.3%) how would that impact the market price of a TIPS fund, given the fact that individual TIPS bonds protect against deflation?
I find that the protection against deflation that individual TIPS can afford is highly overblown. If you bought a new TIPS at auction in the last few years, that's one thing, but if you have 20-plus years of accrued inflation indexing and then deflation rears its ugly head, that bond's protection is fairly meaningless; it has a lot of gains from accrued inflation to lose to deflation. Nominal bonds, especially long term bonds, protect against deflation and do so a lot better than TIPS. Now if you're comparing a TIPS fund to nominal funds, you'd still want nominals. I think the deflation "put" of newly issued TIPS is overrated.
Last edited by Angst on Thu Jul 16, 2020 8:41 am, edited 1 time in total.
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

FIREchief wrote: Wed Jul 15, 2020 6:38 pm Yep. Only problem is that nobody sells SPIA's with true COLA for a married couple.
Indeed, CPI-linked annuities have vanished from the marketplace. But fixed COLA annuities (e.g. 1% or 2% increase in payments every year) are readily available and - although I like the concept of an inflation-linked annuity - most investors are probably shouldn't choose one even if they had the option.
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dbr
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Re: Behavior of TIPS versus Treasuries in March

Post by dbr »

lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS. I don't think there was a problem getting back money from the Treasury for a matured TIPS. I would certainly say that if you have seen these liquidity fluctuations and don't want that in an investment you would not own TIPS. There are lots of other investments that are also not safe. I don't think this has anything to do with some "should" or another but is a personal preference for what you are or are not willing to accept in an investment.
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Re: Behavior of TIPS versus Treasuries in March

Post by Angst »

dbr wrote: Thu Jul 16, 2020 8:54 am
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS. I don't think there was a problem getting back money from the Treasury for a matured TIPS. I would certainly say that if you have seen these liquidity fluctuations and don't want that in an investment you would not own TIPS. There are lots of other investments that are also not safe. I don't think this has anything to do with some "should" or another but is a personal preference for what you are or are not willing to accept in an investment.
I agree 100% - no marketable fixed income security is completely "safe". For complete safety, perhaps not even cash can beat the series-I US Savings bond. As an instrument, it's somewhat like a CD, with inflation adjustment, and a few small, short-term limitations on cashing it in "early".
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Re: Behavior of TIPS versus Treasuries in March

Post by dbr »

Angst wrote: Thu Jul 16, 2020 9:21 am
dbr wrote: Thu Jul 16, 2020 8:54 am
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS. I don't think there was a problem getting back money from the Treasury for a matured TIPS. I would certainly say that if you have seen these liquidity fluctuations and don't want that in an investment you would not own TIPS. There are lots of other investments that are also not safe. I don't think this has anything to do with some "should" or another but is a personal preference for what you are or are not willing to accept in an investment.
I agree 100% - no marketable fixed income security is completely "safe". For complete safety, perhaps not even cash can beat the series-I US Savings bond. As an instrument, it's somewhat like a CD, with inflation adjustment, and a few small, short-term limitations on cashing it in "early".
I bonds are also not "safe" because there is no ongoing guarantee of the real interest rate. You are still a victim of what history dictates is the interest rate available when you buy the bond. Right now that is very low so we are screwed for the time being. Note you cannot offset this by redeeming your bond when interest rates go back up and buying new ones because the purchase limit prevents you from doing this for more than paltry amounts of money.

Putting money into I bonds now is a bad deal, but we are saved from that by the fact that you can't put a lot of money into I bonds in a hurry.

This business of thinking some fixed income investment is good because it is better than other fixed income choices at this time makes no sense.
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Re: Behavior of TIPS versus Treasuries in March

Post by Angst »

dbr wrote: Thu Jul 16, 2020 9:31 am
Angst wrote: Thu Jul 16, 2020 9:21 am
dbr wrote: Thu Jul 16, 2020 8:54 am
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS. I don't think there was a problem getting back money from the Treasury for a matured TIPS. I would certainly say that if you have seen these liquidity fluctuations and don't want that in an investment you would not own TIPS. There are lots of other investments that are also not safe. I don't think this has anything to do with some "should" or another but is a personal preference for what you are or are not willing to accept in an investment.
I agree 100% - no marketable fixed income security is completely "safe". For complete safety, perhaps not even cash can beat the series-I US Savings bond. As an instrument, it's somewhat like a CD, with inflation adjustment, and a few small, short-term limitations on cashing it in "early".
I bonds are also not "safe" because there is no ongoing guarantee of the real interest rate. You are still a victim of what history dictates is the interest rate available when you buy the bond. Right now that is very low so we are screwed for the time being. Note you cannot offset this by redeeming your bond when interest rates go back up and buying new ones because the purchase limit prevents you from doing this for more than paltry amounts of money.

Putting money into I bonds now is a bad deal, but we are saved from that by the fact that you can't put a lot of money into I bonds in a hurry.

This business of thinking some fixed income investment is good because it is better than other fixed income choices at this time makes no sense.
Oh my, well I guess that's conceivable, and even a discontinuation of the dollar for a new currency is conceivable, but all of this could quickly devolve into the philosophy of epistemology, and I don't want to go there, and LadyGeek probably doesn't want us to either.

In my world, I consider I Bonds safe, or certainly at least "safe enough", if I must say so.
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Re: Behavior of TIPS versus Treasuries in March

Post by dbr »

Angst wrote: Thu Jul 16, 2020 9:43 am
dbr wrote: Thu Jul 16, 2020 9:31 am
Angst wrote: Thu Jul 16, 2020 9:21 am
dbr wrote: Thu Jul 16, 2020 8:54 am
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS. I don't think there was a problem getting back money from the Treasury for a matured TIPS. I would certainly say that if you have seen these liquidity fluctuations and don't want that in an investment you would not own TIPS. There are lots of other investments that are also not safe. I don't think this has anything to do with some "should" or another but is a personal preference for what you are or are not willing to accept in an investment.
I agree 100% - no marketable fixed income security is completely "safe". For complete safety, perhaps not even cash can beat the series-I US Savings bond. As an instrument, it's somewhat like a CD, with inflation adjustment, and a few small, short-term limitations on cashing it in "early".
I bonds are also not "safe" because there is no ongoing guarantee of the real interest rate. You are still a victim of what history dictates is the interest rate available when you buy the bond. Right now that is very low so we are screwed for the time being. Note you cannot offset this by redeeming your bond when interest rates go back up and buying new ones because the purchase limit prevents you from doing this for more than paltry amounts of money.

Putting money into I bonds now is a bad deal, but we are saved from that by the fact that you can't put a lot of money into I bonds in a hurry.

This business of thinking some fixed income investment is good because it is better than other fixed income choices at this time makes no sense.
Oh my, well I guess that's conceivable, and even a discontinuation of the dollar for a new currency is conceivable, but all of this could quickly devolve into the philosophy of epistemology, and I don't want to go there, and LadyGeek probably doesn't want us to either.

In my world, I consider I Bonds safe, or certainly at least "safe enough", if I must say so.
I'm digging at the constant posting about wanting to be "safe" without being more specific about what the actual objective is. That is eminently practical and not philosophical at all. Using words without anyone knowing what they mean is philosophy.

From a practical point of view I would not invest a lot of money at an interest rate locked in at a low value in an investment that has the condition on it that once withdrawn you can't replace it. By distinction, people who managed to buy I bonds when the interest rate was 3% (I think) and there was no purchase limit got a windfall. I would also probably be wary of committing to an LMP TIPS ladder at current real interest rates and even an SPIA (ultimate in "safe" excepting inflation) is a bad deal right now. History does not let be be safe all the time.

Disclaimer: I am happy to sit on my intermediate bond and TIPS funds that I have held for decades (since 2000 for TIPS) and just move on.
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Re: Behavior of TIPS versus Treasuries in March

Post by Angst »

dbr wrote: Thu Jul 16, 2020 10:12 am
Angst wrote: Thu Jul 16, 2020 9:43 amOh my, well I guess that's conceivable, and even a discontinuation of the dollar for a new currency is conceivable, but all of this could quickly devolve into the philosophy of epistemology, and I don't want to go there, and LadyGeek probably doesn't want us to either.

In my world, I consider I Bonds safe, or certainly at least "safe enough", if I must say so.
I'm digging at the constant posting about wanting to be "safe" without being more specific about what the actual objective is. That is eminently practical and not philosophical at all. Using words without anyone knowing what they mean is philosophy.

From a practical point of view I would not invest a lot of money at an interest rate locked in at a low value in an investment that has the condition on it that once withdrawn you can't replace it. By distinction, people who managed to buy I bonds when the interest rate was 3% (I think) and there was no purchase limit got a windfall. I would also probably be wary of committing to an LMP TIPS ladder at current real interest rates and even an SPIA (ultimate in "safe" excepting inflation) is a bad deal right now. History does not let be be safe all the time.

Disclaimer: I am happy to sit on my intermediate bond and TIPS funds that I have held for decades (since 2000 for TIPS) and just move on.
I appreciate what you're saying. I'm unfortunately, by nature, always a little slow to catch nuance and quick to conclude. Regarding I Bonds today though, I think I Bonds are flirting with "windfall" territory even with their 0% real rate, because the real yield curve is negative across the spectrum of maturities and the 5 year TIPS in particular is at -1.0%, not to mention that the range of all government rates available is very compressed (i.e. the difference between lowest & highest) compared to where it's typically been in the past, so 1% real over TIPS is pretty nice. :happy

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Re: Behavior of TIPS versus Treasuries in March

Post by palanzo »

vineviz wrote: Wed Jul 15, 2020 5:44 pm
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
Two things were going on in March that you're seeing in these charts.

One was a liquidity shock that manifested across virtually all classes of bonds in one way or another. A liquidity crisis like this is rare (happens maybe a few days per decade, on average), unpredictable, and idiosyncratic.

The second thing that happened was a huge surge in economic uncertainty. Remember that the market price of TIPS moves on three factors: the real yield, realized inflation, and changes in expected inflation. With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.

I suggest setting your bond allocation based on YOUR actual needs, though, and not a horse race between bond classes or any impulse to try to out predict the market on future inflation.

If your future expenses will rise or fall with the general level of inflation, then TIPS will be a lower risk investment than nominal Treasuries. How "large" a part of your portfolio to allocate to TIPS depends on your circumstances, but I typically suggest that investors try to cover their bare minimum retirement spending with a combination of Social Security, an investment in TIPS, and/or a SPIA with a cost-of-living adjustment. Then you can safely put the rest of your portfolio in a mix of stocks, nominal bonds, deferred income annuities/longevity insurance, etc.
But would less inflation expectation result in -12.43%? Or is is simply that we really don't understand how TIPS behave as was evidenced in 2008/2009?
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Re: Behavior of TIPS versus Treasuries in March

Post by grok87 »

palanzo wrote: Thu Jul 16, 2020 11:26 am
vineviz wrote: Wed Jul 15, 2020 5:44 pm
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
Two things were going on in March that you're seeing in these charts.

One was a liquidity shock that manifested across virtually all classes of bonds in one way or another. A liquidity crisis like this is rare (happens maybe a few days per decade, on average), unpredictable, and idiosyncratic.

The second thing that happened was a huge surge in economic uncertainty. Remember that the market price of TIPS moves on three factors: the real yield, realized inflation, and changes in expected inflation. With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.

I suggest setting your bond allocation based on YOUR actual needs, though, and not a horse race between bond classes or any impulse to try to out predict the market on future inflation.

If your future expenses will rise or fall with the general level of inflation, then TIPS will be a lower risk investment than nominal Treasuries. How "large" a part of your portfolio to allocate to TIPS depends on your circumstances, but I typically suggest that investors try to cover their bare minimum retirement spending with a combination of Social Security, an investment in TIPS, and/or a SPIA with a cost-of-living adjustment. Then you can safely put the rest of your portfolio in a mix of stocks, nominal bonds, deferred income annuities/longevity insurance, etc.
But would less inflation expectation result in -12.43%? Or is is simply that we really don't understand how TIPS behave as was evidenced in 2008/2009?
so the -12.43% is from a post above and nominal bonds declined by -3.4%. so tips underperformed by 9%. the duration of the tips market is about 8 years. so one way to think about it is breakeven inflation declined by say 1.25% (i.e. 9%/8).

i think pre covid breakeven inflation was say 1.75%. so it dropped say to 0.5%. i think one question to ask, was that 0.5% really an unbiased estimate of future inflation. maybe, maybe not but it probably wasn't miles off. there probably was a risk premium associated with it.
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

palanzo wrote: Thu Jul 16, 2020 11:26 am But would less inflation expectation result in -12.43%? Or is is simply that we really don't understand how TIPS behave as was evidenced in 2008/2009?
I'd say "neither": changes in expected inflation alone certainly don't fully explain the price divergent between TIPS and nominal Treasuries we briefly saw in March, and even changes in the level of uncertainty about expected inflation don't fully explain it either.

However, it's not true that "we really don't understand how TIPS behave". Financial markets, when they are functioning, are always in equilibrium but that equilibrium is never static. And when there is a liquidity crisis, that equilibrium is going to shift rapidly. Those shifts are interesting to economists, IMHO, but long-term investors arguably should design their portfolio so that the don't really need to care about intraday or intraweek anomalies like this.
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Re: Behavior of TIPS versus Treasuries in March

Post by palanzo »

vineviz wrote: Thu Jul 16, 2020 12:02 pm
palanzo wrote: Thu Jul 16, 2020 11:26 am But would less inflation expectation result in -12.43%? Or is is simply that we really don't understand how TIPS behave as was evidenced in 2008/2009?
I'd say "neither": changes in expected inflation alone certainly don't fully explain the price divergent between TIPS and nominal Treasuries we briefly saw in March, and even changes in the level of uncertainty about expected inflation don't fully explain it either.

However, it's not true that "we really don't understand how TIPS behave". Financial markets, when they are functioning, are always in equilibrium but that equilibrium is never static. And when there is a liquidity crisis, that equilibrium is going to shift rapidly. Those shifts are interesting to economists, IMHO, but long-term investors arguably should design their portfolio so that the don't really need to care about intraday or intraweek anomalies like this.
It is said that Treasuries are the most liquid security in the world. So how did a liquidity crisis arise in Treasuries?
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Re: Behavior of TIPS versus Treasuries in March

Post by palanzo »

grok87 wrote: Thu Jul 16, 2020 11:38 am
palanzo wrote: Thu Jul 16, 2020 11:26 am
vineviz wrote: Wed Jul 15, 2020 5:44 pm
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
Two things were going on in March that you're seeing in these charts.

One was a liquidity shock that manifested across virtually all classes of bonds in one way or another. A liquidity crisis like this is rare (happens maybe a few days per decade, on average), unpredictable, and idiosyncratic.

The second thing that happened was a huge surge in economic uncertainty. Remember that the market price of TIPS moves on three factors: the real yield, realized inflation, and changes in expected inflation. With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.

I suggest setting your bond allocation based on YOUR actual needs, though, and not a horse race between bond classes or any impulse to try to out predict the market on future inflation.

If your future expenses will rise or fall with the general level of inflation, then TIPS will be a lower risk investment than nominal Treasuries. How "large" a part of your portfolio to allocate to TIPS depends on your circumstances, but I typically suggest that investors try to cover their bare minimum retirement spending with a combination of Social Security, an investment in TIPS, and/or a SPIA with a cost-of-living adjustment. Then you can safely put the rest of your portfolio in a mix of stocks, nominal bonds, deferred income annuities/longevity insurance, etc.
But would less inflation expectation result in -12.43%? Or is is simply that we really don't understand how TIPS behave as was evidenced in 2008/2009?
so the -12.43% is from a post above and nominal bonds declined by -3.4%. so tips underperformed by 9%. the duration of the tips market is about 8 years. so one way to think about it is breakeven inflation declined by say 1.25% (i.e. 9%/8).

i think pre covid breakeven inflation was say 1.75%. so it dropped say to 0.5%. i think one question to ask, was that 0.5% really an unbiased estimate of future inflation. maybe, maybe not but it probably wasn't miles off. there probably was a risk premium associated with it.
Thanks grok. That does make sense.
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lvswts
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Re: Behavior of TIPS versus Treasuries in March

Post by lvswts »

dbr wrote: Thu Jul 16, 2020 10:12 am
Angst wrote: Thu Jul 16, 2020 9:43 am
dbr wrote: Thu Jul 16, 2020 9:31 am
Angst wrote: Thu Jul 16, 2020 9:21 am
dbr wrote: Thu Jul 16, 2020 8:54 am

If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS. I don't think there was a problem getting back money from the Treasury for a matured TIPS. I would certainly say that if you have seen these liquidity fluctuations and don't want that in an investment you would not own TIPS. There are lots of other investments that are also not safe. I don't think this has anything to do with some "should" or another but is a personal preference for what you are or are not willing to accept in an investment.
I agree 100% - no marketable fixed income security is completely "safe". For complete safety, perhaps not even cash can beat the series-I US Savings bond. As an instrument, it's somewhat like a CD, with inflation adjustment, and a few small, short-term limitations on cashing it in "early".
I bonds are also not "safe" because there is no ongoing guarantee of the real interest rate. You are still a victim of what history dictates is the interest rate available when you buy the bond. Right now that is very low so we are screwed for the time being. Note you cannot offset this by redeeming your bond when interest rates go back up and buying new ones because the purchase limit prevents you from doing this for more than paltry amounts of money.

Putting money into I bonds now is a bad deal, but we are saved from that by the fact that you can't put a lot of money into I bonds in a hurry.

This business of thinking some fixed income investment is good because it is better than other fixed income choices at this time makes no sense.
Oh my, well I guess that's conceivable, and even a discontinuation of the dollar for a new currency is conceivable, but all of this could quickly devolve into the philosophy of epistemology, and I don't want to go there, and LadyGeek probably doesn't want us to either.

In my world, I consider I Bonds safe, or certainly at least "safe enough", if I must say so.
I'm digging at the constant posting about wanting to be "safe" without being more specific about what the actual objective is. That is eminently practical and not philosophical at all. Using words without anyone knowing what they mean is philosophy.

From a practical point of view I would not invest a lot of money at an interest rate locked in at a low value in an investment that has the condition on it that once withdrawn you can't replace it. By distinction, people who managed to buy I bonds when the interest rate was 3% (I think) and there was no purchase limit got a windfall. I would also probably be wary of committing to an LMP TIPS ladder at current real interest rates and even an SPIA (ultimate in "safe" excepting inflation) is a bad deal right now. History does not let be be safe all the time.

Disclaimer: I am happy to sit on my intermediate bond and TIPS funds that I have held for decades (since 2000 for TIPS) and just move on.

This thread has been very helpful to me. I should have been more specific. I've been very lucky to have a portfolio in the mid 7 figures and I am nearing a point where I feel I can retire safely. By the way I have everything in ETF's so I don't buy individual bonds. But anyhow, prior to March I had kind of (incorrectly) viewed "a bond as a bond" and found myself chasing yield. Well then March hit and I was surprised at my ignorance when my corporate and international bonds tanked along with my stocks. Well I have been blessed that the portfolio has recovered and I am very nearly at my all time portfolio high again. So I have been shifting things around a bit and some people here on the board have helped me think of bonds as something more of an anchor, while the stock portion is where I would go for the growth. So anyhow, I have shifted a fair amount of my bond allocation over to treasuries and TIPS to provide me a bit more of the stability that I originally thought any old bond would provide, but then I ran across what I viewed as an anomaly between treasuries and TIPS so that is what prompted the question. Reading through these responses I feel I have a better handle on what has happened (and perhaps what may happen in the future) and I am more comfortable with what I am doing. I really appreciate all the informed posts related to this topic.
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Re: Behavior of TIPS versus Treasuries in March

Post by pcsrini »

vineviz wrote: Thu Jul 16, 2020 12:02 pm
palanzo wrote: Thu Jul 16, 2020 11:26 am But would less inflation expectation result in -12.43%? Or is is simply that we really don't understand how TIPS behave as was evidenced in 2008/2009?
I'd say "neither": changes in expected inflation alone certainly don't fully explain the price divergent between TIPS and nominal Treasuries we briefly saw in March, and even changes in the level of uncertainty about expected inflation don't fully explain it either.

However, it's not true that "we really don't understand how TIPS behave". Financial markets, when they are functioning, are always in equilibrium but that equilibrium is never static. And when there is a liquidity crisis, that equilibrium is going to shift rapidly. Those shifts are interesting to economists, IMHO, but long-term investors arguably should design their portfolio so that the don't really need to care about intraday or intraweek anomalies like this.
Thanks, vineviz - super helpful. Just for my understanding, if there is a prolonged downturn would we expect the March intraday or intraweek anomalies to persist for a longer period of time, or is it purely a blip after the initial selling and liquidity issues. In March, the downturn was quite short lived. Also, for the more pronounced liquidity issues in bond ETF's during the March downturn especially with Munis and corporates - does the widespread availability and adoption of bond ETF's in the past decade add a new wrinkle ? Is an ETF bond investor more likely to sell under pressure especially when they see big swings, compared with a mutual fund holder who may not experience these same swings.
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Re: Behavior of TIPS versus Treasuries in March

Post by Northern Flicker »

FIREchief wrote: Wed Jul 15, 2020 6:38 pm
vineviz wrote: Wed Jul 15, 2020 5:44 pm With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.
I think this was the main driver. I haven't seen much evidence of liquidity problems.
TIPS ETFs opened up 2% to 2.5% discounts to NAV that persisted for several days, reflective of reduced liquidity as a barrier to arbitrage.
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

pcsrini wrote: Thu Jul 16, 2020 11:42 pm Thanks, vineviz - super helpful. Just for my understanding, if there is a prolonged downturn would we expect the March intraday or intraweek anomalies to persist for a longer period of time, or is it purely a blip after the initial selling and liquidity issues. In March, the downturn was quite short lived.
Unfortunately, I don't think there is a simple and universal answer. It's often, but not always, the case that a liquidity crunch is triggered by (or at least happens concurrently with) a broad economic shock of some sort. So the effects are often hard to distinguish.

I'd say the "anomalous" effects of a true liquidity crunch generally dissipate pretty quickly (days usually, but sometimes weeks) however the effects of the expectations reset can take longer, depending on how the recession ultimately plays out.

One advantage individual investors can take advantage of is minimizing their need to buy liquidity when it is expensive by matching the duration of their bonds to their investment horizon.
pcsrini wrote: Thu Jul 16, 2020 11:42 pm Also, for the more pronounced liquidity issues in bond ETF's during the March downturn especially with Munis and corporates - does the widespread availability and adoption of bond ETF's in the past decade add a new wrinkle ? Is an ETF bond investor more likely to sell under pressure especially when they see big swings, compared with a mutual fund holder who may not experience these same swings.
The growth of bond ETFs has certainly helped markets deal with economic and/or liquidity shocks more quickly and efficiently. I don't see much evidence that individual investors behave much differently based on whether they own bond ETFs or open-end bond funds. Assuming an investor can avoid selling during times of market volatility, the bond ETF owners are likely to have some advantage of fund owners during times like this because they aren't bearing the transaction costs and liquidity costs of other, more panicky investors.

My own tendencies lean to the contrarian, so I often have the urge to aggressively rebalance during periods of high market volatility. And although periodic rebalancing is a crucial part of the investment strategy for most individual investors, there is some evidence that the smart strategy is to avoid rebalancing if volatility is significantly higher than normal. This is probably more important for an ETF investor than a mutual fund investor, since the ETF investor is bearing all of their own transaction costs (including bid/ask spreads).

I'm not sure I really answered your question :(
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Re: Behavior of TIPS versus Treasuries in March

Post by Elysium »

lvswts wrote: Thu Jul 16, 2020 8:43 pm This thread has been very helpful to me. I should have been more specific. I've been very lucky to have a portfolio in the mid 7 figures and I am nearing a point where I feel I can retire safely. By the way I have everything in ETF's so I don't buy individual bonds. But anyhow, prior to March I had kind of (incorrectly) viewed "a bond as a bond" and found myself chasing yield. Well then March hit and I was surprised at my ignorance when my corporate and international bonds tanked along with my stocks. Well I have been blessed that the portfolio has recovered and I am very nearly at my all time portfolio high again. So I have been shifting things around a bit and some people here on the board have helped me think of bonds as something more of an anchor, while the stock portion is where I would go for the growth. So anyhow, I have shifted a fair amount of my bond allocation over to treasuries and TIPS to provide me a bit more of the stability that I originally thought any old bond would provide, but then I ran across what I viewed as an anomaly between treasuries and TIPS so that is what prompted the question. Reading through these responses I feel I have a better handle on what has happened (and perhaps what may happen in the future) and I am more comfortable with what I am doing. I really appreciate all the informed posts related to this topic.
Hopefully you have understood it now. A really helpful rule of thumb is to view TIPS as inflation protection and nominal Treasuries as flight to safety protection. Each has their role, and you cannot mix them up. We cannot expect nominal Long Term Treasuries to protect us in high inflationary period, that is what TIPS are for, and similarly when there is liquidity issues/flight to safety we cannot expect TIPS to do the job, LTT will do it. You have to assign them a role in the portfolio and then compare with whether they are meeting that purpose.
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Re: Behavior of TIPS versus Treasuries in March

Post by Nowizard »

Though more commonly applied to equities, the adage that no one can predict the market is certainly driving tremendous confusion and uncertainty about the best way to invest in bonds. For those of us who are older and used to a reasonably direct belief that when stocks go down, bonds go up or provide a margin of safety, we, at least I, realize that there is much more complexity with bond investing than formerly believed. When confused, we basically do little or nothing and are staying with Total Bond and some ST bonds, all in indexes.

Tim
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Re: Behavior of TIPS versus Treasuries in March

Post by pcsrini »

vineviz wrote: Fri Jul 17, 2020 8:41 am
pcsrini wrote: Thu Jul 16, 2020 11:42 pm Thanks, vineviz - super helpful. Just for my understanding, if there is a prolonged downturn would we expect the March intraday or intraweek anomalies to persist for a longer period of time, or is it purely a blip after the initial selling and liquidity issues. In March, the downturn was quite short lived.
Unfortunately, I don't think there is a simple and universal answer. It's often, but not always, the case that a liquidity crunch is triggered by (or at least happens concurrently with) a broad economic shock of some sort. So the effects are often hard to distinguish.

I'd say the "anomalous" effects of a true liquidity crunch generally dissipate pretty quickly (days usually, but sometimes weeks) however the effects of the expectations reset can take longer, depending on how the recession ultimately plays out.

One advantage individual investors can take advantage of is minimizing their need to buy liquidity when it is expensive by matching the duration of their bonds to their investment horizon.
pcsrini wrote: Thu Jul 16, 2020 11:42 pm Also, for the more pronounced liquidity issues in bond ETF's during the March downturn especially with Munis and corporates - does the widespread availability and adoption of bond ETF's in the past decade add a new wrinkle ? Is an ETF bond investor more likely to sell under pressure especially when they see big swings, compared with a mutual fund holder who may not experience these same swings.
The growth of bond ETFs has certainly helped markets deal with economic and/or liquidity shocks more quickly and efficiently. I don't see much evidence that individual investors behave much differently based on whether they own bond ETFs or open-end bond funds. Assuming an investor can avoid selling during times of market volatility, the bond ETF owners are likely to have some advantage of fund owners during times like this because they aren't bearing the transaction costs and liquidity costs of other, more panicky investors.

My own tendencies lean to the contrarian, so I often have the urge to aggressively rebalance during periods of high market volatility. And although periodic rebalancing is a crucial part of the investment strategy for most individual investors, there is some evidence that the smart strategy is to avoid rebalancing if volatility is significantly higher than normal. This is probably more important for an ETF investor than a mutual fund investor, since the ETF investor is bearing all of their own transaction costs (including bid/ask spreads).

I'm not sure I really answered your question :(
Super helpful. I have also read that due to data quality issues bond mutual fund NAV's in a crisis don't accurately reflect the liquidity issues in the underlying bonds, and that bond ETF's are more accurate in their prices during these times. Like you said, after the pressure of the initial selling, and for broad based bond ETF's, new buyers should recognize the opportunity and should quickly snap them up resulting in a blip even in a more prolonged recession. It will be interesting to observe how this plays out the next time. Matching duration to investment horizon and ignoring blips is sound advice.
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Re: Behavior of TIPS versus Treasuries in March

Post by pcsrini »

Nowizard wrote: Fri Jul 17, 2020 9:21 am Though more commonly applied to equities, the adage that no one can predict the market is certainly driving tremendous confusion and uncertainty about the best way to invest in bonds. For those of us who are older and used to a reasonably direct belief that when stocks go down, bonds go up or provide a margin of safety, we, at least I, realize that there is much more complexity with bond investing than formerly believed. When confused, we basically do little or nothing and are staying with Total Bond and some ST bonds, all in indexes.

Tim
+1. I had the same reaction and response.
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Re: Behavior of TIPS versus Treasuries in March

Post by FIREchief »

Northern Flicker wrote: Fri Jul 17, 2020 12:28 am
FIREchief wrote: Wed Jul 15, 2020 6:38 pm
vineviz wrote: Wed Jul 15, 2020 5:44 pm With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.
I think this was the main driver. I haven't seen much evidence of liquidity problems.
TIPS ETFs opened up 2% to 2.5% discounts to NAV that persisted for several days, reflective of reduced liquidity as a barrier to arbitrage.
Yes, I agree. I guess I just didn't consider "several days" to constitute a meaningful concern.
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: Behavior of TIPS versus Treasuries in March

Post by FIREchief »

Elysium wrote: Fri Jul 17, 2020 9:15 am Each has their role, and you cannot mix them up. We cannot expect nominal Long Term Treasuries to protect us in high inflationary period, that is what TIPS are for, and similarly when there is liquidity issues/flight to safety we cannot expect TIPS to do the job, LTT will do it. You have to assign them a role in the portfolio and then compare with whether they are meeting that purpose.
I somewhat disagree with your suggestion that nominal treasuries are "safer" than TIPS. It all depends upon how you hold the TIPS. If you hold them to maturity in a rolling ladder and don't use them to rebalance (I never rebalance), than they are every bit as safe as any other treasury.
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: Behavior of TIPS versus Treasuries in March

Post by Northern Flicker »

FIREchief wrote: Fri Jul 17, 2020 12:02 pm
Northern Flicker wrote: Fri Jul 17, 2020 12:28 am
FIREchief wrote: Wed Jul 15, 2020 6:38 pm
vineviz wrote: Wed Jul 15, 2020 5:44 pm With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.
I think this was the main driver. I haven't seen much evidence of liquidity problems.
TIPS ETFs opened up 2% to 2.5% discounts to NAV that persisted for several days, reflective of reduced liquidity as a barrier to arbitrage.
Yes, I agree. I guess I just didn't consider "several days" to constitute a meaningful concern.
In the arbitrage world, where only the first in line gets the prize, and market participants are in a race, any gap that extends beyond the next day's market opening would be indicative of a barrier to arbitrage.
Last edited by Northern Flicker on Fri Jul 17, 2020 4:03 pm, edited 1 time in total.
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Re: Behavior of TIPS versus Treasuries in March

Post by palanzo »

Nowizard wrote: Fri Jul 17, 2020 9:21 am Though more commonly applied to equities, the adage that no one can predict the market is certainly driving tremendous confusion and uncertainty about the best way to invest in bonds. For those of us who are older and used to a reasonably direct belief that when stocks go down, bonds go up or provide a margin of safety, we, at least I, realize that there is much more complexity with bond investing than formerly believed. When confused, we basically do little or nothing and are staying with Total Bond and some ST bonds, all in indexes.

Tim
I agree with this sentiment. The question is which ST bonds to use now. ST corporates may be riskier now e.g. Hertz, ST munis have their own state funding issues and Treasuries yield next to nothing.
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Re: Behavior of TIPS versus Treasuries in March

Post by pcsrini »

palanzo wrote: Fri Jul 17, 2020 2:09 pm
Nowizard wrote: Fri Jul 17, 2020 9:21 am Though more commonly applied to equities, the adage that no one can predict the market is certainly driving tremendous confusion and uncertainty about the best way to invest in bonds. For those of us who are older and used to a reasonably direct belief that when stocks go down, bonds go up or provide a margin of safety, we, at least I, realize that there is much more complexity with bond investing than formerly believed. When confused, we basically do little or nothing and are staying with Total Bond and some ST bonds, all in indexes.

Tim
I agree with this sentiment. The question is which ST bonds to use now. ST corporates may be riskier now e.g. Hertz, ST munis have their own state funding issues and Treasuries yield next to nothing.
Given the very low yields, a high yield savings account at Ally or one of the other online accounts may not be a bad idea instead of ST bonds.
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Re: Behavior of TIPS versus Treasuries in March

Post by Elysium »

FIREchief wrote: Fri Jul 17, 2020 12:04 pm
Elysium wrote: Fri Jul 17, 2020 9:15 am Each has their role, and you cannot mix them up. We cannot expect nominal Long Term Treasuries to protect us in high inflationary period, that is what TIPS are for, and similarly when there is liquidity issues/flight to safety we cannot expect TIPS to do the job, LTT will do it. You have to assign them a role in the portfolio and then compare with whether they are meeting that purpose.
I somewhat disagree with your suggestion that nominal treasuries are "safer" than TIPS. It all depends upon how you hold the TIPS. If you hold them to maturity in a rolling ladder and don't use them to rebalance (I never rebalance), than they are every bit as safe as any other treasury.
Is that still true if you have to sell before maturity and in the middle of a crisis, such as the one we experienced in March.
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Re: Behavior of TIPS versus Treasuries in March

Post by JackoC »

dbr wrote: Thu Jul 16, 2020 9:31 am
Angst wrote: Thu Jul 16, 2020 9:21 am
dbr wrote: Thu Jul 16, 2020 8:54 am
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS.
I agree 100% - no marketable fixed income security is completely "safe". For complete safety, perhaps not even cash can beat the series-I US Savings bond.
I bonds are also not "safe" because there is no ongoing guarantee of the real interest rate. You are still a victim of what history dictates is the interest rate available when you buy the bond. Right now that is very low so we are screwed for the time being. Note you cannot offset this by redeeming your bond when interest rates go back up and buying new ones because the purchase limit prevents you from doing this for more than paltry amounts of money.

Putting money into I bonds now is a bad deal, but we are saved from that by the fact that you can't put a lot of money into I bonds in a hurry.

This business of thinking some fixed income investment is good because it is better than other fixed income choices at this time makes no sense.
I completely disagree with the last. The only realistic comparison is among returns you can actually get, and what risk you have to take to get them. What return you want to get for no credit risk, or what you used to get, or what you someday hope to get is not relevant. Nor what you believe you can get on riskier investments. There's a place for risk, but the reasonable assumption here is comparing alternatives for the portion of portfolio set aside for low risk investments.

Anyway the statement about I-bonds being 'safest' didn't say anything about how good or bad the return was. What was stated was correct: after 5 yrs you get original face amount plus full accrued interest. Selling TIPS at any given time prior to maturity you can get much more or less than that.

But on relative return, the 5 yr TIPS yield now is aroun -1.06% (interpolating Jan 2025 and Jan 2026). New I-bonds are 0% fixed. I can't see any good argument why that's not relevant in choosing among low risk investments. I-bonds can only be purchased in what are quite small quantities for many investors, that's a real limitation, true. But I-bond at 0% real rather than TIPS at -1% or the 5 yr note at 0.3% nominal is obvious if those are the choices. Although I would prefer a 5 yr CD at 2% (still barely possible) among low risk assets to any of those. Again, assuming *any* investment in low risk assets. If somebody wants 100% risk assets they needn't concern themselves with this whole discussion. :happy
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Re: Behavior of TIPS versus Treasuries in March

Post by palanzo »

pcsrini wrote: Fri Jul 17, 2020 2:43 pm
palanzo wrote: Fri Jul 17, 2020 2:09 pm
Nowizard wrote: Fri Jul 17, 2020 9:21 am Though more commonly applied to equities, the adage that no one can predict the market is certainly driving tremendous confusion and uncertainty about the best way to invest in bonds. For those of us who are older and used to a reasonably direct belief that when stocks go down, bonds go up or provide a margin of safety, we, at least I, realize that there is much more complexity with bond investing than formerly believed. When confused, we basically do little or nothing and are staying with Total Bond and some ST bonds, all in indexes.

Tim
I agree with this sentiment. The question is which ST bonds to use now. ST corporates may be riskier now e.g. Hertz, ST munis have their own state funding issues and Treasuries yield next to nothing.
Given the very low yields, a high yield savings account at Ally or one of the other online accounts may not be a bad idea instead of ST bonds.
Yes, that may be the best option now. Not a great option but the only one left.
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Re: Behavior of TIPS versus Treasuries in March

Post by dbr »

JackoC wrote: Fri Jul 17, 2020 3:35 pm
dbr wrote: Thu Jul 16, 2020 9:31 am
Angst wrote: Thu Jul 16, 2020 9:21 am
dbr wrote: Thu Jul 16, 2020 8:54 am
lvswts wrote: Wed Jul 15, 2020 4:37 pm
I'm starting to think about my bonds as a safety component but I'm wondering if TIPs should have a large part in the portfolio if this is the expected behavior.
If by safe you mean that it is guaranteed you can get all your money back at any arbitrary time, then no investment that is valued by trading in a market is safe, including TIPS.
I agree 100% - no marketable fixed income security is completely "safe". For complete safety, perhaps not even cash can beat the series-I US Savings bond.
I bonds are also not "safe" because there is no ongoing guarantee of the real interest rate. You are still a victim of what history dictates is the interest rate available when you buy the bond. Right now that is very low so we are screwed for the time being. Note you cannot offset this by redeeming your bond when interest rates go back up and buying new ones because the purchase limit prevents you from doing this for more than paltry amounts of money.

Putting money into I bonds now is a bad deal, but we are saved from that by the fact that you can't put a lot of money into I bonds in a hurry.

This business of thinking some fixed income investment is good because it is better than other fixed income choices at this time makes no sense.
I completely disagree with the last. The only realistic comparison is among returns you can actually get, and what risk you have to take to get them. What return you want to get for no credit risk, or what you used to get, or what you someday hope to get is not relevant. Nor what you believe you can get on riskier investments. There's a place for risk, but the reasonable assumption here is comparing alternatives for the portion of portfolio set aside for low risk investments.

Anyway the statement about I-bonds being 'safest' didn't say anything about how good or bad the return was. What was stated was correct: after 5 yrs you get original face amount plus full accrued interest. Selling TIPS at any given time prior to maturity you can get much more or less than that.

But on relative return, the 5 yr TIPS yield now is aroun -1.06% (interpolating Jan 2025 and Jan 2026). New I-bonds are 0% fixed. I can't see any good argument why that's not relevant in choosing among low risk investments. I-bonds can only be purchased in what are quite small quantities for many investors, that's a real limitation, true. But I-bond at 0% real rather than TIPS at -1% or the 5 yr note at 0.3% nominal is obvious if those are the choices. Although I would prefer a 5 yr CD at 2% (still barely possible) among low risk assets to any of those. Again, assuming *any* investment in low risk assets. If somebody wants 100% risk assets they needn't concern themselves with this whole discussion. :happy
I guess I just can't get very interested in what to pick in bonds and tend to be a little blase. Maybe other people have better answers, including you too already. But then for ten years at one time I had CDs paying 10% even as inflation fell off. But, you are right, that was a long time ago and doesn't help the person buying bonds today.
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

Elysium wrote: Fri Jul 17, 2020 3:13 pm Is that still true if you have to sell before maturity and in the middle of a crisis, such as the one we experienced in March.
This strikes me a somewhat leading question: by definition, a forced sale during a liquidity crisis is going be tumultuous. But without knowing in advance what precipitates the crisis or when it might occur, that's going to be a difficult thing to plan for.

One pre-requisite for identifying an investor's risk-free asset(s) is having an accurate forecast of the timing and size of future liabilities. Framing the question as "hav(ing) to sell before maturity and in the middle of a crisis" pretty much rules out having any accuracy or precision in such a forecast.

That said, from a pure portfolio diversification perspective it is true that nominal Treasuries will almost certainly have a lower correlation with equities than TIPS will have. However it's probably wiser for long-term investors to simply build the portfolio they want for the long-term (including some amount of short-term securities and/or cash so forced sales of long-term assets during crises are less likely) and then evaluate ALL their holdings for liquidity supply if/when the crisis occurs.
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Re: Behavior of TIPS versus Treasuries in March

Post by JackoC »

FIREchief wrote: Wed Jul 15, 2020 6:38 pm
vineviz wrote: Wed Jul 15, 2020 5:44 pm With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.
I think this was the main driver. I haven't seen much evidence of liquidity problems.
There was a severe liquidity crisis in late March which arguably came close to collapsing the whole system. That was mainly responsible for the crazy sell offs and bounce backs in various fixed income assets in that period. Per Treasury Daily Yield Curve, On 3/9 the 10 yr yield was .87% and 10 yr TIPS .32%, on 3/18 1.60% and +.66%, by 4/1 1.04% and -.10, IOW TIPS breakeven didn't move a whole lot in that period, 1.19%, .94%, 1.14%. But it's not plausible to say 'investors by 3/18 saw more opportunities for real return in the economy so bid the TIPS real yield up from -.32% to +0.66%... but then changed their minds back by the end of the month'. Pretty obviously instead the main reason for that whipsaw was a suddenly much decreased appetite to hold TIPS by financial institutions, harder to finance and offload. The same thing happened to US agency securities with only a little more real credit risk than TIPS, besides corporate and muni's pummeled by real credit as well as liquidity fears. But at the peak of this crisis, unlike in 2009, nominal treasuries also began to sell off in the rush for cash. And their liquidity was also visibly distressed, observable to ordinary investors not involved in the treasury market by looking at the futures market. The 'classic' 10 yr note futures contract (ZN) is perhaps the most liquid financial instrument in existence, normally, but bid-offer spread began widening ominously at the peak of that crisis.

Taking a broader year to date it's more plausible to say changing inflation expectations are a major factor in relative TIPS/nominal moves. On 1/2 the 10yr yielded 1.88, TIPS +.08, today .64 and -.82, for TIPS breakeven 1.8 v 1.46. So yes with worst of liquidity panic seemingly past, some of that move is probably just lower inflation expectations because there's a pandemic. But as far as TIPS performance in the crunch, liquidity was a big factor. Like it pretty obviously was in 2009, except again this time nominal treasuries began to fall in price as too many market players at once sought cash at all costs.

Nominals are the most liquid USD cash instrument. But no law of nature says they can't suffer from selloffs in a liquidity crisis. But TIPS seem to consistently more. I-bonds will not (for their limited size), cash in the bank will not. CD's will lose a relatively known amount in interest penalty for early withdrawal (5 yr note went from 0.46% to 0.79% from 3/9-3/18, that's ~1.6% in price, 12 or 6 month interest penalty on a 2% CD is 2% or 1%, and we don't know the whole 5yr note increase in yield was liquidity driven).
Last edited by JackoC on Fri Jul 17, 2020 5:02 pm, edited 1 time in total.
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FIREchief
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Re: Behavior of TIPS versus Treasuries in March

Post by FIREchief »

Elysium wrote: Fri Jul 17, 2020 3:13 pm
FIREchief wrote: Fri Jul 17, 2020 12:04 pm
Elysium wrote: Fri Jul 17, 2020 9:15 am Each has their role, and you cannot mix them up. We cannot expect nominal Long Term Treasuries to protect us in high inflationary period, that is what TIPS are for, and similarly when there is liquidity issues/flight to safety we cannot expect TIPS to do the job, LTT will do it. You have to assign them a role in the portfolio and then compare with whether they are meeting that purpose.
I somewhat disagree with your suggestion that nominal treasuries are "safer" than TIPS. It all depends upon how you hold the TIPS. If you hold them to maturity in a rolling ladder and don't use them to rebalance (I never rebalance), than they are every bit as safe as any other treasury.
Is that still true if you have to sell before maturity and in the middle of a crisis, such as the one we experienced in March.
Isn't this the exact situation I addressed in qualifying my statement in the post quoted?
If you hold them to maturity
:confused
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palanzo
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Re: Behavior of TIPS versus Treasuries in March

Post by palanzo »

JackoC wrote: Fri Jul 17, 2020 4:58 pm
FIREchief wrote: Wed Jul 15, 2020 6:38 pm
vineviz wrote: Wed Jul 15, 2020 5:44 pm With the sudden appearance of what appears/appeared to be a massive economic slowdown, investors were adjusting their expectations to price in a recession of unknown magnitude and duration. Recessions usually mean either less inflation or outright deflation, so this is a scenario in which you'd expect nominal Treasuries to outperform TIPS.
I think this was the main driver. I haven't seen much evidence of liquidity problems.
There was a severe liquidity crisis in late March which arguably came close to collapsing the whole system. That was mainly responsible for the crazy sell offs and bounce backs in various fixed income assets in that period. Per Treasury Daily Yield Curve, On 3/9 the 10 yr yield was .87% and 10 yr TIPS .32%, on 3/18 1.60% and +.66%, by 4/1 1.04% and -.10, IOW TIPS breakeven didn't move a whole lot in that period, 1.19%, .94%, 1.14%. But it's not plausible to say 'investors by 3/18 saw more opportunities for real return in the economy so bid the TIPS real yield up from -.32% to +0.66%... but then changed their minds back by the end of the month'. Pretty obviously instead the main reason for that whipsaw was a suddenly much decreased appetite to hold TIPS by financial institutions, harder to finance and offload. The same thing happened to US agency securities with only a little more real credit risk than TIPS, besides corporate and muni's pummeled by real credit as well as liquidity fears. But at the peak of this crisis, unlike in 2009, nominal treasuries also began to sell off in the rush for cash. And their liquidity was also visibly distressed, observable to ordinary investors not involved in the treasury market by looking at the futures market. The 'classic' 10 yr note futures contract (ZN) is perhaps the most liquid financial instrument in existence, normally, but bid-offer spread began widening ominously at the peak of that crisis.

Taking a broader year to date it's more plausible to say changing inflation expectations are a major factor in relative TIPS/nominal moves. On 1/2 the 10yr yielded 1.88, TIPS +.08, today .64 and -.82, for TIPS breakeven 1.8 v 1.46. So yes with worst of liquidity panic seemingly past, some of that move is probably just lower inflation expectations because there's a pandemic. But as far as TIPS performance in the crunch, liquidity was a big factor. Like it pretty obviously was in 2009, except again this time nominal treasuries began to fall in price as too many market players at once sought cash at all costs.

Nominals are the most liquid USD cash instrument. But no law of nature says they can't suffer from selloffs in a liquidity crisis. But TIPS seem to consistently more. I-bonds will not (for their limited size), cash in the bank will not. CD's will lose a relatively known amount in interest penalty for early withdrawal (5 yr note went from 0.46% to 0.79% from 3/9-3/18, that's ~1.6% in price, 12 or 6 month interest penalty on a 2% CD is 2% or 1%, and we don't know the whole 5yr note increase in yield was liquidity driven).
There are about 13 Trillion worth of treasury securities held by mutual funds, banks, individuals, pension funds and foreign countries. Just how much of this 13 Trillion was sold off to create the liquidity crisis? Who was selling and why?
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Re: Behavior of TIPS versus Treasuries in March

Post by Elysium »

vineviz wrote: Fri Jul 17, 2020 4:57 pm
Elysium wrote: Fri Jul 17, 2020 3:13 pm Is that still true if you have to sell before maturity and in the middle of a crisis, such as the one we experienced in March.
This strikes me a somewhat leading question: by definition, a forced sale during a liquidity crisis is going be tumultuous. But without knowing in advance what precipitates the crisis or when it might occur, that's going to be a difficult thing to plan for.

One pre-requisite for identifying an investor's risk-free asset(s) is having an accurate forecast of the timing and size of future liabilities. Framing the question as "hav(ing) to sell before maturity and in the middle of a crisis" pretty much rules out having any accuracy or precision in such a forecast.

That said, from a pure portfolio diversification perspective it is true that nominal Treasuries will almost certainly have a lower correlation with equities than TIPS will have. However it's probably wiser for long-term investors to simply build the portfolio they want for the long-term (including some amount of short-term securities and/or cash so forced sales of long-term assets during crises are less likely) and then evaluate ALL their holdings for liquidity supply if/when the crisis occurs.
I was only making the point that individual TIPS ladder isn't immune from liquidity issues, and the solution is to hold other types of bonds also along with TIPS, so an investor isn't forced to take an action that isn't desirable.
FIREchief wrote: Fri Jul 17, 2020 5:01 pm Isn't this the exact situation I addressed in qualifying my statement in the post quoted?
If you hold them to maturity
:confused
I was asking about the possibility of not being able to hold them to maturity. Ideally, you would have other types of bonds/cash that you can liquidate. Obviously, holding TIPS ladder with varying maturities will solve that problem to a large extend.
Last edited by Elysium on Fri Jul 17, 2020 9:07 pm, edited 3 times in total.
grok87
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Re: Behavior of TIPS versus Treasuries in March

Post by grok87 »

pcsrini wrote: Fri Jul 17, 2020 11:01 am
vineviz wrote: Fri Jul 17, 2020 8:41 am
pcsrini wrote: Thu Jul 16, 2020 11:42 pm Thanks, vineviz - super helpful. Just for my understanding, if there is a prolonged downturn would we expect the March intraday or intraweek anomalies to persist for a longer period of time, or is it purely a blip after the initial selling and liquidity issues. In March, the downturn was quite short lived.
Unfortunately, I don't think there is a simple and universal answer. It's often, but not always, the case that a liquidity crunch is triggered by (or at least happens concurrently with) a broad economic shock of some sort. So the effects are often hard to distinguish.

I'd say the "anomalous" effects of a true liquidity crunch generally dissipate pretty quickly (days usually, but sometimes weeks) however the effects of the expectations reset can take longer, depending on how the recession ultimately plays out.

One advantage individual investors can take advantage of is minimizing their need to buy liquidity when it is expensive by matching the duration of their bonds to their investment horizon.
pcsrini wrote: Thu Jul 16, 2020 11:42 pm Also, for the more pronounced liquidity issues in bond ETF's during the March downturn especially with Munis and corporates - does the widespread availability and adoption of bond ETF's in the past decade add a new wrinkle ? Is an ETF bond investor more likely to sell under pressure especially when they see big swings, compared with a mutual fund holder who may not experience these same swings.
The growth of bond ETFs has certainly helped markets deal with economic and/or liquidity shocks more quickly and efficiently. I don't see much evidence that individual investors behave much differently based on whether they own bond ETFs or open-end bond funds. Assuming an investor can avoid selling during times of market volatility, the bond ETF owners are likely to have some advantage of fund owners during times like this because they aren't bearing the transaction costs and liquidity costs of other, more panicky investors.

My own tendencies lean to the contrarian, so I often have the urge to aggressively rebalance during periods of high market volatility. And although periodic rebalancing is a crucial part of the investment strategy for most individual investors, there is some evidence that the smart strategy is to avoid rebalancing if volatility is significantly higher than normal. This is probably more important for an ETF investor than a mutual fund investor, since the ETF investor is bearing all of their own transaction costs (including bid/ask spreads).

I'm not sure I really answered your question :(
I have also read that due to data quality issues bond mutual fund NAV's in a crisis don't accurately reflect the liquidity issues in the underlying bonds, and that bond ETF's are more accurate in their prices during these times.
i have also been pitched this line, that bond ETF prices are more accurate in "these times". The people pitching it to me were ETF salespeople!
:)
LOL.

I don't believe it.
RIP Mr. Bogle.
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vineviz
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

grok87 wrote: Fri Jul 17, 2020 7:12 pm
i have also been pitched this line, that bond ETF prices are more accurate in "these times". The people pitching it to me were ETF salespeople!
:)
LOL.

I don't believe it.
That's too bad, but it is unquestionably true.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
pcsrini
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Re: Behavior of TIPS versus Treasuries in March

Post by pcsrini »

grok87 wrote: Fri Jul 17, 2020 7:12 pm
pcsrini wrote: Fri Jul 17, 2020 11:01 am
vineviz wrote: Fri Jul 17, 2020 8:41 am
pcsrini wrote: Thu Jul 16, 2020 11:42 pm Thanks, vineviz - super helpful. Just for my understanding, if there is a prolonged downturn would we expect the March intraday or intraweek anomalies to persist for a longer period of time, or is it purely a blip after the initial selling and liquidity issues. In March, the downturn was quite short lived.
Unfortunately, I don't think there is a simple and universal answer. It's often, but not always, the case that a liquidity crunch is triggered by (or at least happens concurrently with) a broad economic shock of some sort. So the effects are often hard to distinguish.

I'd say the "anomalous" effects of a true liquidity crunch generally dissipate pretty quickly (days usually, but sometimes weeks) however the effects of the expectations reset can take longer, depending on how the recession ultimately plays out.

One advantage individual investors can take advantage of is minimizing their need to buy liquidity when it is expensive by matching the duration of their bonds to their investment horizon.
pcsrini wrote: Thu Jul 16, 2020 11:42 pm Also, for the more pronounced liquidity issues in bond ETF's during the March downturn especially with Munis and corporates - does the widespread availability and adoption of bond ETF's in the past decade add a new wrinkle ? Is an ETF bond investor more likely to sell under pressure especially when they see big swings, compared with a mutual fund holder who may not experience these same swings.
The growth of bond ETFs has certainly helped markets deal with economic and/or liquidity shocks more quickly and efficiently. I don't see much evidence that individual investors behave much differently based on whether they own bond ETFs or open-end bond funds. Assuming an investor can avoid selling during times of market volatility, the bond ETF owners are likely to have some advantage of fund owners during times like this because they aren't bearing the transaction costs and liquidity costs of other, more panicky investors.

My own tendencies lean to the contrarian, so I often have the urge to aggressively rebalance during periods of high market volatility. And although periodic rebalancing is a crucial part of the investment strategy for most individual investors, there is some evidence that the smart strategy is to avoid rebalancing if volatility is significantly higher than normal. This is probably more important for an ETF investor than a mutual fund investor, since the ETF investor is bearing all of their own transaction costs (including bid/ask spreads).

I'm not sure I really answered your question :(
I have also read that due to data quality issues bond mutual fund NAV's in a crisis don't accurately reflect the liquidity issues in the underlying bonds, and that bond ETF's are more accurate in their prices during these times.
i have also been pitched this line, that bond ETF prices are more accurate in "these times". The people pitching it to me were ETF salespeople!
:)
LOL.

I don't believe it.
:D . I know, I take the stuff I read with a grain of salt. FWIW, here is one of these articles:
https://www.institutionalinvestor.com/a ... ral-Change
Angst
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Re: Behavior of TIPS versus Treasuries in March

Post by Angst »

vineviz wrote: Fri Jul 17, 2020 7:18 pm
grok87 wrote: Fri Jul 17, 2020 7:12 pm
i have also been pitched this line, that bond ETF prices are more accurate in "these times". The people pitching it to me were ETF salespeople!
:)
LOL.

I don't believe it.
That's too bad, but it is unquestionably true.
Yes, I'm inclined to accept that the ETF price is still better than "NAV" during trading hours, even when [EDIT - especially when] liquidity issues w/ underlying securities or downright fear are affecting markets. I bookmarked this article from etftrends.com that vineviz linked to back during the March madness. It's well written and addresses the issue directly in the context of what was going on back then. I also remember reading back then that the SEC (?) or some govt entity is looking into ways to implement "limit pricing" in the bond secondary market for individual buyers, like me and most Bogleheads. That could only be a positive thing from the standpoint of liquidity and for the hope of reducing b/a spreads for bonds.
Last edited by Angst on Sat Jul 18, 2020 10:02 am, edited 1 time in total.
pascalwager
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Re: Behavior of TIPS versus Treasuries in March

Post by pascalwager »

I own VAIPX (TIPS fund) and was just now looking at the M* chart and was astonished to see the drop in March. I don't know how I missed it as I check my Google Sheet nearly every day. Maybe I just forgot.

I keep this fund off to the side, like an LMP--not part of my risk portfolio--so I don't rebalance out of it; but I did rebalance heavily out of TBM MF on a day when it lost nearly 1% of value.

In the future I intend to be more cautious when rebalancing--more aware of market conditions.
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FIREchief
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Re: Behavior of TIPS versus Treasuries in March

Post by FIREchief »

Elysium wrote: Fri Jul 17, 2020 6:36 pm
FIREchief wrote: Fri Jul 17, 2020 5:01 pm Isn't this the exact situation I addressed in qualifying my statement in the post quoted?
If you hold them to maturity
:confused
I was asking about the possibility of not being able to hold them to maturity. Ideally, you would have other types of bonds/cash that you can liquidate. Obviously, holding TIPS ladder with varying maturities will solve that problem to a large extend.
If a person will never have to sell a TIPS during a "crisis," than I'll stick to my position that there is no risk of illiquidity impacting them. I said "if you hold them to maturity," because that was the only point I was trying to make. I have little interest in other scenarios, as I'll never have to sell a TIPS prior to maturity. If you think that you will, than certainly you should come up with an alternate strategy that you feel addresses your concerns. The main reason that I've seen people claim that they are "forced" to sell during a crisis is to stick with a rebalancing strategy. As I stated previously, I never rebalance. 8-)
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Northern Flicker
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Re: Behavior of TIPS versus Treasuries in March

Post by Northern Flicker »

What you mean is that if you don't need to sell them, then you won't care about how liquid they are. We can turn the liquidity risk around and say that by holding a TIPS to maturity, you will harvest any liquidity risk premium the market prices into the yield when you buy the TIPS.
Risk is not a guarantor of return.
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FIREchief
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Re: Behavior of TIPS versus Treasuries in March

Post by FIREchief »

Northern Flicker wrote: Fri Jul 17, 2020 11:53 pm What you mean is that if you don't need to sell them, then you won't care about how liquid they are. We can turn the liquidity risk around and say that by holding a TIPS to maturity, you will harvest any liquidity risk premium the market prices into the yield when you buy the TIPS.
I think followed that. If I understand what you're saying than.... :sharebeer

That said, I highly doubt that the extremely miniscule "risk premium" of TIPS being (slightly and of very limited duration) illiquid has extremely small impact on their auction prices. 8-)
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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