Why is Vanguard's TIPS fund up more than other Treasuries?

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cb474
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Why is Vanguard's TIPS fund up more than other Treasuries?

Post by cb474 » Wed Aug 10, 2011 5:52 pm

Why is Vanguard's TIPS fund (VIPSX), on a down stock market day like today, going up more (in percent increase) than Vanguards's short term and intermediate term treasury funds?

Does this suggest that people think the chances on unexpected inflation are higher now? Why? Doesn't a slowing economy suggest the opposite?

Just curious. Thanks for any thoughts.

dumbmoney
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Post by dumbmoney » Wed Aug 10, 2011 5:58 pm

No, it's because the bonds are longer term than intermediate.

Average maturity 5.5 years for intermediate term treasury fund. 9.0 years for TIPS fund (as of 6/30/2011).
Last edited by dumbmoney on Wed Aug 10, 2011 6:06 pm, edited 1 time in total.
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Post by rustymutt » Wed Aug 10, 2011 6:02 pm

Because people have to have somewhere to put all the money from the stock sell off. They put money into bond funds, which drive up the prices.
I've done incredibly well in my government bonds the last week.
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cb474
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Post by cb474 » Wed Aug 10, 2011 6:48 pm

rustymutt wrote:Because people have to have somewhere to put all the money from the stock sell off. They put money into bond funds, which drive up the prices.
I've done incredibly well in my government bonds the last week.
Hmm, it doesn't really seem like you could have read my post before responding, since you're not at answering the question I asked at all.
dumbmoney wrote:No, it's because the bonds are longer term than intermediate.

Average maturity 5.5 years for intermediate term treasury fund. 9.0 years for TIPS fund (as of 6/30/2011).
Thanks dumbmoney. So is the difference in price increase for longer maturity treasuries, on a day like today, because people prefer longer maturities? Seems like the panicky people would go for the safest bet, the short treasuries. Or is it because longer maturities demand higher prices and increase in price more quickly, because of their higher yield?

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Leif
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Post by Leif » Wed Aug 10, 2011 7:37 pm

Both the Vanguard TIPS and TBM have about the same duration, around 5 years. I recall Larry S. saying that TIPS are more volatile. Charting TIPS and TBM recent activity seem to validate.
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cb474
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Post by cb474 » Wed Aug 10, 2011 7:42 pm

Leif Eriksen wrote:Both the Vanguard TIPS and TBM have about the same duration, around 5 years. I recall Larry S. saying that TIPS are more volatile. Charting TIPS and TBM recent activity seem to validate.
Thanks. I was thinking of just the Vanguard treasury funds. Short-term, intermediate-term, long-term, and TIPS. What accounts for their differences in price changes on down stock market days like today (given that treasuries are the safest place to run to)? If it's the differences in average maturity, as dumbmoney says, why is that? I'm just curious to understand the mechanism.

I suppose for TIPS they are also not as liquid as nominal treasuries, so that can have an effect too (as was seen in their big price drop in 2008), perhaps accounting for the volatility, to which you refer.

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mas
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Post by mas » Wed Aug 10, 2011 8:39 pm

The most direct cause is that the funds hold different bonds. Inflation protected treasuries did better today, relative to nominal treasuries. You can verify that directly:
http://www.bloomberg.com/markets/rates- ... -bonds/us/

5-Year nominal: -0.075 (yield dropped, and the price of the bonds rose)
5-Year TIPS: -0.181 (again, the yield dropped (but more than 2x as much)

cb474 wrote:What accounts for their differences in price changes on down stock market days like today (given that treasuries are the safest place to run to)?
Every day is different. You could speculate at what the underlying cause was today, but ultimately there was more demand for TIPS today than nominal treasuries.

cb474 wrote:Thanks dumbmoney. So is the difference in price increase for longer maturity treasuries, on a day like today, because people prefer longer maturities?
Look at the range of gains in nominal treasuries. The 7-10 year bonds gained the most. More than the 30 yr. I don't know whether that is a typical result on "day like today", but I think that you are reading too much into a single day's events.

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Post by cb474 » Wed Aug 10, 2011 8:54 pm

mas wrote:The most direct cause is that the funds hold different bonds. Inflation protected treasuries did better today, relative to nominal treasuries. You can verify that directly:
http://www.bloomberg.com/markets/rates- ... t-bonds/us
Yes, that was the observation that prompted my question in the first place.

Anyway, as your response suggests, I guess I'd have to look at all down days or all days with a large drop and see how the various treasury funds perform and if there's a pattern. If no one else knows any better, perhaps that's the answer to my question. There is not a consistent reason on a given day why one particular Vanguard treasury fund performs the way it does, relative to other Vanguard treasury funds, in response to a decline in the equity markets.

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Post by exigent » Wed Aug 10, 2011 9:36 pm

Perhaps people are interested in some degree of inflation protection given all that has transpired. Or maybe it's something else. Who knows.

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Post by #Cruncher » Wed Aug 10, 2011 10:36 pm

The price of a bond or bond fund varies inversely with its yield, approximately according to the relationship: %Price Change = Duration X -Yield Change
For example, as the chart below shows, for the TIPS fund: 1.97 = 8.1 X -0.243

Code: Select all

                                                                               Yield
Name                            Ticker   Price    $Chg    %Chg   Duration   Change (*)
------------------------------  ------   ------  ------   -----  --------   ----------
Short-Term Treasury              VFISX   $10.87   $0.02   0.18%    2.3 yr   -0.078% pt
Intermediate-Term Treasury       VFITX   $12.10   $0.09   0.75%    5.3 yr   -0.142% pt
Inflation-Protected Securities   VIPSX   $14.51   $0.28   1.97%    8.1 yr   -0.243% pt
Long-Term Treasury               VUSTX   $12.70   $0.30   2.42%   13.2 yr   -0.183% pt
So the difference in a daily price change between funds depends on both the difference in yield change and the difference in duration.

(*) Note: I "backed into" the Yield Change figures for illustration.
Source:
All Vanguard Funds - Price & Yield

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Post by mediahound » Wed Aug 10, 2011 10:46 pm

I don't know the answer to your question but does this video on TIPS from Larry Swedroe help at all?:

http://www.youtube.com/watch?v=0OOi3XFNlA0

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Post by cb474 » Wed Aug 10, 2011 11:09 pm

Thanks #Cruncher. I guess that still doesn't explain why the funds price, yield, duration change the way they do, on a down market day, relative to each other; or if there is a consistent pattern to their relative performance on these days. But it does help clarify how the price is determined.

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Post by knowmad » Wed Aug 10, 2011 11:32 pm

When people are scared, they buy TIPs (funds) more than Nominal (funds) because they sound safer. They don't really care or understand that the extra safety is just inflation protection, and comes at the expense of lower fixed rates. They just seem like magic protection from the big bad economy.

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Post by mediahound » Wed Aug 10, 2011 11:34 pm

Don't TIPS have a slight negative correlation to equities though? Unlike nominal bonds.

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Post by knowmad » Wed Aug 10, 2011 11:44 pm

mediahound wrote:Don't TIPS have a slight negative correlation to equities though? Unlike nominal bonds.
I thought all bonds had a somewhat negative correlation to equities? I'm just guessing that TIPs have even more of a negative correlation in times of extreme fear. I wish someone made a chart of price correlation of TIPs and Nominals to equities on only the "really bad" days. It wouldn't really impact long term asset allocation, but it would be fun to see.

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Post by White Coat Investor » Thu Aug 11, 2011 12:43 am

knowmad wrote:
mediahound wrote:Don't TIPS have a slight negative correlation to equities though? Unlike nominal bonds.
I thought all bonds had a somewhat negative correlation to equities? I'm just guessing that TIPs have even more of a negative correlation in times of extreme fear. I wish someone made a chart of price correlation of TIPs and Nominals to equities on only the "really bad" days. It wouldn't really impact long term asset allocation, but it would be fun to see.
What's the point of a chart showing what happens day to day? I'm interested in correlations over months, years, and even decades.
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Post by cb474 » Thu Aug 11, 2011 3:20 am

EmergDoc wrote:
knowmad wrote:
mediahound wrote:Don't TIPS have a slight negative correlation to equities though? Unlike nominal bonds.
I thought all bonds had a somewhat negative correlation to equities? I'm just guessing that TIPs have even more of a negative correlation in times of extreme fear. I wish someone made a chart of price correlation of TIPs and Nominals to equities on only the "really bad" days. It wouldn't really impact long term asset allocation, but it would be fun to see.
What's the point of a chart showing what happens day to day? I'm interested in correlations over months, years, and even decades.
The point, as I said in the original post of this thread, is that I'm "just curious." And knowmad, who you quote, makes it pretty clear he simply thinks it "would be fun to see."

You know, I watch these things go up and down day to day, I notice what seems like a possible pattern, and I have an intellectual interest to understand it. Why do people chime into a thread just to say they're not interested in the thread?

*
knowmad wrote:When people are scared, they buy TIPs (funds) more than Nominal (funds) because they sound safer. They don't really care or understand that the extra safety is just inflation protection, and comes at the expense of lower fixed rates. They just seem like magic protection from the big bad economy.
It doesn't seem like this could reall be the case, with yesterday's movements, for a couple of reasons. As has already been pointed out in this thread, Vanguard's long term treasury fund did better than the TIPS fund yesterday. So perhaps it simply correlates to the average maturity of the funds, as dumbmoney said. Also, I doubt that the institutional investors, who are the ones who really move the markets, don't understand TIPS in the sense you suggest and make such purely emotional decisions based on magical thinking.

Anyway, I'm coming around to mas' position that there may not be any real pattern or explanation for the day to day movements, that I observed. It would certainly take a lot of statistical evidence, that I don't have, to establish such a pattern, before one could even begin to attempt to explain it. But if anyone has a more sophisticated knowledge of these movements, I'd be curious to know what they have to say.

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Post by #Cruncher » Thu Aug 11, 2011 5:22 am

cb474 wrote:Thanks #Cruncher. I guess that still doesn't explain why the funds price, yield, duration change the way they do, on a down market day, relative to each other; or if there is a consistent pattern to their relative performance on these days.
cb474 wrote:Anyway, I'm coming around to mas' position that there may not be any real pattern or explanation for the day to day movements...
cb, pardon me if I'm wrong, but I'm not sure you get the point I was trying to make about duration. There may or may not be a "consistent pattern" to the changes in yield between nominals and TIPS, or among bonds of different maturities. But, given those changes, there is a pattern to the changes in price. Duration doesn't change materially from one day to the next. So given the changes in yield, the funds' changes in price are simply proportional to duration (approximately).

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Post by cb474 » Thu Aug 11, 2011 5:54 am

I understand your point. But it seems like I was observing one factor, price, change on a day to day basis and you pointed to another factor, yield, that effects that change, but it doesn't explain why the change happens (which was my question). It just pushes the question over to the day to day shifts in yield. In fact, and I could be wrong about this, it seems like price and yield are, to a certain extent, two different ways of talking about the same thing. So your clarification helped explain how all these things are calculated, but I don't see how it explains why the day to day changes happen, in the way they do, relative of one treasury fund to another, on days with declines in the equity market.

Or are you saying that the changes in price/yield are not a good reflection how how much people are moving into, say, Vanguard's short term treasury fund versus into Vanguard's TIPS fund? So my initial observation (based on price) that people seemed to move more into the TIPS fund yesterday, than the short term fund, does not hold up?

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Re: Why is Vanguard's TIPS fund up more than other Treasurie

Post by YDNAL » Thu Aug 11, 2011 6:21 am

cb474 wrote:
mas wrote:The most direct cause is that the funds hold different bonds. Inflation protected treasuries did better today, relative to nominal treasuries. You can verify that directly:
http://www.bloomberg.com/markets/rates- ... -bonds/us/

5-Year nominal: -0.075 (yield dropped, and the price of the bonds rose)
5-Year TIPS: -0.181 (again, the yield dropped (but more than 2x as much)
Yes, that was the observation that prompted my question in the first place.

Anyway, as your response suggests, I guess I'd have to look at all down days or all days with a large drop and see how the various treasury funds perform and if there's a pattern. If no one else knows any better, perhaps that's the answer to my question. There is not a consistent reason on a given day why one particular Vanguard treasury fund performs the way it does, relative to other Vanguard treasury funds, in response to a decline in the equity markets.
In times of unstable markets, the markets can stay irrational longer than you can stay sane (rational). Right in this thread, you see all types of attempts trying to explain the misunderstood. I think that mas has the best observation.

On a related topic, this morning on NBC they asked a CNBC talking head (I paraphase) what was known (not known) Tuesday for an XYZ point increase in the market and known (not known) Wednesday for an ABC point drop. The talking head said.. investors are trying to find out where the bottom might be. :)
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