Time to buy TIPS?

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cosimdm
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Time to buy TIPS?

Post by cosimdm » Tue Sep 07, 2010 4:02 pm

I need help understanding TIPS. When these bonds first were issued, I bought some long dated ones, thinking that getting 2%+ over the rate of inflation was pretty good. ( I think that is what British Consols yielded when there was no inflation to speak of).
Now the rate of return over the inflation rate is under 1% on some of these. if this is so, why do I keep reading that this is a good time to buy TIPS? What am I missing?

livesoft
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Post by livesoft » Tue Sep 07, 2010 4:08 pm

Who said now is a good time to buy TIPS? Do you have links to some articles? I don't think know is a good time to buy them.

Chuck
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Post by Chuck » Tue Sep 07, 2010 4:14 pm

Why would the fact that it was better before mean that it's not good now? I would think when you need inflation protected investment is a good time to buy TIPS.

dbr
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Post by dbr » Tue Sep 07, 2010 4:17 pm

Here is an example from Larry Swedroe. Admittedly Larry does not talk about when to buy TIPS but does make the statement that they are cheap. The article is a refinement relative to current conditions on the general concepts of allocation and maturity shifting that Larry has suggested before. Reading the article will explain the rationale:

http://moneywatch.bnet.com/investing/bl ... blog-river

I also am not very sure where there are a lot of articles saying to buy TIPS now. It is true that one can commonly find advice to include TIPS as part of one's asset allocation for one particular investment plan or another, as appropriate to the individual. That is not the same thing as saying one should buy TIPS now as such AA recommendations are permanent and not advice to time a market.

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Adrian Nenu
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Post by Adrian Nenu » Tue Sep 07, 2010 5:54 pm

Inflation Indexed Treasury
COUPON MATURITY PRICE/YIELD PRICE/YIELD CHANGE TIME
5-Year 0.500 04/15/2015 101-30 / .08 0-09 / -.062 09/07
10-Year 1.250 07/15/2020 102-29 / .94 0-23 / -.076 09/07
20-Year 2.500 01/15/2029 117-23 / 1.40 1-10 / -.076 09/07
30-Year 2.125 02/15/2040 111-23 / 1.62 1-20 / -.066 09/07
http://www.bloomberg.com/markets/rates- ... -bonds/us/

Adrian
anenu@tampabay.rr.com

kenbrumy
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Post by kenbrumy » Tue Sep 07, 2010 6:00 pm

I sold all my TIPS. The Fed is manipulating interest rates. They can't do this forever. I made a bundle when the rates fell. I'll buy back in when their efforts end or fail. One of which is inevitable.

richard
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Post by richard » Tue Sep 07, 2010 6:08 pm

kenbrumy wrote:I sold all my TIPS. The Fed is manipulating interest rates. They can't do this forever. I made a bundle when the rates fell. I'll buy back in when their efforts end or fail. One of which is inevitable.
The Fed has been manipulating interest rates since it was created. That's its main policy tool. You could have a long wait.

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jeffyscott
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Post by jeffyscott » Tue Sep 07, 2010 6:58 pm

dbr wrote:Here is an example from Larry Swedroe. Admittedly Larry does not talk about when to buy TIPS but does make the statement that they are cheap.
He says "relatively cheap" and his point of comparison is nominal nominal bonds. I'd take TIPS over treasuries, but mostly would take neither at the current prices.
press on, regardless - John C. Bogle

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magellan
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Post by magellan » Tue Sep 07, 2010 7:12 pm

Anyone know a good source for historical yields on TIPS (for various maturities).

The ustreas.gov site has lots of good info, but it only goes back to 2003. I thought TIPS have been around a bit longer than that.

I'd love to see real yields over the last 20-30 years.

Jim

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tfb
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Post by tfb » Tue Sep 07, 2010 7:23 pm

magellan wrote:Anyone know a good source for historical yields on TIPS (for various maturities).
St Louis Fed has TIPS yield since they were issued in late 1990s. Before that, you can get the _realized_ real yield by taking nominal yield minus the forward inflation. For example the 10-year nominal yield in 1990 is X, and the inflation between 1990 and 2000 is Y, therefore the realized real yield is X-Y. Note the realized yield is not the same as expected yield, nor guaranteed.
Harry Sit, taking a break from the forums.

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magellan
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Post by magellan » Tue Sep 07, 2010 8:30 pm

tfb wrote:
magellan wrote:Anyone know a good source for historical yields on TIPS (for various maturities).
St Louis Fed has TIPS yield since they were issued in late 1990s. Before that, you can get the _realized_ real yield by taking nominal yield minus the forward inflation. For example the 10-year nominal yield in 1990 is X, and the inflation between 1990 and 2000 is Y, therefore the realized real yield is X-Y. Note the realized yield is not the same as expected yield, nor guaranteed.
Thanks for the reference. I poked around the site, but it looks like their constant maturity TIPS data only goes back to 2003.

If I understand how this works, it'd take a fair amount of work to piece together a constant maturity series using the historical info they have on individual TIP securities.

Am I missing something?

Thanks,

Jim

lazyday
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Post by lazyday » Tue Sep 07, 2010 8:50 pm

I don't like TIPS today, but think ibonds are ok.

Don't forget about ibonds. You can buy 5k paper, 5k electronic, now, and again in the new year. (10K per year total)

Each has + and -.

I prefer ibonds over TIPS today because if rates go up a lot, ibonds can be redeemed after 1 year with a small penalty or after 5 years with no penalty, vs selling TIPS at a large loss, depending on maturity.

ibonds also seem to have slightly better deflation protection in general, but I haven't worked out how much better, or verified that. (for example, when bouncing between inflation and deflation, maybe ibonds provide better deflation protection, but have to verify)
.gov websites show details of inflation and deflation adjustments for both ibonds and TIPS. I haven't noticed any commentary at Bogleheads that extensively compares TIPS vs ibonds for deflation protection in various scenarios.

letsgobobby
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Post by letsgobobby » Wed Sep 08, 2010 1:32 am

I PM'd Larry specifically about the apparent contradiction between the "TIPS are cheap" blog and his advice in Winning Strategy... Bonds where he said at a real rate below (something like) 1.6% he would tilt 0% toward TIPS. He replied that he thought TIPS were cheap relative to nominal treasuries, and that as of approximately April he was 0% TIPS. I hope it's ok that I've paraphrased his response here.

maxfax
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Post by maxfax » Wed Sep 08, 2010 9:41 am

The decision to buy/sell TIPS is two stepped.

First you have to decide whether you think normal bond equivalents are a good buy. It is the interest rate risk that you have to evaluate. Look at the yields, current and trends. Consider where it can go in the future. In the link below this shows in the top graph.

Second you decide whether TIPS are better or worse than the normal debt. Instead of locking in a set compensation for inflation (normal debt) you are betting that the actual inflation will be higher than that. Use the second graph to compare how that decision has played out in the past. Compare the implicit inflation priced in at a certain time with the actual inflation realized in subsequent years.

This is Canadian data, but the US experience has been comparable.
http://www.retailinvestor.org/RRBond.xls

cosimdm
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Time to buy TIPS?

Post by cosimdm » Wed Sep 08, 2010 10:03 am

I wouldn't buy bonds or TIPS right now. Relative to the T bond, TIPS may look cheap, and I think THAT is what the two articles I have read meant.
Thanks to all who took time to send responses.

chaz
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Post by chaz » Wed Sep 08, 2010 11:32 am

I keep some Vanguard TIPS fund in my IRA as part of my bond allocation.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

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