Treasurys no longer provide the ballast for a portfolio

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FIREchief
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Re: Treasurys no longer provide the ballast for a portfolio

Post by FIREchief »

abuss368 wrote: Sat Oct 03, 2020 7:32 pm That portfolio included Treasuries and TIPS.
TIPS are treasuries.
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: Treasurys no longer provide the ballast for a portfolio

Post by abuss368 »

FIREchief wrote: Sat Oct 03, 2020 7:40 pm
abuss368 wrote: Sat Oct 03, 2020 7:32 pm That portfolio included Treasuries and TIPS.
TIPS are treasuries.
Exactly! :sharebeer
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Alchemist
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Alchemist »

Most Bogleheads are not playing the same game as the author of the article, to borrow phrasing from the latest Bogleheads Podcast guest.

A buy and hold TBM or intermediate treasury fund holder owns those bonds because they are boring. That is their job. If interest rates fall a bit, they get an unplanned for bonus in appreciation. If interest rates rise a bit, then they get an unplanned for fall in principle but it does not matter because they hold long enough for the rising interest rate to more than pay them back.

To a boglehead, rising rates on their bond funds are a good thing because long term it will result in higher returns for a buy-and-hold investor.

The audience for this article are people playing a 'risk parity' game, not a boglehead game. Especially people playing a leveraged risk parity game ala the Hedgefundie's Excellent Adventure thread. Winning that game relies on a negative correlation between LTT and the S&P 500. If rates go up even a relatively small amount (1% or 2% for LTTs) at the same time as a stock market crash then they will have lost the game.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by columbia »

To a boglehead, rising rates on their bond funds are a good thing because long term it will result in higher returns for a buy-and-hold investor.
Example of this, in terms of real returns?
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Day9 »

columbia wrote: Sat Oct 03, 2020 9:44 pm
To a boglehead, rising rates on their bond funds are a good thing because long term it will result in higher returns for a buy-and-hold investor.
Example of this, in terms of real returns?
If you invest in a bond fund with an effective 10 years to maturity that yields 1%, and rates go up to 2%, then your $100 investment will fall to $90.98. But then 11 years later your investment will have grown to 90.98*(1.02^11) = $113. If rates had stayed at 1% then it would have grown to only 100*(1.01^11)=$111.
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Always passive
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Always passive »

Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm
Always passive wrote: Sat Oct 03, 2020 4:27 pm
FIREchief wrote: Sat Oct 03, 2020 2:31 pm
Always passive wrote: Sat Oct 03, 2020 1:41 pm
FIREchief wrote: Sat Oct 03, 2020 1:31 pm TL:DR. It sounds like from some of the forum comments that this was just one more instance of click bait written by somebody who a) doesn't understand the basics of investing or b) has an agenda. I'm not sure what exactly is meant by "ballast," but a healthy ladder of US treasuries will always provide a guaranteed cash flow at maturity. I prefer TIPS so that it's guaranteed purchasing power. 8-)
Are you aware that presently TIPS Yield less that inflation, in fact about 1% less? So, how can you assume that they guarantee purchasing power.
They absolutely guarantee purchasing power. The fact that the purchasing power in ten years is less than the purchase price in no way affects the guaranteed aspect.
You got me with your response. Guaranteeing purchasing power means to me that the bond keeps up with inflation. So how can TIPS accomplish that when every single one for any maturity you pick has a negative real yield. Maybe I am missing something. Can you help me understand your logic?
A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
Your comments are correct. What you are saying here is that at maturity you are assured to get at a minimum your original principle, and that is correct, but as far as I know that has nothing to do with purchasing power. In fact if at purchase the bond has negative real yield, for sure you will lose purchasing power: In “real” terms you will receive less than what you put in, and that is the key factor.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by coingaroo »

Alchemist wrote: Sat Oct 03, 2020 8:58 pm Most Bogleheads are not playing the same game as the author of the article, to borrow phrasing from the latest Bogleheads Podcast guest.

A buy and hold TBM or intermediate treasury fund holder owns those bonds because they are boring. That is their job. If interest rates fall a bit, they get an unplanned for bonus in appreciation. If interest rates rise a bit, then they get an unplanned for fall in principle but it does not matter because they hold long enough for the rising interest rate to more than pay them back.

To a boglehead, rising rates on their bond funds are a good thing because long term it will result in higher returns for a buy-and-hold investor.

The audience for this article are people playing a 'risk parity' game, not a boglehead game. Especially people playing a leveraged risk parity game ala the Hedgefundie's Excellent Adventure thread. Winning that game relies on a negative correlation between LTT and the S&P 500. If rates go up even a relatively small amount (1% or 2% for LTTs) at the same time as a stock market crash then they will have lost the game.
Risk parity is not dissimilar to bogleheads portfolios (with long term treasury bonds) with leverage. Someone running the Hedgefundie EA will be seeing similar outcomes as a boring bogleheads portfolio; just with a bigger magnitude which works both ways (up and down).
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Re: Treasurys no longer provide the ballast for a portfolio

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Last edited by FIREchief on Sun Oct 04, 2020 1:22 am, edited 1 time in total.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by FIREchief »

Always passive wrote: Sat Oct 03, 2020 11:07 pm
Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm
Always passive wrote: Sat Oct 03, 2020 4:27 pm
FIREchief wrote: Sat Oct 03, 2020 2:31 pm
Always passive wrote: Sat Oct 03, 2020 1:41 pm

Are you aware that presently TIPS Yield less that inflation, in fact about 1% less? So, how can you assume that they guarantee purchasing power.
They absolutely guarantee purchasing power. The fact that the purchasing power in ten years is less than the purchase price in no way affects the guaranteed aspect.
You got me with your response. Guaranteeing purchasing power means to me that the bond keeps up with inflation. So how can TIPS accomplish that when every single one for any maturity you pick has a negative real yield. Maybe I am missing something. Can you help me understand your logic?
A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
Your comments are correct. What you are saying here is that at maturity you are assured to get at a minimum your original principle, and that is correct, but as far as I know that has nothing to do with purchasing power. In fact if at purchase the bond has negative real yield, for sure you will lose purchasing power: In “real” terms you will receive less than what you put in, and that is the key factor.
No, it's not the "key factor." The key factor is that somebody who invests in TIPS knows exactly what purchasing power they will have when the TIPS matures. The fact that they have to pay a purchase premium for the "privilege" is fully known and accepted.

Inflation adjusted original principle (or better if deflation) to maturity purchasing power is exactly what a TIPS purchaser is buying and being guaranteed. It continues to shock me how many on this forum still don't understand the most basic facts about TIPS.
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: Treasurys no longer provide the ballast for a portfolio

Post by Alchemist »

coingaroo wrote: Sun Oct 04, 2020 12:09 am Risk parity is not dissimilar to bogleheads portfolios (with long term treasury bonds) with leverage. Someone running the Hedgefundie EA will be seeing similar outcomes as a boring bogleheads portfolio; just with a bigger magnitude which works both ways (up and down).
A non-leveraged portfolio can experience losses if LTT/Stocks drop in price together, a leveraged portfolio can experience complete collapse (>90% loss with 2% yield rise combined with bear market). Thus the article's argument in the OP is far more relevant to someone with an EA portfolio than a typical boglehead who is using ITT's or TBM (unleveraged, of course) as their bond component. They nearly want the bonds to fall less than stocks during bear markets. EA portfolios need their bonds price to rise to make up the oversized drawdown in the stocks during a bear.

I am *not* arguing whether or not the article is correct. What I am saying is that it is unimportant to a traditional boglehead portfolio but highly important to a leveraged portfolio that relies on the assumed negative correlation during bear markets.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by hudson »

Always passive wrote: Sat Oct 03, 2020 6:47 am but what about some of us in the 60s, 70s, and 80s?
I think TIPS are the best inflation protector. Stocks, commodities, and real estate may or may not work.
I think that a duration matched, non rolling TIPS ladder or second best TIPS funds are still a good choice for a liability matching portfolio...for those in the category above.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Always passive »

FIREchief wrote: Sun Oct 04, 2020 1:22 am
Always passive wrote: Sat Oct 03, 2020 11:07 pm
Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm
Always passive wrote: Sat Oct 03, 2020 4:27 pm
FIREchief wrote: Sat Oct 03, 2020 2:31 pm

They absolutely guarantee purchasing power. The fact that the purchasing power in ten years is less than the purchase price in no way affects the guaranteed aspect.
You got me with your response. Guaranteeing purchasing power means to me that the bond keeps up with inflation. So how can TIPS accomplish that when every single one for any maturity you pick has a negative real yield. Maybe I am missing something. Can you help me understand your logic?
A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
Your comments are correct. What you are saying here is that at maturity you are assured to get at a minimum your original principle, and that is correct, but as far as I know that has nothing to do with purchasing power. In fact if at purchase the bond has negative real yield, for sure you will lose purchasing power: In “real” terms you will receive less than what you put in, and that is the key factor.
No, it's not the "key factor." The key factor is that somebody who invests in TIPS knows exactly what purchasing power they will have when the TIPS matures. The fact that they have to pay a purchase premium for the "privilege" is fully known and accepted.

Inflation adjusted original principle (or better if deflation) to maturity purchasing power is exactly what a TIPS purchaser is buying and being guaranteed. It continues to shock me how many on this forum still don't understand the most basic facts about TIPS.
First of all you are jumping to conclusions with respect to my knowledge or lack of of Tips. Your comments once again are correct, I can see that you have studied the topic.
Now on the essence of the issue; and, I state it as a question:
If you buy a Tips with negative real yield, is it or is it not true that after paying the premium, the total yield until maturity is less that inflation?
Yes or Not?
And if Not, please educate me.
Thank you, eagerly waiting for your response.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Ferdinand2014 »

Always passive wrote: Sat Oct 03, 2020 11:07 pm
Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm
Always passive wrote: Sat Oct 03, 2020 4:27 pm
FIREchief wrote: Sat Oct 03, 2020 2:31 pm
Always passive wrote: Sat Oct 03, 2020 1:41 pm

Are you aware that presently TIPS Yield less that inflation, in fact about 1% less? So, how can you assume that they guarantee purchasing power.
They absolutely guarantee purchasing power. The fact that the purchasing power in ten years is less than the purchase price in no way affects the guaranteed aspect.
You got me with your response. Guaranteeing purchasing power means to me that the bond keeps up with inflation. So how can TIPS accomplish that when every single one for any maturity you pick has a negative real yield. Maybe I am missing something. Can you help me understand your logic?
A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
Your comments are correct. What you are saying here is that at maturity you are assured to get at a minimum your original principle, and that is correct, but as far as I know that has nothing to do with purchasing power. In fact if at purchase the bond has negative real yield, for sure you will lose purchasing power: In “real” terms you will receive less than what you put in, and that is the key factor.
Your purchasing power will remain intact if you purchase a TIPS bond and hold to maturity as long as the government calculation of inflation applied to the principal of the TIPS bond matches your personal inflation over time. The fact that the real yield is less than inflation at auction purchase does not tell you your purchasing power will be lost if you hold the bond to maturity. The US government guarantees your TIPS bond will be adjusted as I previously described to keep up with inflation by its calculation.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Always passive »

Ferdinand2014 wrote: Sun Oct 04, 2020 6:05 am
Always passive wrote: Sat Oct 03, 2020 11:07 pm
Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm
Always passive wrote: Sat Oct 03, 2020 4:27 pm
FIREchief wrote: Sat Oct 03, 2020 2:31 pm

They absolutely guarantee purchasing power. The fact that the purchasing power in ten years is less than the purchase price in no way affects the guaranteed aspect.
You got me with your response. Guaranteeing purchasing power means to me that the bond keeps up with inflation. So how can TIPS accomplish that when every single one for any maturity you pick has a negative real yield. Maybe I am missing something. Can you help me understand your logic?
A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
Your comments are correct. What you are saying here is that at maturity you are assured to get at a minimum your original principle, and that is correct, but as far as I know that has nothing to do with purchasing power. In fact if at purchase the bond has negative real yield, for sure you will lose purchasing power: In “real” terms you will receive less than what you put in, and that is the key factor.
Your purchasing power will remain intact if you purchase a TIPS bond and hold to maturity as long as the government calculation of inflation applied to the principal of the TIPS bond matches your personal inflation over time. The fact that the real yield is less than inflation at auction purchase does not tell you your purchasing power will be lost if you hold the bond to maturity. The US government guarantees your TIPS bond will be adjusted as I previously described to keep up with inflation by its calculation.

A typical example of positive real yield follows:
From an internet site:

A $1,000 par value TIPS with a 4% coupon would initially generate a return of $10. If inflation-adjusted the par value to $1,050, the coupon payment would instead be
$42 = ($40 x 1.05).
Suppose the TIPS were trading at $925 on the secondary market. The real yield calculation would use the secondary market price (like any other bond) of $925, but use the inflation-adjusted coupon payment of $42. The real yield would thus be:
4.54% (42 ÷ 925).

So help me understand how the math would work when the Tips have negative coupon?
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Re: Treasurys no longer provide the ballast for a portfolio

Post by columbia »

Day9 wrote: Sat Oct 03, 2020 9:59 pm
columbia wrote: Sat Oct 03, 2020 9:44 pm
To a boglehead, rising rates on their bond funds are a good thing because long term it will result in higher returns for a buy-and-hold investor.
Example of this, in terms of real returns?
If you invest in a bond fund with an effective 10 years to maturity that yields 1%, and rates go up to 2%, then your $100 investment will fall to $90.98. But then 11 years later your investment will have grown to 90.98*(1.02^11) = $113. If rates had stayed at 1% then it would have grown to only 100*(1.01^11)=$111.
Sorry, I wasn't clear: a real life example.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by UpperNwGuy »

columbia wrote: Sun Oct 04, 2020 7:36 am
Day9 wrote: Sat Oct 03, 2020 9:59 pm
columbia wrote: Sat Oct 03, 2020 9:44 pm
To a boglehead, rising rates on their bond funds are a good thing because long term it will result in higher returns for a buy-and-hold investor.
Example of this, in terms of real returns?
If you invest in a bond fund with an effective 10 years to maturity that yields 1%, and rates go up to 2%, then your $100 investment will fall to $90.98. But then 11 years later your investment will have grown to 90.98*(1.02^11) = $113. If rates had stayed at 1% then it would have grown to only 100*(1.01^11)=$111.
Sorry, I wasn't clear: a real life example.
You're still not being clear. Give us an example of the kind of example you seek.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by dml130 »

z3r0c00l wrote: Sat Oct 03, 2020 8:08 am Ballast is the perfect word for what treasuries and other similar investments offer. Ballast is generally passive, dead weight that simply lowers the center of mass and improves the righting moment of a ship. The idea that bonds must zig when stocks zag has always been a myth, they are ballast because they are not that volatile, not because they are the opposite of stocks at all times. If you are looking for the canting keel of investing, at considerable cost, then it would have to be an inverse fund like $SH.
Is a simple money market fund a reasonable alternative to treasuries in this low rate environment?
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Re: Treasurys no longer provide the ballast for a portfolio

Post by CardinalRule »

Kevin M wrote: Sat Oct 03, 2020 5:41 pm Here's the article not behind a paywall: https://investingsignal.com/2020/10/03/ ... t-plunges/.
Unrelated to the issue being discussed, how do these things end up getting re-published on the internet? I assume that this "investingsignal" site is based in India or China, or somewhere else where copyrights are not enforced? Not sure how they make money on this theft, though. There are no ads on that site, from what I can tell.

Anyway, sorry for the digression. :?
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Re: Treasurys no longer provide the ballast for a portfolio

Post by anoop »

dml130 wrote: Sun Oct 04, 2020 8:47 am
z3r0c00l wrote: Sat Oct 03, 2020 8:08 am Ballast is the perfect word for what treasuries and other similar investments offer. Ballast is generally passive, dead weight that simply lowers the center of mass and improves the righting moment of a ship. The idea that bonds must zig when stocks zag has always been a myth, they are ballast because they are not that volatile, not because they are the opposite of stocks at all times. If you are looking for the canting keel of investing, at considerable cost, then it would have to be an inverse fund like $SH.
Is a simple money market fund a reasonable alternative to treasuries in this low rate environment?
Everything is close to zero now (like 0.01%) because the returns can’t even cover the expense ratio.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Kevin M »

Always passive wrote: Sat Oct 03, 2020 4:27 pm
FIREchief wrote: Sat Oct 03, 2020 2:31 pm
Always passive wrote: Sat Oct 03, 2020 1:41 pm
FIREchief wrote: Sat Oct 03, 2020 1:31 pm TL:DR. It sounds like from some of the forum comments that this was just one more instance of click bait written by somebody who a) doesn't understand the basics of investing or b) has an agenda. I'm not sure what exactly is meant by "ballast," but a healthy ladder of US treasuries will always provide a guaranteed cash flow at maturity. I prefer TIPS so that it's guaranteed purchasing power. 8-)
Are you aware that presently TIPS Yield less that inflation, in fact about 1% less? So, how can you assume that they guarantee purchasing power.
They absolutely guarantee purchasing power. The fact that the purchasing power in ten years is less than the purchase price in no way affects the guaranteed aspect.
You got me with your response. Guaranteeing purchasing power means to me that the bond keeps up with inflation. So how can TIPS accomplish that when every single one for any maturity you pick has a negative real yield. Maybe I am missing something. Can you help me understand your logic?
FIREchief is correct, but perhaps the language is a bit confusing. The phrase "guaranteed purchasing power" is being interpreted differently by different posters. As FIREchief explains, knowing with relative certainty what your purchasing power will be in 10 years is not the same as knowing with relative certainty that your purchasing power in 10 years will be the same is it is today. Always passive is looking for the latter, but as noted, that is not possible with negative real yields. FIREchief does not dispute that.

There is no disagreement here. It's just a semantics issue.

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Re: Treasurys no longer provide the ballast for a portfolio

Post by motorcyclesarecool »

Blue456 wrote: Sat Oct 03, 2020 7:11 am
Always passive wrote: Sat Oct 03, 2020 6:47 am ...but what about some of us in the 60s, 70s, and 80s?
CD ladder. Principle is guaranteed and will never go down. Pick anywhere from short duration to long duration as long as it matches your investment length. There are also T-bills and I bonds.
I had CDs get called. I thought had bought non-callable CDs but it appears that Fidelity might have auto-rolled them to something callable. Or I chose poorly.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Robot Monster »

Always passive wrote: Sun Oct 04, 2020 7:19 am So help me understand how the math would work when the Tips have negative coupon?
Negative yielding TIPS don't literally have a negative coupon. This may shed some light...
Why does the Treasury issue TIPS with a coupon rate of 0.125% even though the yield to maturity will end up being negative?

So far, the Treasury hasn’t been willing to issue a TIPS with a zero or negative coupon interest rate. So when yields are negative, it sets the coupon rate at 0.125% and then lets buyers pay up at auction to get the resulting yield that is negative to inflation...

If I buy via Treasury Direct and pay more than par or 100, say $107.06 for a coupon rate of 0.125% to result in a negative yield, then is the 7.06 premium ‘protected’ if a chronic deflation sets in? In other words, at maturity will the Treasury reimburse principal of 100, or of 107.06?

When you pay $107.06 for a TIPS at auction, you are paying up to receive that 0.125% coupon rate. After ten years, you get back $100, plus any inflation adjustment to principal. So you are paying $107 for $100, simple as that. If we suffered through chronic deflation for 10 years, you’d get back $100...
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Last edited by Robot Monster on Sun Oct 04, 2020 3:03 pm, edited 1 time in total.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by JoMoney »

Cash in the bank and Savings Bonds have let me sleep pretty well while ignoring whatever stocks might be doing this year.
The realization that whenever I get around to withdrawing from equities, it won't be an all at once situation, but something averaged out over many different time periods, helps ignore the extremes of any particular year or two as well.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Kevin M »

Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
This is not correct.

The price of a TIPS has two components: the unadjusted price and the inflation index ratio. The former is multiplied by the latter to get the inflation-adjusted price.

Every TIPS matures at an unadjusted price of 100 (percent of face value). So what you get at maturity is 100 times the index ratio on the maturity date. If the unadjusted price you pay for the TIPS is greater than 100, you will have less purchasing power at maturity than when you bought the TIPS. This is another way of saying that the real yield is negative if your unadjusted price is greater than 100.

So, it is incorrect to say that you will receive your original principal if your unadjusted price is greater than 100.

Consider the most recent 10-year TIPS auction:

Image

Note that the adjusted price of 112.388136 is the unadjusted price of 111.231330 times the index ratio of 1.01040.

As with all TIPS, the unadjusted price of this TIPS at maturity will be 100. If for purposes of illustration, we assume 0% inflation between the issue date and maturity date, the index ratio at maturity would be the same as on the issue date, and the adjusted price at maturity would be 100 * 1.01040 = 101.040. This would be a loss in purchasing power of 112.388136 - 101.040 = 11.348136. over about 10 years. Thus the real yield of about -1%.

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Re: Treasurys no longer provide the ballast for a portfolio

Post by JoMoney »

It's kind of sad to think about taking 20 years to double money, I can remember when EE Savings Bonds doubled in 10 years or less :annoyed
But if you were willing to do some clever accounting, and look only at 20 year periods, you could put $10,000 (maybe more) into EE Savings Bonds, and $10,000 into stocks, every year, and at the end of a 20 year period the worst case result would to be to get 100% of your money back guaranteed (with a lot of upside potential)... that seems like a reasonable "ballast" to me :wink:
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Blue456 »

motorcyclesarecool wrote: Sun Oct 04, 2020 2:44 pm
Blue456 wrote: Sat Oct 03, 2020 7:11 am
Always passive wrote: Sat Oct 03, 2020 6:47 am ...but what about some of us in the 60s, 70s, and 80s?
CD ladder. Principle is guaranteed and will never go down. Pick anywhere from short duration to long duration as long as it matches your investment length. There are also T-bills and I bonds.
I had CDs get called. I thought had bought non-callable CDs but it appears that Fidelity might have auto-rolled them to something callable. Or I chose poorly.
I thought brokerages allowed you to select non-callable CDs? You can also use a bank, which can actually be safer.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by rossington »

Kevin M wrote: Sun Oct 04, 2020 3:08 pm
Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
This is not correct.

The price of a TIPS has two components: the unadjusted price and the inflation index ratio. The former is multiplied by the latter to get the inflation-adjusted price.

Every TIPS matures at an unadjusted price of 100 (percent of face value). So what you get at maturity is 100 times the index ratio on the maturity date. If the unadjusted price you pay for the TIPS is greater than 100, you will have less purchasing power at maturity than when you bought the TIPS. This is another way of saying that the real yield is negative if your unadjusted price is greater than 100.

So, it is incorrect to say that you will receive your original principal if your unadjusted price is greater than 100.

Consider the most recent 10-year TIPS auction:

Image

Note that the adjusted price of 112.388136 is the unadjusted price of 111.231330 times the index ratio of 1.01040.

As with all TIPS, the unadjusted price of this TIPS at maturity will be 100. If for purposes of illustration, we assume 0% inflation between the issue date and maturity date, the index ratio at maturity would be the same as on the issue date, and the adjusted price at maturity would be 100 * 1.01040 = 101.040. This would be a loss in purchasing power of 112.388136 - 101.040 = 11.348136. over about 10 years. Thus the real yield of about -1%.

Kevin
I don't understand your example. According to Treasury Direct they state this: "When TIPS mature, we pay either the adjusted principal or the original principal, whichever is greater."
Maybe I'm missing something.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Kevin M »

rossington wrote: Sun Oct 04, 2020 3:52 pm I don't understand your example. According to Treasury Direct they state this: "When TIPS mature, we pay either the adjusted principal or the original principal, whichever is greater."
Maybe I'm missing something.
Again, we have a semantics problem. Treasury's use of the word "principal" really means face value, not the unadjusted price you pay.

I don't know if it will help convince you, but TIPS maturing soon will have an unadjusted price close to 100.

Image

Note the price of the Jan 2021 is quite close to 100 (and note the generally increasing prices as maturity increases). This TIPS had an unadjusted price of 102.19 when it was last issued on 5/31/2011. Of course with inflation, your adjusted price will be significantly higher than in May 2011, but the point here is that the unadjusted price will be 100 at maturity regardless of the unadjusted price when issued.

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Re: Treasurys no longer provide the ballast for a portfolio

Post by kim.gold »

CardinalRule wrote: Sun Oct 04, 2020 11:03 am
Kevin M wrote: Sat Oct 03, 2020 5:41 pm Here's the article not behind a paywall: [link which violates WSJ terms of service removed by admin LadyGeek]
Unrelated to the issue being discussed, how do these things end up getting re-published on the internet? I assume that this [domain name removed by admin LadyGeek] site is based in India or China, or somewhere else where copyrights are not enforced? Not sure how they make money on this theft, though. There are no ads on that site, from what I can tell.

Anyway, sorry for the digression. :?
It is definitely India or China stealing US intelectual property. [Political comment removed by moderator oldcomputerguy]
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Ferdinand2014 »

Kevin M wrote: Sun Oct 04, 2020 3:08 pm
Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation. A TIPS individual bond will periodically increase its principle to compensate for inflation and subsequently apply the auction purchase interest rate to the higher principal which then increases your interest payment to accommodate inflation. You are guaranteed to receive your original principal along with the increased principal and associated periodic interest payments. In a deflationary environment you are also guaranteed to receive at a minimum your original principal.
This is not correct.

The price of a TIPS has two components: the unadjusted price and the inflation index ratio. The former is multiplied by the latter to get the inflation-adjusted price.

Every TIPS matures at an unadjusted price of 100 (percent of face value). So what you get at maturity is 100 times the index ratio on the maturity date. If the unadjusted price you pay for the TIPS is greater than 100, you will have less purchasing power at maturity than when you bought the TIPS. This is another way of saying that the real yield is negative if your unadjusted price is greater than 100.

So, it is incorrect to say that you will receive your original principal if your unadjusted price is greater than 100.

Consider the most recent 10-year TIPS auction:

Image

Note that the adjusted price of 112.388136 is the unadjusted price of 111.231330 times the index ratio of 1.01040.

As with all TIPS, the unadjusted price of this TIPS at maturity will be 100. If for purposes of illustration, we assume 0% inflation between the issue date and maturity date, the index ratio at maturity would be the same as on the issue date, and the adjusted price at maturity would be 100 * 1.01040 = 101.040. This would be a loss in purchasing power of 112.388136 - 101.040 = 11.348136. over about 10 years. Thus the real yield of about -1%.

Kevin
U.S. Treasury:

"The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation."


TIPS pay interest on the adjusted (up with inflation, down with deflation) principal. The principal (adjusted) goes up based on the CPI. The interest rate is then applied to this adjusted principal. If you buy a TIPS bond at auction, you will not lose purchasing power (before taxes and if your personal inflation matches the CPI) if held to maturity and consider both the principal and interest paid. You will receive your original principal or the adjusted principal based on inflation - whichever is greater.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Investors Mind Money »

I would not use investment grade bonds as it could go down with stocks. We use short-term treasury to reduce volatility of the portfolio. Although, return from treasury bond is not going to bit inflation in current low interest environment, it does provide “safety” cushion.

I agree with you that young investors who are few decades away from retirement, majority of their portfolio should be aggressively invested as long as it fits their risk tolerance.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by z3r0c00l »

anoop wrote: Sun Oct 04, 2020 11:24 am
dml130 wrote: Sun Oct 04, 2020 8:47 am
z3r0c00l wrote: Sat Oct 03, 2020 8:08 am Ballast is the perfect word for what treasuries and other similar investments offer. Ballast is generally passive, dead weight that simply lowers the center of mass and improves the righting moment of a ship. The idea that bonds must zig when stocks zag has always been a myth, they are ballast because they are not that volatile, not because they are the opposite of stocks at all times. If you are looking for the canting keel of investing, at considerable cost, then it would have to be an inverse fund like $SH.
Is a simple money market fund a reasonable alternative to treasuries in this low rate environment?
Everything is close to zero now (like 0.01%) because the returns can’t even cover the expense ratio.
I would agree that returns are too low to bother with. A savings account, CD, iBond, are all preferable options for me. I am of the opinion that while we can't time changes in interest rates, we can certainly shop around. Many customers of treasuries are forced to buy bonds, they can't use CDs or bank accounts or iBonds because they need to move millions or billions of dollars. This is one area where we have an advantage because we typically just need to buy thousands at a time.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Dennisl »

Sept doesn’t seem like a good example to model after. There wasn’t a big enough drop in equity given the volatility ranged 1.5% on any given day. If you watch the financial news constantly, then you might have felt that there were big moves in sept. For the rest of us, it wasn’t even a blip on the radar. There wasn’t a big enough drop to cause a sell off or flight to save assets. Not a big enough change to trigger rebalancing. If this happens when the market drops 30%, then we should talk.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Robot Monster »

Came across a BlackRock article entitled, "Preparing for a higher inflation regime". Concludes with:
For all of these reasons, we doubt nominal government bonds will provide the portfolio balance they historically have. We prefer inflation-linked bonds and alternatives for potential diversification and sources of resilience.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Kevin M »

Ferdinand2014 wrote: Sun Oct 04, 2020 4:20 pm U.S. Treasury:

"The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation."


TIPS pay interest on the adjusted (up with inflation, down with deflation) principal. The principal (adjusted) goes up based on the CPI. The interest rate is then applied to this adjusted principal. If you buy a TIPS bond at auction, you will not lose purchasing power (before taxes and if your personal inflation matches the CPI) if held to maturity and consider both the principal and interest paid. You will receive your original principal or the adjusted principal based on inflation - whichever is greater.
Right. The problem is that the Treasury language is not clear about what "principal" actually means. In terms of the "original principal" that you will receive (if greater than adjusted principal), they are referring to face value. Here are some definitions from the Treasury glossary that may help:
Treasury wrote: Par Amount (Par Value, Face Value)

The stated value of a security on its original issue date.

Par

The principal amount of a security.
Source: https://www.treasurydirect.gov/indiv/re ... sary.htm#p

From the first definition, we see that par is synonymous with face value. This also is widely-understood bond terminology. Par = 100 (percent of face value).

The second definition equates par with "principal".

So principal = par = face value.

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Re: Treasurys no longer provide the ballast for a portfolio

Post by anoop »

z3r0c00l wrote: Sun Oct 04, 2020 5:00 pm
anoop wrote: Sun Oct 04, 2020 11:24 am
dml130 wrote: Sun Oct 04, 2020 8:47 am
z3r0c00l wrote: Sat Oct 03, 2020 8:08 am Ballast is the perfect word for what treasuries and other similar investments offer. Ballast is generally passive, dead weight that simply lowers the center of mass and improves the righting moment of a ship. The idea that bonds must zig when stocks zag has always been a myth, they are ballast because they are not that volatile, not because they are the opposite of stocks at all times. If you are looking for the canting keel of investing, at considerable cost, then it would have to be an inverse fund like $SH.
Is a simple money market fund a reasonable alternative to treasuries in this low rate environment?
Everything is close to zero now (like 0.01%) because the returns can’t even cover the expense ratio.
I would agree that returns are too low to bother with. A savings account, CD, iBond, are all preferable options for me.
All options in the fixed income arena are bad right now, some are worse than others, but all are bad/worthless. I'm 100% money market in my 401k and the returns are not even enough to cover the quarterly fee charged by the custodian. I guess it is what it is. We live in interesting times and I don't see any of this normalizing in my lifetime. I make more money than that by repeatedly buying and selling 100 shares of Zoom or Apple stock in my taxable account. The moment the next stimulus is signed, I will go back to doing that for a bit.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by JackoC »

Ferdinand2014 wrote: Sun Oct 04, 2020 4:20 pm
Kevin M wrote: Sun Oct 04, 2020 3:08 pm
Ferdinand2014 wrote: Sat Oct 03, 2020 5:05 pm A TIPS fund can lose value. A TIPS individual bond cannot by definition as long as you hold it to maturity and the inflation calculation the government uses matches your personal inflation.
This is not correct.

The price of a TIPS has two components: the unadjusted price and the inflation index ratio. The former is multiplied by the latter to get the inflation-adjusted price.

Every TIPS matures at an unadjusted price of 100 (percent of face value). So what you get at maturity is 100 times the index ratio on the maturity date. If the unadjusted price you pay for the TIPS is greater than 100, you will have less purchasing power at maturity than when you bought the TIPS. This is another way of saying that the real yield is negative if your unadjusted price is greater than 100.

So, it is incorrect to say that you will receive your original principal if your unadjusted price is greater than 100.
U.S. Treasury:

"The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation."

TIPS pay interest on the adjusted (up with inflation, down with deflation) principal. The principal (adjusted) goes up based on the CPI. The interest rate is then applied to this adjusted principal. If you buy a TIPS bond at auction, you will not lose purchasing power (before taxes and if your personal inflation matches the CPI) if held to maturity and consider both the principal and interest paid. You will receive your original principal or the adjusted principal based on inflation - whichever is greater.
Confusing later part of thread which started with 'TIPS guarantee future purchasing power', 'just not necessarily the same purchasing power as now' it was clarified. With that clarification the statement is correct, but confusing I think.

Because now I can't tell if you are reiterating this idea, or saying the the purchasing power of TIPS at maturity can't be less than the purchasing power I used to buy it. Which is not true, Kevin M correct. You seem to be neglecting the fact that practically speaking a negative TIPS yield means a tiny positive coupon (but let's assume it's a 0% coupon for clarity), and you pay more than face value for it now. At -1% yield, further simplifying discounting to say that's just worth 5% over 5 yrs, I would pay 105 in 2020 $'s for a 5yr TIPS at auction, I would get back $100 2020 $'s in 2025 (if CPI-U rose at all in that period). I spent more 2020 $'s to buy it than I'll have at the end: I'll lose purchasing power, albeit per the previous debate a loss I knew and accepted up front, a guaranteed *loss* of purchasing power I think it's clearer to say. That's what a negative TIPS yields means. What else could it possibly mean?

Apologies if you are also saying 'it gtees my future purchasing power, just less purchasing power than I have now''. But I think the thread has illustrated at least that that's a confusing way to put it. :happy
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Re: Treasurys no longer provide the ballast for a portfolio

Post by CardinalRule »

kim.gold wrote: Sun Oct 04, 2020 4:19 pm
CardinalRule wrote: Sun Oct 04, 2020 11:03 am
Kevin M wrote: Sat Oct 03, 2020 5:41 pm Here's the article not behind a paywall: [link which violates WSJ terms of service removed by admin LadyGeek]
Unrelated to the issue being discussed, how do these things end up getting re-published on the internet? I assume that this [domain name removed by admin LadyGeek] site is based in India or China, or somewhere else where copyrights are not enforced? Not sure how they make money on this theft, though. There are no ads on that site, from what I can tell.

Anyway, sorry for the digression. :?
It is definitely India or China stealing US intelectual property. As DJT told us /s
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Ferdinand2014 »

Kevin M wrote: Sun Oct 04, 2020 5:10 pm
Ferdinand2014 wrote: Sun Oct 04, 2020 4:20 pm U.S. Treasury:

"The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation."


TIPS pay interest on the adjusted (up with inflation, down with deflation) principal. The principal (adjusted) goes up based on the CPI. The interest rate is then applied to this adjusted principal. If you buy a TIPS bond at auction, you will not lose purchasing power (before taxes and if your personal inflation matches the CPI) if held to maturity and consider both the principal and interest paid. You will receive your original principal or the adjusted principal based on inflation - whichever is greater.
Right. The problem is that the Treasury language is not clear about what "principal" actually means. In terms of the "original principal" that you will receive (if greater than adjusted principal), they are referring to face value. Here are some definitions from the Treasury glossary that may help:
Treasury wrote: Par Amount (Par Value, Face Value)

The stated value of a security on its original issue date.

Par

The principal amount of a security.
Source: https://www.treasurydirect.gov/indiv/re ... sary.htm#p

From the first definition, we see that par is synonymous with face value. This also is widely-understood bond terminology. Par = 100 (percent of face value).

The second definition equates par with "principal".

So principal = par = face value.

Kevin
I think I understand what you are saying. Maybe I need to rethink my future TIPS plan.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Kevin M »

Ferdinand2014 wrote: Sun Oct 04, 2020 7:08 pm I think I understand what you are saying.
Excellent!

Another thing to consider is that the negative real yield actually means something; i.e., that your purchasing power (based on CPI) will be less at maturity than at purchase.

TIPS quoted yields are based on the unadjusted prices, which can be easily verified by plugging numbers from a recent auction into the spreadsheet YIELD function. As a rough approximation, consider that the unadjusted price of the 10-year TIPS at the most recent auction was about 111. Since the unadjusted price at maturity is 100, over about 10 years the cumulative return is about 100/111 = 0.90, which is a loss of about 10%, or an annualized return of about -1% per year, which is consistent with the quoted yield to maturity of -0.966%.

Ferdinand2014 wrote: Sun Oct 04, 2020 7:08 pm Maybe I need to rethink my future TIPS plan.
Maybe, but then you need to consider what the alternative is. The most recent 10-year breakeven inflation rate is 1.64%, so if inflation were exactly that over the next 10 years, a 10-year nominal Treasury at 0.70% would earn the same -0.94% real return as the 10-year TIPS -0.94% yield (yields from Treasury.gov as of Friday). If inflation is greater than 1.64%, you would be better off with the TIPS; if lower, you'd end up better off with the nominal Treasury. Either way, the expected real return is negative.

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Re: Treasurys no longer provide the ballast for a portfolio

Post by rockstar »

Kevin M wrote: Sun Oct 04, 2020 7:36 pm Excellent!

Another thing to consider is that the negative real yield actually means something; i.e., that your purchasing power (based on CPI) will be less at maturity than at purchase.

TIPS quoted yields are based on the unadjusted prices, which can be easily verified by plugging numbers from a recent auction into the spreadsheet YIELD function. As a rough approximation, consider that the unadjusted price of the 10-year TIPS at the most recent auction was about 111. Since the unadjusted price at maturity is 100, over about 10 years the cumulative return is about 100/111 = 0.90, which is a loss of about 10%, or an annualized return of about -1% per year, which is consistent with the quoted yield to maturity of -0.966%.
But if you're inflation is 1% or more per year, then you're end up close to zero or slightly above for your yield as your principal will be adjusted each year. This isn't a whole lot better than cash unless you think rates will go even lower.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by FIREchief »

Kevin M wrote: Sun Oct 04, 2020 2:19 pm
Always passive wrote: Sat Oct 03, 2020 4:27 pm
FIREchief wrote: Sat Oct 03, 2020 2:31 pm
Always passive wrote: Sat Oct 03, 2020 1:41 pm
FIREchief wrote: Sat Oct 03, 2020 1:31 pm TL:DR. It sounds like from some of the forum comments that this was just one more instance of click bait written by somebody who a) doesn't understand the basics of investing or b) has an agenda. I'm not sure what exactly is meant by "ballast," but a healthy ladder of US treasuries will always provide a guaranteed cash flow at maturity. I prefer TIPS so that it's guaranteed purchasing power. 8-)
Are you aware that presently TIPS Yield less that inflation, in fact about 1% less? So, how can you assume that they guarantee purchasing power.
They absolutely guarantee purchasing power. The fact that the purchasing power in ten years is less than the purchase price in no way affects the guaranteed aspect.
You got me with your response. Guaranteeing purchasing power means to me that the bond keeps up with inflation. So how can TIPS accomplish that when every single one for any maturity you pick has a negative real yield. Maybe I am missing something. Can you help me understand your logic?
FIREchief is correct, but perhaps the language is a bit confusing. The phrase "guaranteed purchasing power" is being interpreted differently by different posters. As FIREchief explains, knowing with relative certainty what your purchasing power will be in 10 years is not the same as knowing with relative certainty that your purchasing power in 10 years will be the same is it is today. Always passive is looking for the latter, but as noted, that is not possible with negative real yields. FIREchief does not dispute that.

There is no disagreement here. It's just a semantics issue.

Kevin
Thanks Kevin. :beer
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Re: Treasurys no longer provide the ballast for a portfolio

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FYI - I removed a website link which reproduced an article in violation of the WSJ Terms of Use (reposting content).
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Re: Treasurys no longer provide the ballast for a portfolio

Post by FIREchief »

Always passive wrote: Sun Oct 04, 2020 4:51 am
FIREchief wrote: Sun Oct 04, 2020 1:22 am No, it's not the "key factor." The key factor is that somebody who invests in TIPS knows exactly what purchasing power they will have when the TIPS matures. The fact that they have to pay a purchase premium for the "privilege" is fully known and accepted.

Inflation adjusted original principle (or better if deflation) to maturity purchasing power is exactly what a TIPS purchaser is buying and being guaranteed.
Your comments once again are correct, I can see that you have studied the topic.
Now on the essence of the issue; and, I state it as a question:
If you buy a Tips with negative real yield, is it or is it not true that after paying the premium, the total yield until maturity is less that inflation?
Yes or Not?
Of course it's true!! If somebody argues with you about that, then they don't understand what the term "real yield" means. 8-)

My LMP is 100% TIPS (I've shared that here on the forum many times), so I've more that just "studied" the topic. I have built my ten year ladder with both positive and negative real yields, at both auctions (including reopenings) and in the secondary market. I fully intend to continue to maintain the ladder regardless of real yields. I fully expect that I'll have to roll an entire rung of maturing TIPS at a negative real yield in next January's auction. I may or may not have to "juice" the total assets depending upon how the January coupons on my other nine rungs cover the expected auction premium. I do inflation adjust the principle of each rung so that they hold approximately the same purchasing value.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Always passive »

FIREchief wrote: Sun Oct 04, 2020 9:15 pm
Always passive wrote: Sun Oct 04, 2020 4:51 am
FIREchief wrote: Sun Oct 04, 2020 1:22 am No, it's not the "key factor." The key factor is that somebody who invests in TIPS knows exactly what purchasing power they will have when the TIPS matures. The fact that they have to pay a purchase premium for the "privilege" is fully known and accepted.

Inflation adjusted original principle (or better if deflation) to maturity purchasing power is exactly what a TIPS purchaser is buying and being guaranteed.
Your comments once again are correct, I can see that you have studied the topic.
Now on the essence of the issue; and, I state it as a question:
If you buy a Tips with negative real yield, is it or is it not true that after paying the premium, the total yield until maturity is less that inflation?
Yes or Not?
Of course it's true!! If somebody argues with you about that, then they don't understand what the term "real yield" means. 8-)

My LMP is 100% TIPS (I've shared that here on the forum many times), so I've more that just "studied" the topic. I have built my ten year ladder with both positive and negative real yields, at both auctions (including reopenings) and in the secondary market. I fully intend to continue to maintain the ladder regardless of real yields. I fully expect that I'll have to roll an entire rung of maturing TIPS at a negative real yield in next January's auction. I may or may not have to "juice" the total assets depending upon how the January coupons on my other nine rungs cover the expected auction premium. I do inflation adjust the principle of each rung so that they hold approximately the same purchasing value.
I think that we have just used different terminology, but mean the same thing,
Since many do not understand what happens to TIPS with negative real yield, allow me to elaborate:
As I retiree I also have a 10 year TIPS ladder that I use to service my basic expenses. The point that I have been making to you all along is that when you determine the actual return you got from a TIPs bond with negative real yield that you have held from issuance to maturity, you have received in total return that is less than inflation.
The government typically sets the real yield component to 0.15% for TIPS bonds with negative real yield (the US has never set this yield either at zero or less, other countries have). And then they calculate the price that one has to pay (premium) at issuance that accounts for the negative yield.
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Re: Treasurys no longer provide the ballast for a portfolio

Post by FIREchief »

Always passive wrote: Sun Oct 04, 2020 11:10 pm
FIREchief wrote: Sun Oct 04, 2020 9:15 pm
Always passive wrote: Sun Oct 04, 2020 4:51 am
FIREchief wrote: Sun Oct 04, 2020 1:22 am No, it's not the "key factor." The key factor is that somebody who invests in TIPS knows exactly what purchasing power they will have when the TIPS matures. The fact that they have to pay a purchase premium for the "privilege" is fully known and accepted.

Inflation adjusted original principle (or better if deflation) to maturity purchasing power is exactly what a TIPS purchaser is buying and being guaranteed.
Your comments once again are correct, I can see that you have studied the topic.
Now on the essence of the issue; and, I state it as a question:
If you buy a Tips with negative real yield, is it or is it not true that after paying the premium, the total yield until maturity is less that inflation?
Yes or Not?
Of course it's true!! If somebody argues with you about that, then they don't understand what the term "real yield" means. 8-)

My LMP is 100% TIPS (I've shared that here on the forum many times), so I've more that just "studied" the topic. I have built my ten year ladder with both positive and negative real yields, at both auctions (including reopenings) and in the secondary market. I fully intend to continue to maintain the ladder regardless of real yields. I fully expect that I'll have to roll an entire rung of maturing TIPS at a negative real yield in next January's auction. I may or may not have to "juice" the total assets depending upon how the January coupons on my other nine rungs cover the expected auction premium. I do inflation adjust the principle of each rung so that they hold approximately the same purchasing value.
I think that we have just used different terminology, but mean the same thing,
Since many do not understand what happens to TIPS with negative real yield, allow me to elaborate:
As I retiree I also have a 10 year TIPS ladder that I use to service my basic expenses. The point that I have been making to you all along is that when you determine the actual return you got from a TIPs bond with negative real yield that you have held from issuance to maturity, you have received in total return that is less than inflation.
The government typically sets the real yield component to 0.15% for TIPS bonds with negative real yield (the US has never set this yield either at zero or less, other countries have). And then they calculate the price that one has to pay (premium) at issuance that accounts for the negative yield.
Yep. TIPS 101 stuff. I really like TIPS. I don’t like negative rates. Who does?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Robot Monster
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Robot Monster »

rockstar wrote: Sun Oct 04, 2020 8:15 pm
Kevin M wrote: Sun Oct 04, 2020 7:36 pm 10-year TIPS have] an annualized return of about -1% per year, which is consistent with the quoted yield to maturity of -0.966%.
But if you[r] inflation is 1% or more per year, then you'[ll] end up close to zero or slightly above for your yield as your principal will be adjusted each year. This isn't a whole lot better than cash unless you think rates will go even lower.
1% is a bit on the low side, regarding inflation expectations. The Fed is trying to have something like 2% average inflation, and the bond market is betting inflation will be 1.64% over the next year years, going by the 10-Year Breakeven Inflation Rate.

That all said, we don't really know what will happen to inflation. There's no guarantee inflation won't fall to Japan's 0.2% inflation rate, in which case, you'll be happy if your portfolio has assets that thrive under that environment e.g. nominal treasuries. The Swensen portfolio advocates both nominal Treasuries and TIPS.
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Robot Monster »

Said today, October 5th:

"US treasuries still demonstrate inverse correlation with stocks. The upside potential is limited but the diversification value still exists. Broader diversification is the key." -- Kathy Jones, Chief Fixed Income Strategist of Schwab
link
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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HomerJ
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Re: Treasurys no longer provide the ballast for a portfolio

Post by HomerJ »

Always passive wrote: Sat Oct 03, 2020 6:47 am There is a good article at the WSJ on the traditional hedging against stock market fall.
For those that have access...
https://www.wsj.com/articles/theres-no- ... lead_pos11

A bit of the txt here...
“There’s No Place to Hide Anymore When the Stock Market Plunges
All the obvious hedges against stock-market volatility—Treasurys, gold, bitcoin and the VIX—stopped working in September

September hurt shareholders, not only because stocks fell but also because the things they’d bought to protect their portfolios also fell. From the S&P 500’s high on the 2nd of the month, stocks, Treasurys, gold, bitcoin and the VIX volatility index all dropped.

This total failure of hedging is unusual, but investors need to get used to the idea that Treasurys no longer provide the ballast for a portfolio.”

———
So Bogleheads, why invest in investment grade bonds, treasuries, etc. unless you are retired and have no other choice? If you are young, 20% bonds should be the maximum, but what about some of us in the 60s, 70s, and 80s?
Why is this a good article?

Did you check what he claimed? It's real easy to do. Half these writers don't know what they are talking about, so always check them. Go to morningstar.com

Vanguard Total Stock Market Index Fund (VTSAX) dropped 5.71% from Sept 2 to Oct 2.

Vanguard Intermediate Treasury Fund Admiral (VFIUX) is even (up 0.003%)
Vanguard Short-term Treasury Fund Admiral (VFIRX) is also even (up 0.06%)

Looks like Treasury Funds did not drop.

Looks like they did provide ballast.

So, if the writer can't get basic facts right, why do you care about his conclusions?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Always passive
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Re: Treasurys no longer provide the ballast for a portfolio

Post by Always passive »

HomerJ wrote: Mon Oct 05, 2020 9:13 am
Always passive wrote: Sat Oct 03, 2020 6:47 am There is a good article at the WSJ on the traditional hedging against stock market fall.
For those that have access...
https://www.wsj.com/articles/theres-no- ... lead_pos11

A bit of the txt here...
“There’s No Place to Hide Anymore When the Stock Market Plunges
All the obvious hedges against stock-market volatility—Treasurys, gold, bitcoin and the VIX—stopped working in September

September hurt shareholders, not only because stocks fell but also because the things they’d bought to protect their portfolios also fell. From the S&P 500’s high on the 2nd of the month, stocks, Treasurys, gold, bitcoin and the VIX volatility index all dropped.

This total failure of hedging is unusual, but investors need to get used to the idea that Treasurys no longer provide the ballast for a portfolio.”

———
So Bogleheads, why invest in investment grade bonds, treasuries, etc. unless you are retired and have no other choice? If you are young, 20% bonds should be the maximum, but what about some of us in the 60s, 70s, and 80s?
Why is this a good article?

Did you check what he claimed? It's real easy to do. Half these writers don't know what they are talking about, so always check them. Go to morningstar.com

Vanguard Total Stock Market Index Fund (VTSAX) dropped 5.71% from Sept 2 to Oct 2.

Vanguard Intermediate Treasury Fund Admiral (VFIUX) is even (up 0.003%)
Vanguard Short-term Treasury Fund Admiral (VFIRX) is also even (up 0.06%)

Looks like Treasury Funds did not drop.

Looks like they did provide ballast.

So, if the writer can't get basic facts right, why do you care about his conclusions?
The article may not be written to your liking but given that the yields are at near zero rates, you do not have to do much thinking to realize that treasury yields may not have much room to drop. Thus, you can easily come to the same conclusion that the WSJ writer did without getting hang up on his text.
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