Current state of TIPS market

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texasfight
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Current state of TIPS market

Post by texasfight »

I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
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Re: Current state of TIPS market

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texasfight wrote: Wed Aug 19, 2020 9:15 am I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
Why do you think that "people are paying up big time right now for inflation protection?" The article states that the breakeven inflation rate on a ten year term is 1.69%. If I think inflation will equal that (I do), than my inflation protection is free. What am I missing here? :confused
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texasfight
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Re: Current state of TIPS market

Post by texasfight »

FIREchief wrote: Wed Aug 19, 2020 12:21 pm
texasfight wrote: Wed Aug 19, 2020 9:15 am I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
Why do you think that "people are paying up big time right now for inflation protection?" The article states that the breakeven inflation rate on a ten year term is 1.69%. If I think inflation will equal that (I do), than my inflation protection is free. What am I missing here? :confused
Look at tweet 6/10. People are now actually paying a liquidity premium for TIPS over treasuries when you look at the inflation risk premium.
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Re: Current state of TIPS market

Post by FIREchief »

texasfight wrote: Wed Aug 19, 2020 12:27 pm
FIREchief wrote: Wed Aug 19, 2020 12:21 pm
texasfight wrote: Wed Aug 19, 2020 9:15 am I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
Why do you think that "people are paying up big time right now for inflation protection?" The article states that the breakeven inflation rate on a ten year term is 1.69%. If I think inflation will equal that (I do), than my inflation protection is free. What am I missing here? :confused
Look at tweet 6/10. People are now actually paying a liquidity premium for TIPS over treasuries when you look at the inflation risk premium.
That guy is just making stuff up. Where does his "expected inflation" line come from? There is no such thing. Also the thing (perhaps only thing) that all the experts and academics agree on is that it is impossible to discretely determine the value of either the liquidity premium or inflation protection premium. It is unknowable, so anybody who shows it on a graph is just pulling numbers out of the air.
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Re: Current state of TIPS market

Post by loukycpa »

I may not have this quite right, but the way I'm understanding where things are now is TIPS investors are accepting a negative nominal yield of about negative 1%. If inflation adjustment ends up being 2%+, this is still a good bet compared to regular Treasuries, with 10 year yield of less than 1%. Of course if things go the other way, and we have no inflation or even deflation, TIPS will lose vs. regular Treasuries. Am I on the right track?

This doesn't seem like an unreasonable bet in the current state of things. I read where the Fed has willing to accept inflation at higher than 2% for some period of time as long as long term average remains 2%.

I have a 10% allocation to TIPS currently as part of my 50% bond allocation. I am concerned about long term inflation as well as a stock and bond asset bubble.
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Re: Current state of TIPS market

Post by FIREchief »

loukycpa wrote: Wed Aug 19, 2020 12:44 pm I may not have this quite right, but the way I'm understanding where things are now is TIPS investors are accepting a negative nominal yield of about negative 1%. If inflation adjustment ends up being 2%+, this is still a good bet compared to regular Treasuries, with 10 year yield of less than 1%. Of course if things go the other way, and we have no inflation or even deflation, TIPS will lose vs. regular Treasuries. Am I on the right track?
Yes. You understand correctly. Better than many here on the forum. :beer
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texasfight
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Re: Current state of TIPS market

Post by texasfight »

FIREchief wrote: Wed Aug 19, 2020 12:37 pm
texasfight wrote: Wed Aug 19, 2020 12:27 pm
FIREchief wrote: Wed Aug 19, 2020 12:21 pm
texasfight wrote: Wed Aug 19, 2020 9:15 am I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
Why do you think that "people are paying up big time right now for inflation protection?" The article states that the breakeven inflation rate on a ten year term is 1.69%. If I think inflation will equal that (I do), than my inflation protection is free. What am I missing here? :confused
Look at tweet 6/10. People are now actually paying a liquidity premium for TIPS over treasuries when you look at the inflation risk premium.
That guy is just making stuff up. Where does his "expected inflation" line come from? There is no such thing. Also the thing (perhaps only thing) that all the experts and academics agree on is that it is impossible to discretely determine the value of either the liquidity premium or inflation protection premium. It is unknowable, so anybody who shows it on a graph is just pulling numbers out of the air.
I get what you are saying. It is the underlying model that it has diverged from, but you can always argue that the market's price for expected inflation is the best estimate so you can argue that it is still all due to inflation expectations
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Re: Current state of TIPS market

Post by Robot Monster »

Since we're talking about TIPS, for those that are not aware, there's a 30yr TIPS auction tomorrow that you can participate in up till 9:30am et (at least, that's when Vanguard's window for it closes). At the moment it yields -0.36% vs the 10yr at -1.03%.
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Re: Current state of TIPS market

Post by Watty »

loukycpa wrote: Wed Aug 19, 2020 12:44 pm I may not have this quite right, but the way I'm understanding where things are now is TIPS investors are accepting a negative nominal yield of about negative 1%. If inflation adjustment ends up being 2%+, this is still a good bet compared to regular Treasuries, with 10 year yield of less than 1%. Of course if things go the other way, and we have no inflation or even deflation, TIPS will lose vs. regular Treasuries. Am I on the right track?
One quirk is that(as I understand it) if there is deflation and you hold a TIPS to maturity then you will be paid the par value of the bond. How that compares to regular treasuries is more complex and I don't really understand it but I would think that it could help in some situations.
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Re: Current state of TIPS market

Post by Robot Monster »

Watty wrote: Wed Aug 19, 2020 1:21 pm
loukycpa wrote: Wed Aug 19, 2020 12:44 pm I may not have this quite right, but the way I'm understanding where things are now is TIPS investors are accepting a negative nominal yield of about negative 1%. If inflation adjustment ends up being 2%+, this is still a good bet compared to regular Treasuries, with 10 year yield of less than 1%. Of course if things go the other way, and we have no inflation or even deflation, TIPS will lose vs. regular Treasuries. Am I on the right track?
One quirk is that(as I understand it) if there is deflation and you hold a TIPS to maturity then you will be paid the par value of the bond. How that compares to regular treasuries is more complex and I don't really understand it but I would think that it could help in some situations.
Someone tell me if I'm mistaken...

The 10yr nominal pays 0.68%. Now let's say we undergo the deflation Switzerland is seeing, -0.9%. The 10yr yield might fall to what the Swiss 10yr pays, -0.499%. That's over a 1% drop, which means your 10yr bond goes up 10% in value. Meanwhile, your TIPS will go down in value. Uhhh...I think. :wink:
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Re: Current state of TIPS market

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Robot Monster wrote: Wed Aug 19, 2020 1:30 pm The 10yr nominal pays 0.68%. Now let's say we undergo the deflation Switzerland is seeing, -0.9%. The 10yr yield might fall to what the Swiss 10yr pays, -0.499%. That's over a 1% drop, which means your 10yr bond goes up 10% in value. Meanwhile, your TIPS will go down in value. Uhhh...I think. :wink:
It depends. If the ten year TIPS real yield also drops the same amount (from -1.01% to -2.19%), than the value of the TIPS will also skyrocket.
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Re: Current state of TIPS market

Post by TaxingAccount »

Is the 3.6% 30 day SEC yield on Ishares Tips ETF STIP accurate? thank you
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Re: Current state of TIPS market

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TaxingAccount wrote: Sat Aug 22, 2020 3:12 am Is the 3.6% 30 day SEC yield on Ishares Tips ETF STIP accurate? thank you
It is not an accurate indication of the current yield. See the disclaimer Blackrock provides about 30-day yield: "An exceptionally high 30-Day SEC yield may be attributable to a rise in the inflation rate, which might not be repeated."

A better measure of expected returns is the fund's yield-to-maturity, which is currently 0.17% (or 0.11% net of the expense ratio).
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Re: Current state of TIPS market

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market timer wrote: Sat Aug 22, 2020 3:21 am
TaxingAccount wrote: Sat Aug 22, 2020 3:12 am Is the 3.6% 30 day SEC yield on Ishares Tips ETF STIP accurate? thank you
It is not an accurate indication of the current yield. See the disclaimer Blackrock provides about 30-day yield: "An exceptionally high 30-Day SEC yield may be attributable to a rise in the inflation rate, which might not be repeated."

A better measure of expected returns is the fund's yield-to-maturity, which is currently 0.17% (or 0.11% net of the expense ratio).
agree
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Re: Current state of TIPS market

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TaxingAccount wrote: Sat Aug 22, 2020 3:12 amIs the 3.6% 30 day SEC yield on Ishares Tips ETF STIP accurate?
No! I calculate the average yield-to-maturity (YTM) of STIP's holdings to be -1.33%. [*] Subtracting the fund's 0.06% expense ratio gives an estimated SEC yield of -1.39%.

* Here are the data used to calculate the -1.33% average YTM of the 0-5 year index that STIP follows. The prices are from Friday's WSJ TIPS Quotes. The yields are weighted by each issue's market value (face value X index ratio X price).

Code: Select all

                                  Face Value   Index       Ask
Row     Matures    Coupon   Years  (000,000)   Ratio      Price      Yield

Code: Select all

  9   01/15/2021   1.125%    0.40    36,678   1.17621   101.06250   (1.610%)
 10   04/15/2021   0.125%    0.65    44,958   1.08562   100.84375   (1.192%)
 11   07/15/2021   0.625%    0.90    35,841   1.14160   101.93750   (1.543%)

 12   01/15/2022   0.125%    1.40    41,283   1.13681   101.93750   (1.262%)
 13   04/15/2022   0.125%    1.65    44,439   1.05799   102.18750   (1.181%)
 14   07/15/2022   0.125%    1.90    41,000   1.11887   103.03125   (1.450%)

 15   01/15/2023   0.125%    2.40    41,000   1.11471   103.37500   (1.264%)
 16   04/15/2023   0.625%    2.65    47,029   1.03586   104.96875   (1.223%)
 17   07/15/2023   0.375%    2.90    41,000   1.10563   105.28125   (1.411%)

 18   01/15/2024   0.625%    3.40    41,000   1.10272   106.62500   (1.282%)
 19   04/15/2024   0.500%    3.65    32,217   1.02018   106.53125   (1.227%)
 20   07/15/2024   0.125%    3.90    41,005   1.08361   106.06250   (1.384%)
 21   10/15/2024   0.125%    4.15    35,189   1.00286   106.37500   (1.369%)

 22   01/15/2025   2.375%    4.40    28,000   1.36501   116.62500   (1.294%)
 23   01/15/2025   0.250%    4.40    41,000   1.08632   106.96875   (1.286%)
 24   04/15/2025   0.125%    4.65    18,476   0.99612   106.78125   (1.286%)
 25   07/15/2025   0.375%    4.90    41,000   1.08499   108.75000   (1.349%)
For the past few months I've been posting every week the daily average YTMs for this index (TIPS maturing in 0 to 5 years) plus those maturing in 1-5, 1-10, 1+, and 15+ years. The most recent ones are at the top of this post.
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Re: Current state of TIPS market

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#Cruncher wrote: Sat Aug 22, 2020 7:54 am
TaxingAccount wrote: Sat Aug 22, 2020 3:12 amIs the 3.6% 30 day SEC yield on Ishares Tips ETF STIP accurate?
No! I calculate the average yield-to-maturity (YTM) of STIP's holdings to be -1.33%. [*] Subtracting the fund's 0.06% expense ratio gives an estimated SEC yield of -1.39%.
This looks correct, I'd just note this is a real yield (inflation adjusted). Earlier, I quoted a nominal YTM.
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Re: Current state of TIPS market

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market timer wrote: Sat Aug 22, 2020 3:21 am
TaxingAccount wrote: Sat Aug 22, 2020 3:12 am Is the 3.6% 30 day SEC yield on Ishares Tips ETF STIP accurate? thank you
It is not an accurate indication of the current yield. See the disclaimer Blackrock provides about 30-day yield: "An exceptionally high 30-Day SEC yield may be attributable to a rise in the inflation rate, which might not be repeated."
About a month ago, I had noted that these (TIPS) funds that are showing -3.x% now, will swing the other way next month with the +0.5% June CPI increase (NSA), here:
viewtopic.php?f=10&t=320558&p=5384426&h ... c#p5384426

That post has some links that explain the problems with the calculation of nominal SEC yield for TIPS funds.
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Re: Current state of TIPS market

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market timer wrote: Sat Aug 22, 2020 8:18 am
#Cruncher wrote: Sat Aug 22, 2020 7:54 am... I calculate the average yield-to-maturity (YTM) of STIP's holdings to be -1.33%. ...
This looks correct, I'd just note this is a real yield (inflation adjusted). Earlier, I quoted a nominal YTM.
It's impossible to calculate a nominal YTM for a TIPS fund. This is because it's impossible to calculate the nominal YTM of an individual TIPS until it matures -- and a fund obviously only holds bonds that haven't matured. (Note the last two words in the term "yield to maturity".) One may add an actual or projected inflation rate to the yield of an unmatured TIPS and call it a "yield to maturity", but that isn't what it is.

Until it matures, the yield to maturity (YTM) of any bond can only be calculated in terms of the "currency" in which it is denominated. E.g., until it matures, the YTM of a Euro denominated bond can only be calculated in terms of Euros. After it matures, we could calculate what the YTM was in dollar terms.

Likewise, before it matures, the YTM of a TIPS can only be calculated in terms of its "currency". And that is constant dollars. We know that every interest payment and the principal payment at maturity will be in terms of the dollar value at time of issuance. [*] The inflation adjustment made to every interest and principal payment is merely the mechanism for providing these constant dollars.

[I just noticed that the post by TaxingAccount that I here quote from, has been deleted!]
TaxingAccount wrote: Sat Aug 22, 2020 9:56 amAre those negative yields [of TIPS listed in my previous post] based on an inflation rate of zero?
You could say that. But I think it confuses the issue. It implies that one must make some assumption of future inflation to calculate a TIPS' yield to maturity. Better, I think to say that future inflation is ignored in calculating a TIPS' YTM.

* I'm here ignoring the exceedingly unlikely possibility of deflation over the entire term of a TIPS when the principal payments at maturity would be in current rather than constant dollars. (See the TreasuryDirect FAQ, What happens to TIPS if deflation occurs?.)
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Re: Current state of TIPS market

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texasfight wrote: Wed Aug 19, 2020 9:15 am I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
This is a ridiculous assertion by the author of the tweet. It is exactly the opposite, inflation protection is actually cheap right now, given how low nominal treasury yields are. If inflation picks up even modestly above an expected 2% then TIPS buyers will win over holders of nominal treasuries. In order for TIPS buyers to lose, inflation need to stay very low, even then given 10 year nominal is at just about 50bps, you don't need very much to win with TIPS now. You have to wonder why people write such stuff up.
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Re: Current state of TIPS market

Post by Elysium »

He says liquidity is getting better and better for TIPS presumably because it is getting to be a crowded trade. I will add for good reasons, because everyone knows inflation has dropped along with consumer spending at the moment, but those who are getting in to TIPS now are forward looking to higher anticipated future inflation, and the fact that nominals are going to get killed if/when that happens. It is possible that the TIPS buyers are wrong about future inflation, but then again as I said earlier you don't need a huge uptick in inflation to win with TIPS given how low nominals have become.
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Re: Current state of TIPS market

Post by Robot Monster »

Elysium wrote: Sat Aug 22, 2020 11:37 am ...those who are getting in to TIPS now are forward looking to higher anticipated future inflation, and the fact that nominals are going to get killed if/when that happens. It is possible that the TIPS buyers are wrong about future inflation, but then again as I said earlier you don't need a huge uptick in inflation to win with TIPS given how low nominals have become.
As a TIPS buyer myself, I'm not buying them because I envision higher future inflation. I do not predict, have no crystal ball. I have TIPS simply as insurance against the possibility. TIPS are also insurance against the Fed changing its inflation target, something raised by the May 7th, 2020 Bloomberg article, "Inflation Is the Way to Pay Off Coronavirus Debt":

"...But there’s another way that the government can shrink the mountain of debt weighing down the U.S. economy: inflation. Because most interest payments are fixed in nominal terms, inflation makes existing debt less important in real terms. Raising the long-term inflation target from the current 2% to a still-modest 4% would substantially increase the rate at which debt effectively vanishes...."
https://www.bloomberg.com/opinion/artic ... virus-debt
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Re: Current state of TIPS market

Post by jeffyscott »

#Cruncher wrote: Sat Aug 22, 2020 11:21 am
market timer wrote: Sat Aug 22, 2020 8:18 am
#Cruncher wrote: Sat Aug 22, 2020 7:54 am... I calculate the average yield-to-maturity (YTM) of STIP's holdings to be -1.33%. ...
This looks correct, I'd just note this is a real yield (inflation adjusted). Earlier, I quoted a nominal YTM.
It's impossible to calculate a nominal YTM for a TIPS fund. This is because it's impossible to calculate the nominal YTM of an individual TIPS until it matures -- and a fund obviously only holds bonds that haven't matured. (Note the last two words in the term "yield to maturity".) One may add an actual or projected inflation rate to the yield of an unmatured TIPS and call it a "yield to maturity", but that isn't what it is.
They don't provide any information about how they came up with 0.17% as the YTM for STIP. Based on your -1.33%, it would seem that there is an assumption of 1.5% inflation. From the treasury yield curve rates, break even inflation for 5 year is about 1.5%, so perhaps it's just based it on that or some variation of the same sort of thing. Maybe the nominal YTM that they report is (or effectively is) what the YTM would be were each TIPS replaced with a nominal of the same maturity. FWIW, 0.17% is the unweighted average of 6 mo. to 5 year treasury rates (with the addition of an interpolated 4 year rate) that treasury yield curve shows for 8/20.
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Re: Current state of TIPS market

Post by loukycpa »

I am 47 and have been investing for about 25 years (began in the mid 90s). During that time inflation has been relatively modest, and returns on stocks and even bonds have generally outpaced (in a long term sense at least, obviously not every year). Seems like we all assume this is guaranteed to go on forever.

I was alive but just a kid during the late 70s. I remember hearing my parents and grandparents talk about US inflation and interest rates during this period. Both were double digits in 1979 and 1980, high single digits in surrounding years. As far as the cost of inflation protection currently, I think it is good to think about how you would feel about your portfolio (and the cost of inflation protection via TIPS) if we went through this period again. If we did (not predicting we will, I know nothing and am skeptical of anyone who thinks they do), the current cost I bet would look like a heck of a bargain.

Something to think about.
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Re: Current state of TIPS market

Post by Robot Monster »

loukycpa wrote: Sun Aug 23, 2020 7:24 am I am 47 and have been investing for about 25 years (began in the mid 90s). During that time inflation has been relatively modest, and returns on stocks and even bonds have generally outpaced (in a long term sense at least, obviously not every year). Seems like we all assume this is guaranteed to go on forever.

I was alive but just a kid during the late 70s. I remember hearing my parents and grandparents talk about US inflation and interest rates during this period. Both were double digits in 1979 and 1980, high single digits in surrounding years. As far as the cost of inflation protection currently, I think it is good to think about how you would feel about your portfolio (and the cost of inflation protection via TIPS) if we went through this period again. If we did (not predicting we will, I know nothing and am skeptical of anyone who thinks they do), the current cost I bet would look like a heck of a bargain.

Something to think about.
Seems many people are worried about an inflationary surprise (due to central bank stimulus), and part of the reason for the rally in gold prices is a reflection of this. Gold obliterated US stocks performance wise from Jan 1972 - Dec 1980:

Inflation adjusted CAGR
Gold: 23.01%
US Stocks: 0%
Cash: -1.17%
https://www.portfoliovisualizer.com/bac ... ion3_3=100

I don't mean to turn this into a gold thread, so perhaps we can just leave it at that.

Oh, but I do have to mention commodities did well during this time, too.
viewtopic.php?p=5418528#p5418528
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Re: Current state of TIPS market

Post by texasfight »

Elysium wrote: Sat Aug 22, 2020 11:30 am
texasfight wrote: Wed Aug 19, 2020 9:15 am I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
This is a ridiculous assertion by the author of the tweet. It is exactly the opposite, inflation protection is actually cheap right now, given how low nominal treasury yields are. If inflation picks up even modestly above an expected 2% then TIPS buyers will win over holders of nominal treasuries. In order for TIPS buyers to lose, inflation need to stay very low, even then given 10 year nominal is at just about 50bps, you don't need very much to win with TIPS now. You have to wonder why people write such stuff up.
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming. Main reason I don't invest in TIPS outside of short term liquidity events (they were a steal in Mar 2020) is that you are dependent on CPI - not a fan of the hedonic adjustments and the way CPI is calculated. IMO TIPS don't keep up with asset price inflation over the long term as well as nominals. Now in the short term they can do great as we have seen recently as real yields have collapsed, but they have not done as well as mega cap growth (multiple expansions affect on duration/convexity of cash flows has made Apple hit 2 trillion in market cap) or gold and miners (everything goes up as currency is debased trade).
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Re: Current state of TIPS market

Post by nedsaid »

texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
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Re: Current state of TIPS market

Post by texasfight »

nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
TIPS don't do anything particularly well except get sold off in liquidity crises, and there is no futures market for me to lever them efficiently like nominals. They are a scam for the risk averse saver class who has been crushed vs. their risk heavy peers. Moral of the story is load up on as much risk as possible as we are hitting all time highs in S&P 500 in what is essentially a great depression. I don't how much more obvious it can get that the US is an asset price dependent economy so assets will be pumped as hard as possible to get a recovery. Hedge with DXY and VIX calls because dollar milkshake theory is a possibility.
Last edited by texasfight on Sun Aug 23, 2020 1:49 pm, edited 1 time in total.
fatcoffeedrinker
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Re: Current state of TIPS market

Post by fatcoffeedrinker »

nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
Even if inflation skyrockets, TIPS bought today and held to maturity will give you negative real return. But the nominal return will beat that of nominal bonds.
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Re: Current state of TIPS market

Post by rockstar »

texasfight wrote: Wed Aug 19, 2020 9:15 am I think everyone would enjoy reading this thread about what effect nominal yields, expected inflation, and liquidity have on TIPS pricing. People are paying up big time right now for inflation protection.

https://twitter.com/R_Perli/status/1296 ... 70211?s=20
The reality is that investment grade bonds don't have enough yield to cover inflation. TIPS are one of your few remaining choices before reaching for yield. I'm pretty much going all in with equities. My current reach for yield is WFC preferred stock, which I bought at par or below. It's yielding a bit over 5%, which is plenty to get me through the pandemic.
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Re: Current state of TIPS market

Post by nedsaid »

fatcoffeedrinker wrote: Sun Aug 23, 2020 1:49 pm
nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
Even if inflation skyrockets, TIPS bought today and held to maturity will give you negative real return. But the nominal return will beat that of nominal bonds.
I have not thought this through but deep down I probably realized this hence my reticence to buy more TIPS. Though I didn't realize this at a conscious level, I probably realized this subconsciously. I looked at buying more TIPS but somehow I just could not pull the trigger. The negative real yields on many bonds don't make me enthusiastic to buy bonds in general. Texasfight pretty much said above that stocks are the only game in town and I fear that he might be right. For bond buyers who want potential return above inflation would be looking at Corporate Bonds and US Government Agency Bonds like GNMAs and other mortgage backed securities. I asked Grok87 about buying TIPS and he shared my reluctance to buy more as well. The Fed really has distorted the fixed income markets.
A fool and his money are good for business.
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Re: Current state of TIPS market

Post by fatcoffeedrinker »

nedsaid wrote: Sun Aug 23, 2020 2:03 pm
fatcoffeedrinker wrote: Sun Aug 23, 2020 1:49 pm
nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
Even if inflation skyrockets, TIPS bought today and held to maturity will give you negative real return. But the nominal return will beat that of nominal bonds.
I have not thought this through but deep down I probably realized this hence my reticence to buy more TIPS. Though I didn't realize this at a conscious level, I probably realized this subconsciously. I looked at buying more TIPS but somehow I just could not pull the trigger. The negative real yields on many bonds don't make me enthusiastic to buy bonds in general. Texasfight pretty much said above that stocks are the only game in town and I fear that he might be right. For bond buyers who want potential return above inflation would be looking at Corporate Bonds and US Government Agency Bonds like GNMAs and other mortgage backed securities. I asked Grok87 about buying TIPS and he shared my reluctance to buy more as well. The Fed really has distorted the fixed income markets.
I have the same trepidations. I am "supposed to" per my plan add to my TIPS ladder in January and February to buy the 10-year 2031 and the 30-year 2051. But I may hold off if real yields are still negative. There is no rush, as I can buy these on the secondary market or secondary auctions later. Of course, real yields could go further negative. But I do believe that after COVID gets better, both real and nominal yields will increase.

I may still buy my normal slug of iBonds this year and next. At least those are 0% real yield. If one plans to hold for the minimum of 5 years so as not to pay any interest penalty, then that compares to -1.25% real for 5-year TIPS right now.
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Re: Current state of TIPS market

Post by nedsaid »

fatcoffeedrinker wrote: Sun Aug 23, 2020 2:18 pm
nedsaid wrote: Sun Aug 23, 2020 2:03 pm
fatcoffeedrinker wrote: Sun Aug 23, 2020 1:49 pm
nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
Even if inflation skyrockets, TIPS bought today and held to maturity will give you negative real return. But the nominal return will beat that of nominal bonds.
I have not thought this through but deep down I probably realized this hence my reticence to buy more TIPS. Though I didn't realize this at a conscious level, I probably realized this subconsciously. I looked at buying more TIPS but somehow I just could not pull the trigger. The negative real yields on many bonds don't make me enthusiastic to buy bonds in general. Texasfight pretty much said above that stocks are the only game in town and I fear that he might be right. For bond buyers who want potential return above inflation would be looking at Corporate Bonds and US Government Agency Bonds like GNMAs and other mortgage backed securities. I asked Grok87 about buying TIPS and he shared my reluctance to buy more as well. The Fed really has distorted the fixed income markets.
I have the same trepidations. I am "supposed to" per my plan add to my TIPS ladder in January and February to buy the 10-year 2031 and the 30-year 2051. But I may hold off if real yields are still negative. There is no rush, as I can buy these on the secondary market or secondary auctions later. Of course, real yields could go further negative. But I do believe that after COVID gets better, both real and nominal yields will increase.

I may still buy my normal slug of iBonds this year and next. At least those are 0% real yield. If one plans to hold for the minimum of 5 years so as not to pay any interest penalty, then that compares to -1.25% real for 5-year TIPS right now.
I would still be a buyer of I-Bonds. The taxes when cashed in still take you below inflation but I-Bonds seem to be the least dirty shirt in the laundry hamper.
A fool and his money are good for business.
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Re: Current state of TIPS market

Post by fatcoffeedrinker »

nedsaid wrote: Sun Aug 23, 2020 2:29 pm
fatcoffeedrinker wrote: Sun Aug 23, 2020 2:18 pm
nedsaid wrote: Sun Aug 23, 2020 2:03 pm
fatcoffeedrinker wrote: Sun Aug 23, 2020 1:49 pm
nedsaid wrote: Sun Aug 23, 2020 1:35 pm

I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
Even if inflation skyrockets, TIPS bought today and held to maturity will give you negative real return. But the nominal return will beat that of nominal bonds.
I have not thought this through but deep down I probably realized this hence my reticence to buy more TIPS. Though I didn't realize this at a conscious level, I probably realized this subconsciously. I looked at buying more TIPS but somehow I just could not pull the trigger. The negative real yields on many bonds don't make me enthusiastic to buy bonds in general. Texasfight pretty much said above that stocks are the only game in town and I fear that he might be right. For bond buyers who want potential return above inflation would be looking at Corporate Bonds and US Government Agency Bonds like GNMAs and other mortgage backed securities. I asked Grok87 about buying TIPS and he shared my reluctance to buy more as well. The Fed really has distorted the fixed income markets.
I have the same trepidations. I am "supposed to" per my plan add to my TIPS ladder in January and February to buy the 10-year 2031 and the 30-year 2051. But I may hold off if real yields are still negative. There is no rush, as I can buy these on the secondary market or secondary auctions later. Of course, real yields could go further negative. But I do believe that after COVID gets better, both real and nominal yields will increase.

I may still buy my normal slug of iBonds this year and next. At least those are 0% real yield. If one plans to hold for the minimum of 5 years so as not to pay any interest penalty, then that compares to -1.25% real for 5-year TIPS right now.
I would still be a buyer of I-Bonds. The taxes when cashed in still take you below inflation but I-Bonds seem to be the least dirty shirt in the laundry hamper.
I'm hoping to be in the 0% tax bracket when I cash mine in. :D
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dodecahedron
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Re: Current state of TIPS market

Post by dodecahedron »

nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
I view my TIPS as insurance, not as investment.

I have been a homeowner paying for insurance against fire and other disasters for almost 40 years and very grateful that "fires and other disasters" have been "underperforming" for me. I have seen fires overperform for close relatives and neighbors. Yes, I know homeowners' insurance is likely to be a negative expected actuarial value for me, but it is still worth it.

The insurance, in either case, is only partial and imperfect. If my house burns down, there will be priceless mementos that may be irreplaceable and some of the workmanship, details, and materials in the classic older portion of my house may not be practical to replicate.

Similarly, if there is massive inflation, my TIPS may or may not make me entirely whole, depending on how well CPI captures my personal cost of living and how well my other assets (including equities) perform.

But either way, I think both significant homeowners coverage and TIPS for a substantial portion of my portfolio (about 25%) are worthwhile insurance against potential disasters that I *hope* are unlikely, but do not know for sure will be unlikely.
Last edited by dodecahedron on Sun Aug 23, 2020 2:35 pm, edited 1 time in total.
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Re: Current state of TIPS market

Post by jeffyscott »

fatcoffeedrinker wrote: Sun Aug 23, 2020 1:49 pm
nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
Even if inflation skyrockets, TIPS bought today and held to maturity will give you negative real return. But the nominal return will beat that of nominal bonds.
With higher than expected inflation, the real return of TIPS will also beat the real return of nominals.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Current state of TIPS market

Post by FIREchief »

texasfight wrote: Sun Aug 23, 2020 1:43 pm TIPS don't do anything particularly well except get sold off in liquidity crises, and there is no futures market for me to lever them efficiently like nominals. They are a scam for the risk averse saver class who has been crushed vs. their risk heavy peers.
Well this is interesting. I know that there are a whole lotta folks here on the forum who hate TIPS, but this is the first time I've seen them referred to as a "scam." :twisted: Do the experts who many look to for guidance know about this? :P
Moral of the story is load up on as much risk as possible as we are hitting all time highs in S&P 500 in what is essentially a great depression. I don't how much more obvious it can get that the US is an asset price dependent economy so assets will be pumped as hard as possible to get a recovery. Hedge with DXY and VIX calls because dollar milkshake theory is a possibility.
I don't know anything about milkshake theories, but I DO load up on equities (100%) in my risk portfolio. I have no need to hedge to reach for more than the market provides. Mr. Market has been pretty good to me the past 30 years, so no reason for me to go looking for more love from exotic shiny things. :D
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: Current state of TIPS market

Post by FIREchief »

dodecahedron wrote: Sun Aug 23, 2020 2:33 pm I view my TIPS as insurance, not as investment.

I have been a homeowner paying for insurance against fire and other disasters for almost 40 years and very grateful that "fires and other disasters" have been "underperforming" for me. I have seen fires overperform for close relatives and neighbors. Yes, I know homeowners' insurance is likely to be a negative expected actuarial value for me, but it is still worth it.
Very well put! :beer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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dodecahedron
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Re: Current state of TIPS market

Post by dodecahedron »

jeffyscott wrote: Sun Aug 23, 2020 2:33 pm
fatcoffeedrinker wrote: Sun Aug 23, 2020 1:49 pm
nedsaid wrote: Sun Aug 23, 2020 1:35 pm
texasfight wrote: Sun Aug 23, 2020 1:13 pm
The way TIPS buyers lose is by inflation coming in lower than breakevens currently priced in. Which is what I suspect will happen. This is the primary reasons TIPS have underperformed nominals for 20 years, inflation keeps underperforming.
I do own TIPS and have wanted to add to them but negative yields on TIPS have given me pause. If inflation underperforms, TIPS will give you guaranteed negative real returns.
Even if inflation skyrockets, TIPS bought today and held to maturity will give you negative real return. But the nominal return will beat that of nominal bonds.
With higher than expected inflation, the real return of TIPS will also beat the real return of nominals.
If higher than expected inflation is realized in short or medium term, *future inflationary expectations* for longer term may escalate meaning that folks buying long term TIPS today may see positive real returns (if they choose sell their holdings well before maturity for any reason.)

That said, I am not buying TIPS for speculative reasons. I view them as insurance not as investment.
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FIREchief
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Re: Current state of TIPS market

Post by FIREchief »

fatcoffeedrinker wrote: Sun Aug 23, 2020 2:18 pm I am "supposed to" per my plan add to my TIPS ladder in January and February to buy the 10-year 2031 and the 30-year 2051. But I may hold off if real yields are still negative. There is no rush, as I can buy these on the secondary market or secondary auctions later. Of course, real yields could go further negative. But I do believe that after COVID gets better, both real and nominal yields will increase.
This is the beauty of a ladder. Just buy the rung on schedule and forget about it for 12 months. If rates improve, you'll buy the next rung at a better price. If they get worse, you have at least bought this years at a better price. Like yourself, I'm scheduled to buy a rung of ten years in January (it will be the first time I've replaced a fully funded maturing rung). I plan to just put the blindfold on / hold my nose and do it. I think that's what we call "stay the course" around here. 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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Re: Current state of TIPS market

Post by rockstar »

Robot Monster wrote: Sun Aug 23, 2020 10:05 am
loukycpa wrote: Sun Aug 23, 2020 7:24 am I am 47 and have been investing for about 25 years (began in the mid 90s). During that time inflation has been relatively modest, and returns on stocks and even bonds have generally outpaced (in a long term sense at least, obviously not every year). Seems like we all assume this is guaranteed to go on forever.

I was alive but just a kid during the late 70s. I remember hearing my parents and grandparents talk about US inflation and interest rates during this period. Both were double digits in 1979 and 1980, high single digits in surrounding years. As far as the cost of inflation protection currently, I think it is good to think about how you would feel about your portfolio (and the cost of inflation protection via TIPS) if we went through this period again. If we did (not predicting we will, I know nothing and am skeptical of anyone who thinks they do), the current cost I bet would look like a heck of a bargain.

Something to think about.
Seems many people are worried about an inflationary surprise (due to central bank stimulus), and part of the reason for the rally in gold prices is a reflection of this. Gold obliterated US stocks performance wise from Jan 1972 - Dec 1980:

Inflation adjusted CAGR
Gold: 23.01%
US Stocks: 0%
Cash: -1.17%
https://www.portfoliovisualizer.com/bac ... ion3_3=100

I don't mean to turn this into a gold thread, so perhaps we can just leave it at that.

Oh, but I do have to mention commodities did well during this time, too.
viewtopic.php?p=5418528#p5418528
The economy looks nothing like it did in the 70s. The Fed buying treasuries and HY bonds is not going to create out of control inflation. Now, if the government decides to go ahead and provide the additional $600 of stimulus to the unemployed, then we might see inflation. But it's not remotely in the same ballpark as the 70s inflation. The reality is that in this economic environment equities make far more sense than bonds even at their ridiculously high valuations. The Fed is predicting post the pandemic that the 10 year treasury will yield 80bps. If this is true, then I expect a lot of pain in the long end of the curve post the pandemic. I'm staying away from bonds. This is a great opportunity to sell bonds right now with the Fed's bond buying program. Time to take a profit.
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texasfight
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Re: Current state of TIPS market

Post by texasfight »

New lows in 5 yr real yields this morning. Mega cap growth soaring.
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Re: Current state of TIPS market

Post by loukycpa »

I generally agree if you want/need your portfolio to produce real returns over inflation from where we are now, equities are the only game in town. But that is a long term game not a short term one. If you are in the accumulation phase and 10 years or more from retirement/FIRE, I wouldn't have much in bonds beyond emergency fund. For those who are nearing or in retirement though, I would want to have 5 to 10 years worth of expenses covered by a bond portfolio. That translates into at least a 20% allocation to bonds and typically significantly more. Then get the real returns over the long term from the equity side of the portfolio. The problem is the stock market can be irrational longer than you can stay solvent.

My inclination has always been when we start to approach irrational exuberance and high valuations for stocks you need to be cautious and keep some powder dry. I wonder though how much that is even relevant as much fed reserve and government intervention we now seem to get in the economy. There seems to be no end anymore to how much tilting of playing field we can get in favor of the "investors" (particularly the leveraged ones) over the "savers". Underestimating this tilting has cost me over the years. Lesson learned.
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