TIPS pricing?

[Rupert Dacat]

I own TIPS maturing 1/15/2025. The coupon is 2.375%. Since the coupon is higher than the current short term TIPS real yield, shouldn't such a bond be trading at greater than par value ($100). Vanguard reports the price (on 11/17) to be $98.73. What am I not taking into account?

Thank you,
Rupe

[toddthebod]

I own TIPS maturing 1/15/2025. The coupon is 2.375%. Since the coupon is higher than the current short term TIPS real yield, shouldn't such a bond be trading at greater than par value ($100). Vanguard reports the price (on 11/17) to be $98.73. What am I not taking into account?

Thank you,
Rupe

The coupon is less than the yield, not higher.

[Rupert Dacat]

I own TIPS maturing 1/15/2025. The coupon is 2.375%. Since the coupon is higher than the current short term TIPS real yield, shouldn't such a bond be trading at greater than par value ($100). Vanguard reports the price (on 11/17) to be $98.73. What am I not taking into account?

Thank you,
Rupe

The coupon is less than the yield, not higher.

If it's not too much trouble, would you explain that further, please?
Thank you.

[toddthebod]

I own TIPS maturing 1/15/2025. The coupon is 2.375%. Since the coupon is higher than the current short term TIPS real yield, shouldn't such a bond be trading at greater than par value ($100). Vanguard reports the price (on 11/17) to be $98.73. What am I not taking into account?

Thank you,
Rupe

The coupon is less than the yield, not higher.

If it's not too much trouble, would you explain that further, please?
Thank you.

The current yield on your TIPS is 3.496. The coupon is 2.375. The rest of the yield comes from the price.

You said, "the coupon is higher than the current short term TIPS real yield." Where did you get that?

[Rupert Dacat]

I own TIPS maturing 1/15/2025. The coupon is 2.375%. Since the coupon is higher than the current short term TIPS real yield, shouldn't such a bond be trading at greater than par value ($100). Vanguard reports the price (on 11/17) to be $98.73. What am I not taking into account?

Thank you,
Rupe

The coupon is less than the yield, not higher.

If it's not too much trouble, would you explain that further, please?
Thank you.

The current yield on your TIPS is 3.496. The coupon is 2.375. The rest of the yield comes from the price.

You said, "the coupon is higher than the current short term TIPS real yield." Where did you get that?

The Treasury lists the 11/17 real yield on 5 yr TIPS to be 2.22%. I fear that i am not understanding something basic.

[JBTX]

I own TIPS maturing 1/15/2025. The coupon is 2.375%. Since the coupon is higher than the current short term TIPS real yield, shouldn't such a bond be trading at greater than par value ($100). Vanguard reports the price (on 11/17) to be $98.73. What am I not taking into account?

Thank you,
Rupe

The coupon is less than the yield, not higher.

If it's not too much trouble, would you explain that further, please?
Thank you.

The current yield on your TIPS is 3.496. The coupon is 2.375. The rest of the yield comes from the price.

You said, "the coupon is higher than the current short term TIPS real yield." Where did you get that?

The Treasury lists the 11/17 real yield on 5 yr TIPS to be 2.22%. I fear that i am not understanding something basic.

https://www.wsj.com/market-data/bonds/tips

1/15/25 at this point is basically a one year tips, not a 5 year tips. It is true that the 2028 TIps are around 2.2%. But 1/15/25 are around 3.5%.

[Rupert Dacat]

The coupon is less than the yield, not higher.

If it's not too much trouble, would you explain that further, please?
Thank you.

The current yield on your TIPS is 3.496. The coupon is 2.375. The rest of the yield comes from the price.

You said, "the coupon is higher than the current short term TIPS real yield." Where did you get that?

The Treasury lists the 11/17 real yield on 5 yr TIPS to be 2.22%. I fear that i am not understanding something basic.

https://www.wsj.com/market-data/bonds/tips

1/15/25 at this point is basically a one year tips, not a 5 year tips. It is true that the 2028 TIps are around 2.2%. But 1/15/25 are around 3.5%.

Why is the real yield on the 1 year (approximately) TIPS so high?
Thank you

[Valuethinker]

If it's not too much trouble, would you explain that further, please?
Thank you.

The current yield on your TIPS is 3.496. The coupon is 2.375. The rest of the yield comes from the price.

You said, "the coupon is higher than the current short term TIPS real yield." Where did you get that?

The Treasury lists the 11/17 real yield on 5 yr TIPS to be 2.22%. I fear that i am not understanding something basic.

https://www.wsj.com/market-data/bonds/tips

1/15/25 at this point is basically a one year tips, not a 5 year tips. It is true that the 2028 TIps are around 2.2%. But 1/15/25 are around 3.5%.

Why is the real yield on the 1 year (approximately) TIPS so high?
Thank you

The nominal yield curve is inverted -- short term rates are higher than long term rates. That's not usual in yield curves which are normally upward sloping (time on the X axis, YTM on the Y axis). High nominal rates will tend to bring with them high *anticipated* real yields. Because the tradeoff for a buyer of TIPS for inflation protection is more expensive (ie the alternative, the nominal rate, is higher).

The "real yield" is a calculation based on the nominal yield curve. In effect it's the market's guess based on the nominal yield curve, of what inflation will be. That number is the "breakeven inflation rate" such that (1+nominal) = (1+real)*(1 + expected inflation)- -the point of indifference between holding a nominal bond, and an inflation linked bond, if we knew what the inflation would be over their remaining term. We know the nominal interest rate, we make an assumption re expected inflation, and derive a "real Yield to Maturity".

https://saylordotorg.github.io/text_mac ... al-an.html

https://www.ubs.com/content/dam/assets/ ... ned-en.pdf

https://fredblog.stlouisfed.org/2022/05 ... n=fredblog

To calculate historical real interest rates, one can either use a forecast of inflation or the average rate of inflation that actually occurred over the period of the loan/bond. When one uses a forecast of inflation to construct a real rate, that measure is called an “ex ante” real rate, while using realized inflation produces “ex post” real rates. Because forecasts of inflation will generally differ from each other and from the average rate of inflation realized over a period, estimates of real interest rates for the same date and same horizon can differ from each other.

[rossington]

Isn't the yield "high" because the OP's bond is almost at maturity?

[Valuethinker]

Isn't the yield "high" because the OP's bond is almost at maturity?

That is not a given.

Yield will converge towards zero as the bond approaches maturity, whether from higher (bond trading at a discount to par) or lower (premium) as the time to the last coupon shrinks (accrued interest grows) and price approaches 100 (par).

[chemocean]

I understand if you keep TIPS until maturity, you will redeem the par value times the inflation factor. Although you receive asset protection with CPI inflation with the purchase of individual TIPS bonds held to maturity, you are missing out on the opportunity to receive current higher interest in the meantime.

[JBTX]

If it's not too much trouble, would you explain that further, please?
Thank you.

The current yield on your TIPS is 3.496. The coupon is 2.375. The rest of the yield comes from the price.

You said, "the coupon is higher than the current short term TIPS real yield." Where did you get that?

The Treasury lists the 11/17 real yield on 5 yr TIPS to be 2.22%. I fear that i am not understanding something basic.

https://www.wsj.com/market-data/bonds/tips

1/15/25 at this point is basically a one year tips, not a 5 year tips. It is true that the 2028 TIps are around 2.2%. But 1/15/25 are around 3.5%.

Why is the real yield on the 1 year (approximately) TIPS so high?
Thank you

Ultimately the total yield on TIPS is going to approximate the nominal yield on conventional bonds. As stated above the yield curve is currently inverted - short term rates are higher than long term rates. The markets expect inflation to go back down, so the real yield on TIPS will equal the difference between expected inflation and nominal bond yields.

[Rupert Dacat]

Thank you, all.
I built a TIPS ladder today!

Rupe