Y'all may be missing the point of TIPS

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McQ
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Y'all may be missing the point of TIPS

Post by McQ »

“Compound interest is the 8th wonder of the world.”

This sentiment is often erroneously attributed to Albert Einstein (https://quoteinvestigator.com/2019/09/0 ... 8%2C876.80.).

Even lacking the endorsement of the sage, compounding truly does produce fantastic results over multi-decade periods.

A stock investment held for 10 years returning 10.0% annually turns $10,000 into $26,000.
Over 20 years, $67,000.
Over 30 years, $175,000.

Back to TIPS.

Inflation is the 8th terror of Hades: compounding put in the denominator.

Let’s take 4% as an uncomfortably high but plausible rate of inflation over the long term under moderately unfavorable circumstances in a developed country like the US.

After 10 years, inflation at 4% turns $10,000 in cash into $6,650 real.
After 20 years, you have only $4,400 of spending power.
After 30 years, $2,940.

Conclusions

1. The point of owning TIPS is best fulfilled by long TIPS—the longer the better, up to your life expectancy and a cushion.

2. Owners of SPIAs may wish to protect themselves with a TIPS insurance policy: an abbreviated ladder that commences, say, 10 years after the SPIA was taken out, and continues at least to joint life expectancy. Inflation is the ravager of the SPIA.

As a case in point, consider our own Taylor Larimore, who took out a pair of SPIAs early in his 80s, seventeen years ago. Consumer prices have gone up 48% in the interim; his payments, which will continue for as long as he lives, have already lost one-third of their purchasing power.

Had Taylor taken out the SPIA ten years earlier, in his early 70s, a more typical beginning age, his (smaller) payments would now have lost 50% of their purchasing power.

And that was over a 27-year period with one of the lowest inflation rates seen in the modern US, at only 2.6%.

I personally intend to annuitize some of my TIAA accumulation in my mid-70s.

And I will certainly lay in a stock of long TIPS as reinsurance on that “insurance” purchase.
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Re: Y'all may be missing the point of TIPS

Post by ScubaHogg »

“compounding put in the denominator”
This is now my new favorite saying!

Endorse all of the above. I am hoping against hope that we start to see actual CPI adjusted SPIA/DIAs offered again in the future. They solve many retirement problems.
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Re: Y'all may be missing the point of TIPS

Post by er999 »

The dilemma is that tips inflation fighting superpower is most powerful at the max duration 30 years out, but that’s also a long enough duration where stocks are predicted to outperform (but not guaranteed as I believe your articles have addressed).
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Re: Y'all may be missing the point of TIPS

Post by TimeIsYourFriend »

What if the TIPS yield is negative? Then what?
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Re: Y'all may be missing the point of TIPS

Post by Dottie57 »

ScubaHogg wrote: Fri May 10, 2024 2:09 pm
“compounding put in the denominator”
This is now my new favorite saying!

Endorse all of the above. I am hoping against hope that we start to see actual CPI adjusted SPIA/DIAs offered again in the future. They solve many retirement problems.
How about multiple smaller SPIA bought every 5 years. Starting at 75 yrs, …. Say 4 or 5 spia.
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Re: Y'all may be missing the point of TIPS

Post by #Cruncher »

McQ wrote: Fri May 10, 2024 1:59 pm ... compounding put in the denominator.
...
After 10 years, inflation at 4% turns $10,000 in cash into $6,650 real.
Unfortunately you're not dividing by 1.04. You're multiplying by 0.96, which is not the same thing. The correct result is $6,760 not $6,650.
McQ, in same post, wrote:1. The point of owning TIPS is best fulfilled by long TIPS—the longer the better, ...
Short term TIPS principal compensates for inflation exactly the same as long term TIPS.
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Re: Y'all may be missing the point of TIPS

Post by White Coat Investor »

#Cruncher wrote: Fri May 10, 2024 2:54 pm Short term TIPS principal compensates for inflation exactly the same as long term TIPS.
That was my understanding too. Why are long TIPS better other than they provide a longer guarantee and in "normal times" a higher yield to compensate you for the interest rate risk you're running. Is the argument that the higher yield provides more inflation protection? I could buy that. But I otherwise I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
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Re: Y'all may be missing the point of TIPS

Post by rockstar »

A TIPS ladder is essentially a DIY annuity with COLA assuming your after tax return is still positive real. So the comparison should be against annuities as that’s what one would swap a TIPS ladder for.
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

rockstar wrote: Fri May 10, 2024 3:00 pm A TIPS ladder is essentially a DIY annuity with COLA assuming your after tax return is still positive real. So the comparison should be against annuities as that’s what one would swap a TIPS ladder for.
A period certain annuity maybe, but not a life annuity.
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Re: Y'all may be missing the point of TIPS

Post by AlwaysLearningMore »

Dottie57 wrote: Fri May 10, 2024 2:21 pm
ScubaHogg wrote: Fri May 10, 2024 2:09 pm
“compounding put in the denominator”
This is now my new favorite saying!

Endorse all of the above. I am hoping against hope that we start to see actual CPI adjusted SPIA/DIAs offered again in the future. They solve many retirement problems.
How about multiple smaller SPIA bought every 5 years. Starting at 75 yrs, …. Say 4 or 5 spia.
+1
Also provide longevity insurance.
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Re: Y'all may be missing the point of TIPS

Post by slicendice »

White Coat Investor wrote: Fri May 10, 2024 2:57 pm Why are long TIPS better other than they provide a longer guarantee and in "normal times" a higher yield to compensate you for the interest rate risk you're running. Is the argument that the higher yield provides more inflation protection? I could buy that. But I otherwise I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
The thirty year is superior because of certainty over real income. There is no certainty of income with 6 sequential 5 year TIPS. The main point of TIPS ladders is certainty of the real income stream, which is something that other piles of assets will not offer.
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

White Coat Investor wrote: Fri May 10, 2024 2:57 pm
#Cruncher wrote: Fri May 10, 2024 2:54 pm Short term TIPS principal compensates for inflation exactly the same as long term TIPS.
That was my understanding too. Why are long TIPS better other than they provide a longer guarantee and in "normal times" a higher yield to compensate you for the interest rate risk you're running. Is the argument that the higher yield provides more inflation protection? I could buy that. But I otherwise I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
The higher yield compensates you for duration risk, but unless the breakeven inflation rate also systemically increases with term (and from a quick glance it doesn't appear that it does) I don't see why the higher yield is offering more inflation protection.
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Re: Y'all may be missing the point of TIPS

Post by bombcar »

Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

slicendice wrote: Fri May 10, 2024 3:17 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm Why are long TIPS better other than they provide a longer guarantee and in "normal times" a higher yield to compensate you for the interest rate risk you're running. Is the argument that the higher yield provides more inflation protection? I could buy that. But I otherwise I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
The thirty year is superior because of certainty over real income. There is no certainty of income with 6 sequential 5 year TIPS. The main point of TIPS ladders is certainty of the real income stream, which is something that other piles of assets will not offer.
But that is trading off duration vs reinvestment risk - how does that offer higher inflation protection?
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
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Re: Y'all may be missing the point of TIPS

Post by slicendice »

bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Maybe in a taxable account you have an argument, but the real yield advantage on TIPS over I-bonds is pretty significant right now.
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Re: Y'all may be missing the point of TIPS

Post by bombcar »

avalpert1 wrote: Fri May 10, 2024 3:33 pm
bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
Because I Bonds avoid the biggest downside of TIPS and so you don’t have to hold them to maturity to avoid that.

Or another way. TIPS aren’t limited; I bonds are. There’s a reason.
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

bombcar wrote: Fri May 10, 2024 3:35 pm
avalpert1 wrote: Fri May 10, 2024 3:33 pm
bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
Because I Bonds avoid the biggest downside of TIPS and so you don’t have to hold them to maturity to avoid that.

Or another way. TIPS aren’t limited; I bonds are. There’s a reason.
Something being limited isn't a reason to buy them... and the biggest downsides to TIPS (whatever you think those are) may or may not be relevant in anyone's particular circumstance - so again, as a general statement you have not offered a compelling reason to meditate before buy TIPS ahead of I-Bonds.
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Re: Y'all may be missing the point of TIPS

Post by rockstar »

avalpert1 wrote: Fri May 10, 2024 3:33 pm
bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
True. But do you want to buy a 30 year TIPS right now?
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Re: Y'all may be missing the point of TIPS

Post by slicendice »

avalpert1 wrote: Fri May 10, 2024 3:33 pm
slicendice wrote: Fri May 10, 2024 3:17 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm Why are long TIPS better other than they provide a longer guarantee and in "normal times" a higher yield to compensate you for the interest rate risk you're running. Is the argument that the higher yield provides more inflation protection? I could buy that. But I otherwise I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
The thirty year is superior because of certainty over real income. There is no certainty of income with 6 sequential 5 year TIPS. The main point of TIPS ladders is certainty of the real income stream, which is something that other piles of assets will not offer.
But that is trading off duration vs reinvestment risk - how does that offer higher inflation protection?
As was mentioned up thread, short TIPS will give you inflation protection. I think what the OP of the thread is implying by favoring long TIPS is certainty over the cost of that long term inflation protected income stream. With long TIPS you know today what the next 30 years of inflation protected income will cost. With buying a 5 year TIPS 6 times, you have no idea what the same income stream will cost over 30 years.
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

rockstar wrote: Fri May 10, 2024 3:39 pm
avalpert1 wrote: Fri May 10, 2024 3:33 pm
bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
True. But do you want to buy a 30 year TIPS right now?
Well no, my mothers ladder than I manage goes out 22 years and my current ladder designed as an SS bridge goes 23 - but I have bought TIPS in both those durations (and many others) this year before I'd consider I-Bonds. The real yield even 6 months out is higher for TIPS than I-bonds...
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

slicendice wrote: Fri May 10, 2024 3:43 pm
avalpert1 wrote: Fri May 10, 2024 3:33 pm
slicendice wrote: Fri May 10, 2024 3:17 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm Why are long TIPS better other than they provide a longer guarantee and in "normal times" a higher yield to compensate you for the interest rate risk you're running. Is the argument that the higher yield provides more inflation protection? I could buy that. But I otherwise I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
The thirty year is superior because of certainty over real income. There is no certainty of income with 6 sequential 5 year TIPS. The main point of TIPS ladders is certainty of the real income stream, which is something that other piles of assets will not offer.
But that is trading off duration vs reinvestment risk - how does that offer higher inflation protection?
As was mentioned up thread, short TIPS will give you inflation protection. I think what the OP of the thread is implying by favoring long TIPS is certainty over the cost of that long term inflation protected income stream. With long TIPS you know today what the next 30 years of inflation protected income will cost. With buying a 5 year TIPS 6 times, you have no idea what the same income stream will cost over 30 years.
So again, that is just focusing on reinvestment/duration risk trading certainty for potentially higher returns - an easier bet to accept today at 2%+ real rates/4.5% nominal rates than it was say three years ago when real rates were negative and nominal rates <2%... but as a general assertion not sure I buy it.
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Re: Y'all may be missing the point of TIPS

Post by rockstar »

avalpert1 wrote: Fri May 10, 2024 3:47 pm
rockstar wrote: Fri May 10, 2024 3:39 pm
avalpert1 wrote: Fri May 10, 2024 3:33 pm
bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
True. But do you want to buy a 30 year TIPS right now?
Well no, my mothers ladder than I manage goes out 22 years and my current ladder designed as an SS bridge goes 23 - but I have bought TIPS in both those durations (and many others) this year before I'd consider I-Bonds. The real yield even 6 months out is higher for TIPS than I-bonds...
It is. Besides the tax advantage with I Bonds, the 30 year maturity is good. So I’m okay earning less since I consider them a part of my emergency fund. And I don’t have to cash them in for 30 years. Think of them at the end of the ladder since you can’t buy many per year.
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

rockstar wrote: Fri May 10, 2024 3:55 pm
avalpert1 wrote: Fri May 10, 2024 3:47 pm
rockstar wrote: Fri May 10, 2024 3:39 pm
avalpert1 wrote: Fri May 10, 2024 3:33 pm
bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
True. But do you want to buy a 30 year TIPS right now?
Well no, my mothers ladder than I manage goes out 22 years and my current ladder designed as an SS bridge goes 23 - but I have bought TIPS in both those durations (and many others) this year before I'd consider I-Bonds. The real yield even 6 months out is higher for TIPS than I-bonds...
It is. Besides the tax advantage with I Bonds, the 30 year maturity is good. So I’m okay earning less since I consider them a part of my emergency fund. And I don’t have to cash them in for 30 years. Think of them at the end of the ladder since you can’t buy many per year.
If I needed a ladder rung that went out 30 years I would still definitely fill it with a 2.3% yielding TIPS over a 1.3% yielding I-Bond - I may be ok not chasing every bit of yield, but when there is very little risk in choosing the higher one (particularly one that will last for 3 decades) I'm not going to lose any sleep over it.
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Re: Y'all may be missing the point of TIPS

Post by Escapevelocity »

I sold of all my considerable stash of I Bonds last year and haven't looked back. Meanwhile, I've accumulate about $500k in TIPS in a combination of individual securities and funds. I don't foresee getting back into I Bonds in the forseeable future.

1) The yield on TIPS is significantly higher than I Bonds.
2) Dealing with Treasury direct, while fine in most respects, was a major headache when I was locked out of my account and couldn't get back in for 3-4 months.
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Re: Y'all may be missing the point of TIPS

Post by Gaston »

White Coat Investor wrote: Fri May 10, 2024 2:57 pm I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
How does the above apply to TIPS mutual funds and ETFs? As interest rates bounce around over the next 30 years, is there a benefit to holding VAIPX (7-year average maturity) versus VTIP (2-year average maturity)?
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Re: Y'all may be missing the point of TIPS

Post by rossington »

McQ wrote: Fri May 10, 2024 1:59 pm
A stock investment held for 10 years returning 10.0% annually turns $10,000 into $26,000.
Over 20 years, $67,000.
Over 30 years, $175,000.
Seems that the real return is in stocks, even after adjusting for inflation.
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Re: Y'all may be missing the point of TIPS

Post by HanSolo »

Gaston wrote: Fri May 10, 2024 4:14 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
How does the above apply to TIPS mutual funds and ETFs? As interest rates bounce around over the next 30 years, is there a benefit to holding VAIPX (7-year average maturity) versus VTIP (2-year average maturity)?
I'm not sure of the math, but perhaps the risk of short-term TIPS (and the funds that hold them) is that, at maturity, they might get reinvested when TIPS real yields are negative. Longer-term TIPS put off that day of reckoning for a longer time.
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Re: Y'all may be missing the point of TIPS

Post by slicendice »

avalpert1 wrote: Fri May 10, 2024 3:52 pm
slicendice wrote: Fri May 10, 2024 3:43 pm
avalpert1 wrote: Fri May 10, 2024 3:33 pm
slicendice wrote: Fri May 10, 2024 3:17 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm Why are long TIPS better other than they provide a longer guarantee and in "normal times" a higher yield to compensate you for the interest rate risk you're running. Is the argument that the higher yield provides more inflation protection? I could buy that. But I otherwise I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
The thirty year is superior because of certainty over real income. There is no certainty of income with 6 sequential 5 year TIPS. The main point of TIPS ladders is certainty of the real income stream, which is something that other piles of assets will not offer.
But that is trading off duration vs reinvestment risk - how does that offer higher inflation protection?
As was mentioned up thread, short TIPS will give you inflation protection. I think what the OP of the thread is implying by favoring long TIPS is certainty over the cost of that long term inflation protected income stream. With long TIPS you know today what the next 30 years of inflation protected income will cost. With buying a 5 year TIPS 6 times, you have no idea what the same income stream will cost over 30 years.
So again, that is just focusing on reinvestment/duration risk trading certainty for potentially higher returns - an easier bet to accept today at 2%+ real rates/4.5% nominal rates than it was say three years ago when real rates were negative and nominal rates <2%... but as a general assertion not sure I buy it.
I think it is a similar decision to 3 years ago, its just that the cost of the cashflows is cheaper now (and different shaped yield curve). Three years ago you could get -1.5% for 5 years with the ability to reset after that or get 0.5% for 30. If you value certainty in the long term income stream at the time of sale, you sign up for 0.5% for 30 rather than risk having to buy more negative yielding bonds in 5 years.
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Re: Y'all may be missing the point of TIPS

Post by Kenkat »

I think your point is sufficiently strong enough that it could have warranted the use of “all y’all” - i.e., “All y’all may be missing the point of TIPS”. Just something to consider for next time perhaps.
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Re: Y'all may be missing the point of TIPS

Post by Richard1580 »

I think TIPS are excellent for a LMP ladder.

However, if you are looking for capital preservation, long TIPS are risky. If something happens and you need to cash out before maturity (and interest rates have spiked) you may be in a world of hurt. It all depends on how good your crystal ball is. :beer
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Re: Y'all may be missing the point of TIPS

Post by Dpmbball »

er999 wrote: Fri May 10, 2024 2:16 pm The dilemma is that tips inflation fighting superpower is most powerful at the max duration 30 years out, but that’s also a long enough duration where stocks are predicted to outperform (but not guaranteed as I believe your articles have addressed).
That is the point…new capital in and reinvestment of dividends year after year for 30 years… or TIPS for 30 years

I do agree CPI adjusted annuities are beneficial
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Re: Y'all may be missing the point of TIPS

Post by rockstar »

avalpert1 wrote: Fri May 10, 2024 4:00 pm
rockstar wrote: Fri May 10, 2024 3:55 pm
avalpert1 wrote: Fri May 10, 2024 3:47 pm
rockstar wrote: Fri May 10, 2024 3:39 pm
avalpert1 wrote: Fri May 10, 2024 3:33 pm
Why? TIPS have a higher real yield than I-Bonds now, why should I prefer the lower yield?
True. But do you want to buy a 30 year TIPS right now?
Well no, my mothers ladder than I manage goes out 22 years and my current ladder designed as an SS bridge goes 23 - but I have bought TIPS in both those durations (and many others) this year before I'd consider I-Bonds. The real yield even 6 months out is higher for TIPS than I-bonds...
It is. Besides the tax advantage with I Bonds, the 30 year maturity is good. So I’m okay earning less since I consider them a part of my emergency fund. And I don’t have to cash them in for 30 years. Think of them at the end of the ladder since you can’t buy many per year.
If I needed a ladder rung that went out 30 years I would still definitely fill it with a 2.3% yielding TIPS over a 1.3% yielding I-Bond - I may be ok not chasing every bit of yield, but when there is very little risk in choosing the higher one (particularly one that will last for 3 decades) I'm not going to lose any sleep over it.
When looking out that far, there is a high probability that I sell before maturity because I might die before maturity. I get TIPS for less long periods.
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Re: Y'all may be missing the point of TIPS

Post by Gaston »

HanSolo wrote: Fri May 10, 2024 4:25 pm
Gaston wrote: Fri May 10, 2024 4:14 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
How does the above apply to TIPS mutual funds and ETFs? As interest rates bounce around over the next 30 years, is there a benefit to holding VAIPX (7-year average maturity) versus VTIP (2-year average maturity)?
I'm not sure of the math, but perhaps the risk of short-term TIPS (and the funds that hold them) is that, at maturity, they might get reinvested when TIPS real yields are negative. Longer-term TIPS put off that day of reckoning for a longer time.
Let me see if I understand what you are saying (my TIPS knowledge is limited). I assume funds like VAIPX and VTIP are selling maturing bonds and buying new ones on a regular basis. Because VAIPX has a longer average duration, however, maybe this sell-old-buy-new process occurs less frequently, meaning that with VAIPX the reinvestment risk will occur less frequently than with VTIP. Is this the idea? If yes, is this risk greater in a rising or falling interest rate environment?
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Re: Y'all may be missing the point of TIPS

Post by bobcat2 »

When you buy a 30 year TIPS bond you will have to make as many as 60 semi-annual transactions with the coupons (if held to maturity) and if you sell before maturity the principal amount is uncertain. If you buy an I-bond that earns interest for 30 years it automatically reinvests the interest and the principal simply compounds in real terms with certainty whether before maturity or at maturity.

If you are not reinvesting the semi-annual coupons in additional TIPS bonds (and you probably aren't because your coupons aren't big enough to buy additional bonds or maybe big enough to buy one or two, but buying one or two on the secondary market is costly) then the interest rate you are getting is likely lower than the coupon rate you got at auction. This problem goes away with I-bonds and their automatic reinvestment.

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Re: Y'all may be missing the point of TIPS

Post by billaster »

I dunno. I'll just take your hypothetical 10% nominal and subtract your hypothetical 4% inflation and book 6% real. Your portfolio doesn't need to be complicated. And the math is a lot easier.
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Richard1580
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Re: Y'all may be missing the point of TIPS

Post by Richard1580 »

bobcat2 wrote: Fri May 10, 2024 5:22 pm When you buy a 30 year TIPS bond you will have to make as many as 60 semi-annual transactions with the coupons (if held to maturity) and if you sell before maturity the principal amount is uncertain. If you buy an I-bond that earns interest for 30 years it automatically reinvests the interest and the principal simply compounds in real terms with certainty whether before maturity or at maturity.

If you are not reinvesting the semi-annual coupons in additional TIPS bonds (and you probably aren't because your coupons aren't big enough to buy additional bonds or maybe big enough to buy one or two, but buying one or two on the secondary market is costly) then the interest rate you are getting is likely lower than the coupon rate you got at auction. This problem goes away with I-bonds and their automatic reinvestment.

BobK
Very true. I-bonds have a number of advantages over TIPS. However, their coupon is currently about 1% below TIPS and you are limited as to how many I-bonds you can purchase in a calendar year. It is all a matter of trade offs.
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Joe Public
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Re: Y'all may be missing the point of TIPS

Post by Joe Public »

I know TIPS are eligible to be STRIPS, but do any zero coupon TIPS actually exist? I admittedly haven't looked very hard, but I haven't found any.
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HanSolo
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Re: Y'all may be missing the point of TIPS

Post by HanSolo »

Gaston wrote: Fri May 10, 2024 5:21 pm
HanSolo wrote: Fri May 10, 2024 4:25 pm
Gaston wrote: Fri May 10, 2024 4:14 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
How does the above apply to TIPS mutual funds and ETFs? As interest rates bounce around over the next 30 years, is there a benefit to holding VAIPX (7-year average maturity) versus VTIP (2-year average maturity)?
I'm not sure of the math, but perhaps the risk of short-term TIPS (and the funds that hold them) is that, at maturity, they might get reinvested when TIPS real yields are negative. Longer-term TIPS put off that day of reckoning for a longer time.
Let me see if I understand what you are saying (my TIPS knowledge is limited). I assume funds like VAIPX and VTIP are selling maturing bonds and buying new ones on a regular basis. Because VAIPX has a longer average duration, however, maybe this sell-old-buy-new process occurs less frequently, meaning that with VAIPX the reinvestment risk will occur less frequently than with VTIP. Is this the idea? If yes, is this risk greater in a rising or falling interest rate environment?
Yes, that's what I was thinking. We might also consider that TIPS having negative real yields (which is something we saw, not too long ago) could be influenced by both nominal bond yields being low and expectations of future inflation being low. And the two variables could either reinforce each other or offset each other (depending on which way the economic/market winds are blowing).

I'll just add that if longer TIPS face the same risk but later, that could be considered an advantage of longer over shorter... but then the disadvantage is that if the longer ones are then reinvested at negative real yields, then you're locked into that lower yield for longer than you'd be with the shorter TIPS.

My rough assumption, then, is that one shouldn't worry about it. Since I have allocations to both funds now (VAIPX and VTAPX), then I should just be glad I'm fully allocated to them now (according to my AA), while real yields are positive.
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nisiprius
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Re: Y'all may be missing the point of TIPS

Post by nisiprius »

TimeIsYourFriend wrote: Fri May 10, 2024 2:21 pm What if the TIPS yield is negative? Then what?
What if nominal bonds have a yield that is more negative?
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TN_Boy
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Re: Y'all may be missing the point of TIPS

Post by TN_Boy »

bobcat2 wrote: Fri May 10, 2024 5:22 pm When you buy a 30 year TIPS bond you will have to make as many as 60 semi-annual transactions with the coupons (if held to maturity) and if you sell before maturity the principal amount is uncertain. If you buy an I-bond that earns interest for 30 years it automatically reinvests the interest and the principal simply compounds in real terms with certainty whether before maturity or at maturity.

If you are not reinvesting the semi-annual coupons in additional TIPS bonds (and you probably aren't because your coupons aren't big enough to buy additional bonds or maybe big enough to buy one or two, but buying one or two on the secondary market is costly) then the interest rate you are getting is likely lower than the coupon rate you got at auction. This problem goes away with I-bonds and their automatic reinvestment.

BobK
If I-bonds were as easy to deal with as treasuries and I could buy enough of them, that'd be great. But I didn't want the hassle of Treasury Direct, nor could I buy enough iBonds, nor could I buy iBonds in an IRA, where most of my bond money resides. Three strikes and they were out. Thus I got rid of mine a few years ago. They do have some nice properties.

For the interest thrown off by individual TIPS bonds, I reinvest them in an intermediate duration TIPs fund. Although you'd incur some transaction costs, you could also invest the interest in fixed maturity iShares TIPs ETFs matching the maturity of the bond throwing off interest.

BobK, what do you think of those fixed maturity iShares ETFs?
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Svensk Anga
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Re: Y'all may be missing the point of TIPS

Post by Svensk Anga »

Joe Public wrote: Fri May 10, 2024 6:08 pm I know TIPS are eligible to be STRIPS, but do any zero coupon TIPS actually exist? I admittedly haven't looked very hard, but I haven't found any.
There are a number of TIPS issues that have coupon rates of 0.125%, which is as low as Treasury will go. That's close enough to zero coupon for practical purposes, especially if you are buying in the neighborhood of 2% real yield to maturity. The inflation adjustment is zero coupon.

Have a look at the coupon column here: https://www.wsj.com/market-data/bonds/tips
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Svensk Anga
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Re: Y'all may be missing the point of TIPS

Post by Svensk Anga »

Gaston wrote: Fri May 10, 2024 4:14 pm
White Coat Investor wrote: Fri May 10, 2024 2:57 pm I don't see a difference between a 30 year TIPS and six 5 year TIPS bought sequentially.
How does the above apply to TIPS mutual funds and ETFs? As interest rates bounce around over the next 30 years, is there a benefit to holding VAIPX (7-year average maturity) versus VTIP (2-year average maturity)?
In the normal case, the longer duration fund should yield more since it should trade at a higher real interest rate to compensate for increased rate risk. Since we currently have an inverted real yield curve at the short end, it may be a while before the normal case materializes.
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Re: Y'all may be missing the point of TIPS

Post by Riprap »

How does the U.S. Treasury benefit by issuing TIPS?
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Svensk Anga
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Re: Y'all may be missing the point of TIPS

Post by Svensk Anga »

I think that loading up on liability duration matched TIPS at 2 - 2.5% real yield is very much in the tune with the ethos of Bogleheads. Here, equity investors are quite content to accept the market return via index funds. How about we also accept historical average US market real returns for fixed income? That is what is currently on offer with TIPS. It seems like holding out for more real yield or taking on more risk by speculating that nominal bonds will do better than the historical average, when one's retirement is adequately funded, is just being greedy. As a retiree, I wouldn't take historical average US market nominal returns for fixed income though as that entails a lot of inflation risk. Market real return on nominal bonds can be quite ugly for decades at a time - potentially one's whole retirement. Guaranteed historical average fixed income real return, as far out as 30 years, when your human capital is nil is a pretty attractive deal.

The above applies to retirees or those approaching that point. For those with many years of accumulation to go, I suspect that nominal bonds and disciplined rebalancing could work better than favoring TIPS. That will depend on what correlations develop in the future. The trick is how and when to execute the transition.
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Re: Y'all may be missing the point of TIPS

Post by avalpert1 »

Riprap wrote: Fri May 10, 2024 8:58 pm How does the U.S. Treasury benefit by issuing TIPS?
They are able to fund current expenses with longer term debt...
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Svensk Anga
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Re: Y'all may be missing the point of TIPS

Post by Svensk Anga »

Riprap wrote: Fri May 10, 2024 8:58 pm How does the U.S. Treasury benefit by issuing TIPS?
Presumably, it will lower overall interest expense by attracting capital from investors who think nominal bonds in a fiat currency world are a poor deal.

Supposedly there is also value in getting a direct reading on real interest rates and therefore forward inflation expectations.
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Re: Y'all may be missing the point of TIPS

Post by anoop »

This assumes the inflation measure actually matches one's personal inflation. For most people the CPI heavily understates inflation.

I think gold, stocks, and perhaps bitcoin are better hedges against inflation.

When inflation was running under 2% (sometimes well under), the CPI understating it didn't cause too much damage. At higher rates of inflation it starts to become very clear that the CPI is actually a very poor measure of what people are feeling.
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Re: Y'all may be missing the point of TIPS

Post by RyeBourbon »

anoop wrote: Fri May 10, 2024 9:26 pm For most people the CPI heavily understates inflation.

Citation?
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Re: Y'all may be missing the point of TIPS

Post by TimeIsYourFriend »

nisiprius wrote: Fri May 10, 2024 6:28 pm
TimeIsYourFriend wrote: Fri May 10, 2024 2:21 pm What if the TIPS yield is negative? Then what?
What if nominal bonds have a yield that is more negative?
A real yield? That isn’t known in advance for nominals.
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