Inflation; Total Bond Market; GNMAs; and TIPS

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Taylor Larimore
Advisory Board
Posts: 27326
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Inflation; Total Bond Market; GNMAs; and TIPS

Post by Taylor Larimore » Sun Jan 29, 2012 5:52 pm

Bogleheads:

This is an update of a post I made last year :

YEAR..INFLATION..TBM....GNMA ....TIPS
1996......3.3%.....3.6%.....5.2%
1997......1.7%.....9.4%.....9.5%
1998......1.6%.....8.6%.....7.1%
1999......2.7%....-0.8%.....0.8%
2000......3.4%....11.4%...11.2%
2001......2.8%.....8.4%.....7.9%......7.7% (TIPS first full year.)
2002......1.6%.....8.3%.....9.7%.....16.6% (Best annual return.)
2003......2.3%.....4.0%.....2.5%......8.0%
2004......2.7%.....4.2%.....4.1%......8.3%
2005......3.4%.....2.4%.....3.3%......2.6%
2006......3.2%.....4.3%.....4.3%......0.4%
2007......2.8%.....5.9%.....7.0%.....11.6%
2008......0.1%.....5.1%.....7.2%.....-2.8% (Worst annual return.)
2009......2.7%.....5.9%.....5.3%.....10.8%
2010......1.5%.....6.5%.....6.9%......6.2%
2011.....3.0% ....7.6%....7.7%....13.2%

It is notable that inflation has increased nearly 3% during the last three years but bond funds continue to perform nicely.

Past performance does not guarantee future performance.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
ofcmetz
Posts: 2312
Joined: Tue Feb 08, 2011 8:09 pm
Location: Louisiana

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by ofcmetz » Sun Jan 29, 2012 6:20 pm

I wonder what this year will bring. As current yields will possibly remain unchanged this year. Of course they could go up or down as well.

I just threw some darts at the wall and I predict bond returns and inflation will be equal this year. ;) Or maybe not.
Never underestimate the power of the force of low cost index funds.

winterescape
Posts: 261
Joined: Sun Apr 15, 2007 2:53 pm
Location: Upstate NY

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by winterescape » Sun Jan 29, 2012 10:14 pm

Thanks Taylor for the historic chart. It helps me keep perspective.

The Vanguard site shows
Vanguard GNMA Fund Admiral Shares 7.80%
Vanguard Total Bond Mkt Index Admiral 7.69%
Vanguard GNMA Fund Investor Shares 7.69%
Vanguard Total Bond Mkt Index Inv 7.56%
so are you comparing the Total Bond Mkt Index Admiral to the GNMA Fund Investor Shares ?

I still like the somewhat shorter duration on the GNMA, but who knows…

User avatar
Taylor Larimore
Advisory Board
Posts: 27326
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Uniform type shares

Post by Taylor Larimore » Mon Jan 30, 2012 11:22 am

Hi Winterescape:

I used your figures to edit shares in the chart to "investor shares." Thank you.

You may find this Conversation interesting:

GNMA behavior in a sharply rising environment

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by richard » Mon Jan 30, 2012 11:32 am

Image

LynnC
Posts: 796
Joined: Thu Mar 01, 2007 7:01 pm
Location: California

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by LynnC » Mon Jan 30, 2012 11:48 am

Hi Taylor,

Thanks to you and my reading here, I own two out of three funds and have for some time. Both funds are performing well.

Thank you,

LynnC

winterescape
Posts: 261
Joined: Sun Apr 15, 2007 2:53 pm
Location: Upstate NY

Re: Uniform type shares

Post by winterescape » Mon Jan 30, 2012 7:53 pm

Taylor Larimore wrote:Hi Winterescape:

I used your figures to edit shares in the chart to "investor shares." Thank you.

You may find this Conversation interesting:

GNMA behavior in a sharply rising environment

Best wishes.
Taylor
Taylor,
Thanks for the link to that thread, I had not read it. What I fail to see mentioned anywhere in the thread was what happened in 2008. Just plot gnma VS TBM in google.
http://www.google.com/finance?chdnp=1&c ... MUTF:VFIJX&

User avatar
tipswatcher
Posts: 289
Joined: Tue Jun 21, 2011 5:17 pm
Contact:

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by tipswatcher » Mon Jan 30, 2012 8:09 pm

As much as I watch TIPS - I have been investing in them for 13 years - I still admit I can be baffled at what causes that base rate to rise and fall.

(And, since I am a buy-and-hold TIPS investor, I haven't cared all that much up to the last six months. I am still a net buyer of TIPS, buying more than are maturing. I am having a real problem buying them at these current super low rates, and I have some super-great 10-year TIPS maturing this year. Sob.)

Thank you Taylor, for this chart, which I am trying to digest.

The best year for TIPS was 2002, with a return of of 16.6% but an inflation rate of only 1.6%

The worst year for TIPS was 2008, with a return of -2.8% and an inflation rate of 0.1%.

It doesn't appear that the inflation rate is directly related to the TIPS-fund return.

In fact, I would guess that TIPS do better in times of economic decline, and lower inflation rates, because easy Fed policy causes a FEAR of higher inflation. That is certainly the case today. But today's Treasury market is a shambles, with artificially, government-manipulated super-low rates in nominal Treasuries. The TIPS base rate is going to fall with the nominal rate, keeping some sort of 'expected inflation' spread.

I definitely FEAR inflation ... not now, but in the future. Maybe I am wrong, but buying a nominal 10-year Treasury seems foolish to me when I can buy a TIPS that will adjust for inflation over 10 years, even if I have to give up a small real yield.

Maybe I am wrong. Who knows?
TIPS: Perfect investment for imperfect times?

User avatar
Index Fan
Posts: 2552
Joined: Wed Mar 07, 2007 12:13 pm
Location: The great Midwest

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by Index Fan » Mon Jan 30, 2012 10:27 pm

I too have wondered at TIPS returns. Perhaps the Vanguard TIPS Fund has done well recently because of its similarity to long-term government bonds (i.e., its duration and treasury status).
"Optimum est pati quod emendare non possis." | -Seneca

Gamecock
Posts: 9
Joined: Tue Oct 26, 2010 8:58 am

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by Gamecock » Mon Jan 30, 2012 11:05 pm

Should add intl bonds to the list since vanguard is going to offer them soon.

TBM is 95% us bonds / 5% intl. Bonds.

Seem it will track the Barclays Global Aggregate ex-USD Float Adjusted Index (Hedged), but I cannot find this anywhere.

User avatar
novastepp
Posts: 340
Joined: Sun Apr 03, 2011 8:13 pm
Location: Indiana

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by novastepp » Mon Jan 30, 2012 11:12 pm

I just find enjoyment in the fact that last year at this time, all the media "know-it-alls" were saying that inflation was coming and to dump bonds, especially long-term bonds. My long-term bond holdings did wonderfully. My dad, who is nearing retirement, pulled in a beautiful double digit return last year because of his bond holdings.

hazlitt777
Posts: 1033
Joined: Fri Aug 12, 2011 4:10 am
Location: Wisconsin

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Post by hazlitt777 » Tue Jan 31, 2012 9:22 am

Gold did over 11% last year.

aaron843
Posts: 13
Joined: Fri Apr 30, 2010 1:03 pm

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Post by aaron843 » Tue Jan 31, 2012 9:51 am

If I understand correctly, gold does well when the level of fear is increasing. Bonds do well when interest rates are falling. Does that sound generally right?

hazlitt777
Posts: 1033
Joined: Fri Aug 12, 2011 4:10 am
Location: Wisconsin

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Post by hazlitt777 » Tue Jan 31, 2012 10:13 am

aaron843 wrote:If I understand correctly, gold does well when the level of fear is increasing. Bonds do well when interest rates are falling. Does that sound generally right?
Aaron, I never liked all this talk in financies of the "emotional element." Yes, emotions play a role short term. But long term, the fundamentals are the deciding factor. This is applicable to all financial assets. God should not get "special treatment" in regards to fear. There are fundamentals that drive gold too, like any other financial asset.

So I would put it this way: Bonds do well when interest rates fall or when there is lots of fear that rates will fall.

Stocks do well when their is prosperity, good business environments, good management, or a lot of "antifear" or "confidence" that the economy is good or will become better.

Gold does well when there is a lot of monetization of debt, currency debasement, deficit spending, and yes, when there is fear that these things will happen or will continue to happen.

Does that make sense. I think that is a more fair and accurate way of putting it.

PreserveCapital
Posts: 551
Joined: Thu Mar 05, 2009 3:19 pm

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by PreserveCapital » Tue Jan 31, 2012 10:21 am

novastepp wrote:I just find enjoyment in the fact that last year at this time, all the media "know-it-alls" were saying that inflation was coming and to dump bonds, especially long-term bonds. My long-term bond holdings did wonderfully. My dad, who is nearing retirement, pulled in a beautiful double digit return last year because of his bond holdings.

LOL, as a teenager, did you ever think you would someday be high-fiving with the old man because of his bond portfolio returns? :sharebeer

hazlitt777
Posts: 1033
Joined: Fri Aug 12, 2011 4:10 am
Location: Wisconsin

Re: Total Bond Market; GNMAs; TIPS and Inflation

Post by hazlitt777 » Tue Jan 31, 2012 10:30 am

PreserveCapital wrote:
novastepp wrote:I just find enjoyment in the fact that last year at this time, all the media "know-it-alls" were saying that inflation was coming and to dump bonds, especially long-term bonds. My long-term bond holdings did wonderfully. My dad, who is nearing retirement, pulled in a beautiful double digit return last year because of his bond holdings.

LOL, as a teenager, did you ever think you would someday be high-fiving with the old man because of his bond portfolio returns? :sharebeer
Just don't be overexposed. The fundamentals are not looking good long term. So be diversified and don't misunderstand what many who are warning about bonds are really saying.

winterescape
Posts: 261
Joined: Sun Apr 15, 2007 2:53 pm
Location: Upstate NY

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Post by winterescape » Sat Jan 19, 2013 5:17 pm

Taylor Larimore wrote:Bogleheads:

This is an update of a post I made last year :

YEAR..INFLATION..TBM....GNMA ....TIPS
1996......3.3%.....3.6%.....5.2%
1997......1.7%.....9.4%.....9.5%
1998......1.6%.....8.6%.....7.1%
1999......2.7%....-0.8%.....0.8%
2000......3.4%....11.4%...11.2%
2001......2.8%.....8.4%.....7.9%......7.7% (TIPS first full year.)
2002......1.6%.....8.3%.....9.7%.....16.6% (Best annual return.)
2003......2.3%.....4.0%.....2.5%......8.0%
2004......2.7%.....4.2%.....4.1%......8.3%
2005......3.4%.....2.4%.....3.3%......2.6%
2006......3.2%.....4.3%.....4.3%......0.4%
2007......2.8%.....5.9%.....7.0%.....11.6%
2008......0.1%.....5.1%.....7.2%.....-2.8% (Worst annual return.)
2009......2.7%.....5.9%.....5.3%.....10.8%
2010......1.5%.....6.5%.....6.9%......6.2%
2011......3.0%.....7.6%.....7.7%....13.2%
2012......1.7%.....4.1%.....2.5%......6.9% (winterescape update)

It is notable that inflation has increased nearly 3% from 2008 to 2011, but bond funds continued to perform nicely.

Past performance does not guarantee future performance.

Best wishes.
Taylor

Taylor, a couple of data points to restart this thread. And.... for 2012 ....
Vanguard Total Bond Mkt Index Adm 4.15%
Vanguard GNMA Fund Admiral Shares 2.45%
Vanguard Inflation-Protect Sec Adm 6.90%

Vanguard Total Bond Mkt Index Adm Average duration 5.2 years
Vanguard GNMA Fund Admiral Shares Average duration 3.6 years
Vanguard Inflation-Protect Sec Adm Average duration 8.5 years

clacy
Posts: 107
Joined: Wed Apr 20, 2011 8:50 pm

Re: Inflation; Total Bond Market; GNMAs; and TIPS

Post by clacy » Sat Jan 19, 2013 7:28 pm

Is there a method of using TIPS vs nominal bonds to calculate real interest rates?

User avatar
Taylor Larimore
Advisory Board
Posts: 27326
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Updated returns

Post by Taylor Larimore » Sat Jan 19, 2013 8:33 pm

Winterscape:

Thank you for the 2012 year-end returns and duration figures. I edited the quote with your additions.

It is notable that TIPS with the longest duration, enjoyed double-digit returns during the 2008-2011 inflationary period.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Post Reply