Anyone selling TIPs now?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
btenny
Posts: 4453
Joined: Sun Oct 07, 2007 6:47 pm

Anyone selling TIPs now?

Post by btenny » Wed Feb 01, 2012 2:41 pm

The price of the TIP fund is now well over $119 per share. The 30 day SEC yield is down to a NEGATIVE 0.92%. I am thinking about selling out and going to cash or something else with this money for a while. Yes I still want to own TIPS long term but this price is crazy high and sure looks like a bubble waiting to burst. Anyone else think this?

Bill

User avatar
nisiprius
Advisory Board
Posts: 36031
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Anyone selling TIPs now?

Post by nisiprius » Wed Feb 01, 2012 3:22 pm

You call it a "bubble." Here are how much some other "bubbles" rose and then fell:

South Seas company, 1719-1720-1721, rose 8.2X, then lost 90% of its peak value
Gold, 1977-1980-1982, rose 8.5X, then lost 65% of its peak value
NASDAQ Composite index, 1997-2000-2002, rose 3.8X, then lost 75% of its peak value.

[Added] Apologies to the original poster, these remarks of mine are wrong. I was wrong about how the price and NAV of a TIPS fund work.

The TIP ETF originated in 12/2003. Morningstar is showing it as starting at 101.85 but I assume, for no good reason, it started at a round 100. The principal value is indexed for inflation. The CPI was 184.3 in December 2005, and 226.23 in November 2011 which is close enough to the present. So based on inflation indexing, it seems to me that the value of the ETF would be expected to be 100 * (226.23/184.3 ) = 122.8 due to inflation indexing alone.

How big a bubble do you think there is, and how much of its peak value do you think it might lose?
Last edited by nisiprius on Thu Feb 02, 2012 5:41 am, edited 5 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
nisiprius
Advisory Board
Posts: 36031
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Anyone selling TIPs now?

Post by nisiprius » Wed Feb 01, 2012 3:36 pm

So, I made this picture. Frankly, I don't understand it.
[Added] And thank goodness I didn't. I screwed up. See later postings.

This is what I did. I used Morningstar.com to plot the price of the TIP ETF. Then I used Excel and a CPI table to plot the value of the CPI from 12/2003 to 11/2011, scaled so that 12/2003 = 100. Then I used Photoshop Elements to tweak the CPI chart by eye to have the same scaling as the ETF price chart, and superimposed them. This is what it ended up looking like.

It is what it is. Blue line is the CPI, 12/2003 = 100.


Image
Last edited by nisiprius on Thu Feb 02, 2012 5:42 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
jjustice
Posts: 463
Joined: Tue Aug 04, 2009 9:58 am

Re: Anyone selling TIPs now?

Post by jjustice » Wed Feb 01, 2012 3:43 pm

Nisiprius, why would you compare a bond bubble to bubbles in such notoriously volatile investments as the South Sea company, gold, and NASDAQ? I'm surprised that you didn't throw in tulips as well.

A bond bubble would never be comparable to such examples, but that doesn't mean that we can't be experiencing a bubble.

I'm not worried because I was frightened out over a year ago. I left money on the table, but I've slept like a baby ever since--waking up every two hours to cry about that money.

John

User avatar
Ice-9
Posts: 1292
Joined: Wed Oct 15, 2008 12:40 pm
Location: Rockville, MD

Re: Anyone selling TIPs now?

Post by Ice-9 » Wed Feb 01, 2012 3:44 pm

Nisiprius,

I by no means claim any expertise in this matter. However, your chart is just the PRICE of the TIP ETF, correct? Aren't the inflation adjustments paid out as part of the dividend, together with any interest payments?

So, my novice eye tells me this price chart - instead of showing any actual adjustment for inflation - probably more closely represents how much people value a security that tracks inflation. And apparently they value such a security more today than ever. Just not at a value that matches its inflation adjusted value. :D

User avatar
nisiprius
Advisory Board
Posts: 36031
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Anyone selling TIPs now?

Post by nisiprius » Wed Feb 01, 2012 5:53 pm

Ice-9 wrote:Nisiprius,

I by no means claim any expertise in this matter. However, your chart is just the PRICE of the TIP ETF, correct? Aren't the inflation adjustments paid out as part of the dividend, together with any interest payments?

So, my novice eye tells me this price chart - instead of showing any actual adjustment for inflation - probably more closely represents how much people value a security that tracks inflation. And apparently they value such a security more today than ever. Just not at a value that matches its inflation adjusted value. :D
I'm probably mixed up. You underestimate my own degree of ignorance. (I mostly own individual TIPS).

I've assumed that a mutual fund or ETF would act like a portfolio of TIPS, in which only the (inflation-adjusted) interest would be paid out, with the inflation-adjusted principal being considered part of the bond's value. But now that you mention it... you might be right about the principal inflation adjustments being paid out. Except... I don't quite understand how the inflation adjustments can be paid out as part of the dividend, since they aren't accessible to the owner of the bond. They're locked inside the bond until it matures. (Hence the angst about having to pay taxes on it). So where would the money to pay it out come from?

However it works, it works the same way for the ETF and the mutual fund, because both the price chart and the growth chart for TIP and VIPSX track either other very closely.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Anyone selling TIPs now?

Post by dbr » Wed Feb 01, 2012 6:00 pm

I don't know what the regulation is that causes the result, but it is certainly true that TIPS funds pay out the inflation increment as received. If one owns a TIPS fund, it is a good idea to understand that, as spending the entire dividend will defeat the whole point of owning TIPS.

User avatar
abuss368
Posts: 12460
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Anyone selling TIPs now?

Post by abuss368 » Wed Feb 01, 2012 6:00 pm

Bogleheads select an asset allocation and then stay the course.

Do you know something that the market does not know already? You have to be right two times. When you should 1) get out and 2) get back in.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

Tom_T
Posts: 1465
Joined: Wed Aug 29, 2007 2:33 pm

Re: Anyone selling TIPs now?

Post by Tom_T » Wed Feb 01, 2012 7:07 pm

Whenever someone says "I really want to sell x now", the follow-up question should be, "And buy what?"

User avatar
nisiprius
Advisory Board
Posts: 36031
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Anyone selling TIPs now?

Post by nisiprius » Wed Feb 01, 2012 7:57 pm

dbr wrote:I don't know what the regulation is that causes the result, but it is certainly true that TIPS funds pay out the inflation increment as received. If one owns a TIPS fund, it is a good idea to understand that, as spending the entire dividend will defeat the whole point of owning TIPS.
But the inflation increment isn't received. The coupon payment is received, the inflation increment is not. That's why the tax on OID is annoying.

So I think you're right, but where does the money to pay out those inflation increments come from?

Does a mutual fund sell bonds on the market to fund the payouts, or what?

How does this work in an ETF, which I thought was simply a package of securities?

Believe it or not, I did something--more than skimming, less than reading--the VIPSX prospectus trying to find where this is explained, and I couldn't find it.

I just read the TIP prospectus, and which says "Distributions of net realized securities gains, if any, generally are declared and paid once a year..." So I guess it's the same as for stocks. I guess I don't understand the basic mechanics of how mutual funds and ETFs actually work. Do mutual funds and ETFs need to sell securities on the market periodically, to raise an amount of cash equal to the calculated securities gain, so that they can distribute it? If every stock in a mutual fund doubles in value during the year, do they need to sell off half of the fund's portfolio to make the distribution? Why doesn't this create market chaos at the end of every calendar year?

Don't answer here, I'm starting a new thread about it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
mas
Posts: 1461
Joined: Tue Feb 20, 2007 12:54 pm

Re: Anyone selling TIPs now?

Post by mas » Wed Feb 01, 2012 8:31 pm

nisiprius wrote:
dbr wrote:I don't know what the regulation is that causes the result, but it is certainly true that TIPS funds pay out the inflation increment as received. If one owns a TIPS fund, it is a good idea to understand that, as spending the entire dividend will defeat the whole point of owning TIPS.
But the inflation increment isn't received. The coupon payment is received, the inflation increment is not. That's why the tax on OID is annoying.
The fund (which holds TIPS) does not "receive" the inflation increment, but a TIPS mutual fund or ETF must pay out that amount each year, so the fund holder does "receive" it.
nisiprius wrote:So I think you're right, but where does the money to pay out those inflation increments come from?

Does a mutual fund sell bonds on the market to fund the payouts, or what?
Yes, a fund or ETF would probably need to sell some fraction of their portfolio in order to distribute the cash.
In fact, they may have reinvested cash received from interest payments earlier as well, so they would need to sell enough bonds to cover that payout (although is it monthly, maybe they just hold cash?).
nisiprius wrote:How does this work in an ETF, which I thought was simply a package of securities?
Works the same in an ETF. ETFs can certainly buy/sell within their portfolio. They may not need to worry about cash flows from purchase/redemption like a mutual fund, but they still need to do it at least a few times a year when their index rebalances.
nisiprius wrote:I just read the TIP prospectus, and which says "Distributions of net realized securities gains, if any, generally are declared and paid once a year..." So I guess it's the same as for stocks. I guess I don't understand the basic mechanics of how mutual funds and ETFs actually work. Do mutual funds and ETFs need to sell securities on the market periodically, to raise an amount of cash equal to the calculated securities gain, so that they can distribute it? If every stock in a mutual fund doubles in value during the year, do they need to sell off half of the fund's portfolio to make the distribution? Why doesn't this create market chaos at the end of every calendar year?
I don't think this "net realized securities gains" covers the situation with TIPS funds that you are surprised at. Instead "Dividends from net investment income, if any, generally are declared and paid monthly by the Fund", does. But the key is that the inflation increment is considered "investment income". That is why you have to pay taxes on it if you hold an individual TIPS bond yourself - and the fund is required to distribute it to its holders.

User avatar
mas
Posts: 1461
Joined: Tue Feb 20, 2007 12:54 pm

Re: Anyone selling TIPs now?

Post by mas » Wed Feb 01, 2012 8:32 pm

nisiprius wrote:Don't answer here, I'm starting a new thread about it.
Too late!

User avatar
nisiprius
Advisory Board
Posts: 36031
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Anyone selling TIPs now?

Post by nisiprius » Thu Feb 02, 2012 5:59 am

In any case, my apologies to the original poster. As I now understand it, the price and NAV of a TIPS fund are not expected to grow with inflation the way the principal of an individual TIPS or a TIPS ladder does, because the fund pays out the inflation adjustments as well as the actual coupon interest. Thus, if it weren't for interest fluctuations and speculative fluctuations, a price chart for a TIPS fund ought to be flat, just as it ought to be for a bond fund.

Although now I'm even more confused, because if capital gains are paid out at the end of the year, but capital losses are not sucked back in (!), then a price chart that spans more than a year... it makes my head spin, sorry.

Anyway, if I've got it straight this time, looking at the price chart for the last year, up to just before the drop when capital gains were paid out, it looks as if a mostly-corporate-bond fund (green, Intermediate-Term Investment Grade) was flat, intermediate-term Treasury had an 8% run-up, and TIPS had maybe a 11% run-up.

I don't know what to make of that, either, because the ten-year Treasury interest rate has dropped about 1.5% this year, seems like--from about 3.5% to 2%. 1.5% times duration would account for some of that, but, sure, as I've assumed all along, there's some component of speculative run-up, and maybe it's more for TIPS than it is for nominal Treasuries.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Anyone selling TIPs now?

Post by dbr » Thu Feb 02, 2012 9:33 am

nisiprius wrote:In any case, my apologies to the original poster. As I now understand it, the price and NAV of a TIPS fund are not expected to grow with inflation the way the principal of an individual TIPS or a TIPS ladder does, because the fund pays out the inflation adjustments as well as the actual coupon interest. Thus, if it weren't for interest fluctuations and speculative fluctuations, a price chart for a TIPS fund ought to be flat, just as it ought to be for a bond fund
Also, in any case, one thing I hammer on repeatedly is for people to please not spend all the distribution of a TIPS fund as if it were income, because when this is not understood the entire inflation protection mechanism is destroyed.

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

Re: Anyone selling TIPs now?

Post by PreserveCapital » Thu Feb 02, 2012 9:41 am

The huge relative run-up in TIPS must mean that the market has a relatively higher expectation of unexpected inflation, since unexpected inflation is what TIPS is designed to protect against.

Now please someone explain how there can be an expectation of something that's unexpected.

User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: Anyone selling TIPs now?

Post by Lbill » Thu Feb 02, 2012 10:52 am

I think that TIPS have gone up in market price because, like nominal Treasurys, lower interest rates have brought about an increase in existing bond prices. This seems likely to reverse when interest rates rise to the degree this is not offset by increases in the CPI. The risk of TIPS is that, since interest rates are being held down by the Fed, rates will probably increase without being driven by inflation. Some commentators, such as Jim Grant, do believe the Fed has created a gigantic bond bubble by depressing rates for so long. It is worrisome and I do wonder if it would make sense to cash out some or all of my TIPS ladder and take the profits. Put the money into short term bonds or CDs instead.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

User avatar
Doc
Posts: 8304
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Anyone selling TIPs now?

Post by Doc » Thu Feb 02, 2012 11:48 am

PreserveCapital wrote:The huge relative run-up in TIPS must mean that the market has a relatively higher expectation of unexpected inflation, since unexpected inflation is what TIPS is designed to protect against.
The data doesn't support any large change in expected inflation as indicated by the break even inflation (blue line) for the ten over the past five years.

Image

http://research.stlouisfed.org/fredgraph.png?g=4IW

The anomaly in the of fall '08 is most likely a liquidity issue although some short term deflation fears may have contributed to it. Both TIPS and nominal treasuries show a large decrease in yield in mid '11 and therefore a higher price. This decrease was concurrent with a much smaller decrease in the spread indicating lower inflation fears if anything.

Inflation is relatively steady. People don't "fear" slow changes because they have time to react to small. Furthermore the break even inflation is the average over the life of the bond. Inflation ups and downs during the time frame of a single four year period are not likely to have much of an effect on a thirty year bond.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

zeugmite
Posts: 1016
Joined: Tue Jul 22, 2008 11:48 pm

Re: Anyone selling TIPs now?

Post by zeugmite » Thu Feb 02, 2012 3:20 pm

At least the real yield curve is still upward sloping, FWIW.

User avatar
Prokofiev
Posts: 930
Joined: Mon Feb 19, 2007 9:45 pm
Location: New Orleans

Re: Anyone selling TIPs now?

Post by Prokofiev » Thu Feb 02, 2012 3:35 pm

I would certainly sell all my TIPs now, if I hadn't already sold them all several months ago at far lower prices.
Everything should be made as simple as possible, but not simpler - Einstein

User avatar
Rob5TCP
Posts: 3076
Joined: Tue Jun 05, 2007 7:34 pm
Location: New York, NY

Re: Anyone selling TIPs now?

Post by Rob5TCP » Thu Feb 02, 2012 5:35 pm

I bought a "bunch" about 3 1/2 years ago. I have somewhere between 20-30% left. It gets harder and harder to justify holding them. At this point, I have more I Bonds (from years ago), then I have TIPS.

Captain_Video
Posts: 54
Joined: Fri Nov 07, 2008 3:23 pm
Location: Florida's Space Coast

Re: Anyone selling TIPs now?

Post by Captain_Video » Thu Feb 02, 2012 8:02 pm

I too bought TIPS about 3 1/2 years ago and have about 2/3 in individual bonds and 1/3 in the Vanguard TIPS fund. I am not selling now and intend to hold the individual bonds to maturity. In the meantime the bonds will provide an inflation adjusted income.

I also agree that the whole TIPS fund distribution should not be spent; the inflation adjustment portion should be reinvested. But how does one determine what portion of the distribution is from interest and what portion from the inflation adjustment? I have never seen these broken out.

User avatar
Sammy_M
Posts: 1882
Joined: Sun Nov 25, 2007 8:30 am

Re: Anyone selling TIPS now?

Post by Sammy_M » Thu Feb 02, 2012 8:08 pm

btenny wrote:I still want to own TIPS long term but this price is crazy high and sure looks like a bubble waiting to burst. Anyone else think this?

Bill
Yes. But what is more important is what I thought when I wrote my IPS. I recently reduced my TIPS exposure. http://www.bogleheads.org/forum/viewtop ... 3#p1292503

wawoodjr
Posts: 39
Joined: Sun May 10, 2009 9:43 am

Re: Anyone selling TIPs now?

Post by wawoodjr » Thu Feb 02, 2012 8:37 pm

I understand that some folks alter TIPs allocations based on current yields. By my IPS, I maintain a constant 20% of my bond allocation in TIP etf and rebalance as necessary. Just so happens my TIPs just surpassed an upper band so I'll sell some now to bring it back it in line with original allocation. Is it wrong to rebalance TIPs in the same fashion as the rest of my portfolio? Anything else to me seems like market timing.

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

Re: Anyone selling TIPs now?

Post by tipswatcher » Thu Feb 02, 2012 9:23 pm

Now please someone explain how there can be an expectation of something that's unexpected.
Unexpected inflation is when inflation runs 3.5% and a 10-year Treasury is paying 1.9%.

Against that 10-year Treasury, a 10-year TIPS paying slightly less than inflation is still attractive, since the buyer expects inflation to run more than the breakeven point, which would be something like 2.1% over 10 years. But the nominal Treasury buyer expects ... well, who knows? Armageddon?

So buying a TIPS right now is not illogical, at least against a nominal 10-year Treasury.

I question the logic of buying a 10-year Treasury at 1.9%, though.

On selling TIPS, the original topic, I've been a buy-and-hold investor in TIPS for 12 years. I was still buying in early 2011 but don't find the current rates attractive.

I've owned TIPS mutual funds in the past, but not now.

Looking for other super-safe alternatives. Finding I Bonds, but that's about it.
TIPS: Perfect investment for imperfect times?

User avatar
grabiner
Advisory Board
Posts: 22182
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Anyone selling TIPs now?

Post by grabiner » Thu Feb 02, 2012 9:54 pm

nisiprius wrote:Morningstar is showing it as starting at 101.85 but I assume, for no good reason, it started at a round 100.
ETFs do not start at a round value. The fund provider determines what is in a Creation Unit and how many shares that will be, and the ETF's net asset value is determined from those numbers. If a Creation Unit of TIP is 100,000 shares and the TIPS in that unit cost $10.185M, then the opening price of TIP was 101.85.
The principal value is indexed for inflation.
This is true for individual TIPS, but not for TIPS funds, which must distribute the inflation adjustment as income. The only reason that the TIP ETF increased in price is that falling rates on TIPS increased the value of the TIPS which this ETF holds.
Wiki David Grabiner

User avatar
nisiprius
Advisory Board
Posts: 36031
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Anyone selling TIPs now?

Post by nisiprius » Thu Feb 02, 2012 10:10 pm

Captain_Video wrote:I also agree that the whole TIPS fund distribution should not be spent; the inflation adjustment portion should be reinvested. But how does one determine what portion of the distribution is from interest and what portion from the inflation adjustment? I have never seen these broken out.
At the risk of committing further bungles... I assume that you uncheck the box that says "reinvest dividends" and check the box that says "reinvest capital gains." Yes? No? Anyone?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
SimpleGift
Posts: 3100
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Anyone selling TIPs now?

Post by SimpleGift » Thu Feb 02, 2012 10:49 pm

nisiprius wrote:
Captain_Video wrote:I also agree that the whole TIPS fund distribution should not be spent; the inflation adjustment portion should be reinvested. But how does one determine what portion of the distribution is from interest and what portion from the inflation adjustment? I have never seen these broken out.
At the risk of committing further bungles... I assume that you uncheck the box that says "reinvest dividends" and check the box that says "reinvest capital gains." Yes? No? Anyone?
Personally, I've never been able to determine what part of the quarterly distributions of Vanguard's TIPS fund (VIPSX) are actually inflation adjustments to principal. As best I know, it isn't labeled "capital gain." So my approach has been to 1) automatically send all distributions from VIPSX (income and capital gains) to my money market fund, and 2) set up an automatic, quarterly reinvestment from my money market fund back to VIPSX that represents about what the rate of inflation is currently running, times my principal amount. Once a year, I check the Consumer Price Index to see if I need to adjust my quarterly reinvestment amount in VIPSX up or down.

An inelegant and imprecise method perhaps, but it does serve to approximately keep the inflation adjustments to principal reinvested back into the fund, I believe.
Last edited by SimpleGift on Thu Feb 02, 2012 10:59 pm, edited 1 time in total.
Cordially, Todd

natureexplorer
Posts: 4191
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Re: Anyone selling TIPs now?

Post by natureexplorer » Thu Feb 02, 2012 10:59 pm

The government shorts TIPS. Just sayin'.

delisim
Posts: 139
Joined: Wed Dec 05, 2007 10:24 am

Re: Anyone selling TIPs now?

Post by delisim » Thu Feb 02, 2012 11:23 pm

Yes...Selling a bunch and buying a little. Earlier this year, we hit a rebalancing trigger so I sold some TIPS (VIPSX) for International Index (in tax advantaged account). We didn't fiddle with our automated, future tax advantaged contributions, which include both TIPS (VIPSX) and International Index, because of the administrative headache of doing so. Just accumulating on course for our AA until we hit another trigger.

EyeDee
Posts: 1264
Joined: Tue Feb 20, 2007 12:15 am

Re: Anyone selling TIPs now?

Post by EyeDee » Thu Feb 02, 2012 11:45 pm

Simplegift wrote: Personally, I've never been able to determine what part of the quarterly distributions of Vanguard's TIPS fund (VIPSX) are actually inflation adjustments to principal. As best I know, it isn't labeled "capital gain."
.
On Inflation-Protected Securities distribution page:

https://personal.vanguard.com/us/funds/ ... st=tab%3A4

click on link titled:

"Important information about Vanguard Inflation-Protected Securities Fund Investor Shares distributions

and it will put one on the following page with Interest and Inflation breakdown which I found when I looked at fund distribution page after reading this conversation.

https://personal.vanguard.com/us/conten ... bleJSP.jsp
Randy

Bongleur
Posts: 2066
Joined: Fri Dec 03, 2010 10:36 am

Re: Anyone selling TIPs now?

Post by Bongleur » Thu Feb 02, 2012 11:54 pm

The Fed has been purchasing 60% of the 20-30 year TIPS:

Article:
http://www.zerohedge.com/news/under-twi ... -treasurys

table:

http://www.zerohedge.com/sites/default/ ... 091%25.png
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

User avatar
SimpleGift
Posts: 3100
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Anyone selling TIPs now?

Post by SimpleGift » Fri Feb 03, 2012 12:07 am

EyeDee wrote:On Inflation-Protected Securities distribution page:
https://personal.vanguard.com/us/conten ... bleJSP.jsp
Thanks, EyeDee. I suspected the exact breakdowns of the VIPSX distributions were available somewhere. In my case, I'm too lazy to look up the exact figures four times per year and make a manual (but very precise) reinvestment of the inflation adjustments back into the fund. So I'll probably still stick with my automatic (but more imprecise) reinvestment method, which I only need to check and readjust once per year. Thanks again for the link, though, as others will undoubtedly find it helpful.
Cordially, Todd

DickBenson
Posts: 809
Joined: Sun Apr 08, 2007 7:27 pm

Re: Anyone selling TIPs now?

Post by DickBenson » Fri Feb 03, 2012 3:07 am

Bongleur wrote:The Fed has been purchasing 60% of the 20-30 year TIPS:

Article:
http://www.zerohedge.com/news/under-twi ... -treasurys

table:

http://www.zerohedge.com/sites/default/ ... 091%25.png
Are these purchases made only on initial offerings, or do they also make some purchases in the secondary market?

Do you have any idea why the 10 - 20 year have a "na" in the percent column? Where did this table come from?

Dick

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Anyone selling TIPs now?

Post by dbr » Fri Feb 03, 2012 10:28 am

Has anyone considered the possibility that a TIPS allocation can be reblanced just like any other asset class? Why do people think there is something special about deciding TIPS are too high or too low? Also didn't Larry Swedroe already weigh in with some ideas about how to manage TIPS allocation based on real yields. How consistent his monthly analysis of TIPS is with that is open to question.

User avatar
Rob5TCP
Posts: 3076
Joined: Tue Jun 05, 2007 7:34 pm
Location: New York, NY

Re: Anyone selling TIPs now?

Post by Rob5TCP » Fri Feb 03, 2012 11:45 am

I have my TIPS allocation % in I Bonds. These were bought years ago. At the time, I thought the real return was great, so I bought beyond what I intended to have in TIPS. Because they have become more valuable, I won't redeem them. When 2008 came around and earlier last year I bought heavily in TIPS. I was beyond my allocation, but thought they were at a level I wanted more of (expand my allocation).

I would have kept them. The question becomes would I buy them at this level now. The answer is no, so I started selling a number of months back.
Last edited by Rob5TCP on Fri Feb 03, 2012 11:48 am, edited 1 time in total.

btenny
Posts: 4453
Joined: Sun Oct 07, 2007 6:47 pm

Re: Anyone selling TIPs now?

Post by btenny » Fri Feb 03, 2012 11:46 am

Well guys the reference to the Gov't buying so many long TIPS has convincced me to sell. Eventually someone in Washington is going to wake up and let the market price stuff. When that happens I see long bonds and long TIP interest rates increasing. The gotcha is I have no idea if this increase will happen soon or 5 years from now. But when it does 7-8 year TIPS funds will go down. So like others have pointed out maybe rebalancing my TIP allocation down to a smaller amount is the right thing to do. Now if the price will just stay above $119 while I do this.

Anyone think houses are cheap now?

Bill

User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: Anyone selling TIPs now?

Post by Lbill » Fri Feb 03, 2012 12:15 pm

I just took a snapshot of the present value of my TIPS holdings in the following way: First, I determined the total current adjusted principal value of my bonds. Next, I determined the total cumulative interest payments I'd receive on these bond at their current principal value if held to maturity. I added these two sums together to determine the total value of my TIPS holdings. I compared this to the total current market value of my TIPS and found that the market value is about 4% higher than the estimated current value. That doesn't seem like much. In other words, if I sold all my TIPS today, I'd receive net 4% more than I'd receive if I hung onto them until they matured, receiving the interest payments.

I guess to complete the analysis, I would need to estimate the earnings on the proceeds if I sold the bonds now and reinvested them elsewhere. If I put the proceeds in cash, the best estimate would be the current interest rate of about 0%, so that's a non-starter. If I reinvested in nominal treasuries with the same average maturity of my TIPS (7.5 years), that would be about 1.5% annual compound interest which (without calculating) is maybe 2% net of the principal value over the average maturity of 7.5 years. So, I figure that my estimated gain from selling my TIPS now and placing the money in alternatives of comparable riskiness might be in the neighborhood of 6% or so (4% capital gain + 2% net interest payments until maturity). I'd be interested in comments regarding my back-of-the-envelope analysis method. There are probably more sophisticated ways to do this. The bottom line is that if this is a ballpark accurate way to do this analysis, it doesn't seem to me that a net 6% gain would be worth giving up the inflation protection of my TIPS by selling them now and putting the money into non- inflation protected alternatives or taking on more risk with other investments. Comments?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

carolinaman
Posts: 3065
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: Anyone selling TIPs now?

Post by carolinaman » Fri Feb 03, 2012 12:48 pm

btenny wrote:Well guys the reference to the Gov't buying so many long TIPS has convincced me to sell. Eventually someone in Washington is going to wake up and let the market price stuff. When that happens I see long bonds and long TIP interest rates increasing. The gotcha is I have no idea if this increase will happen soon or 5 years from now. But when it does 7-8 year TIPS funds will go down. So like others have pointed out maybe rebalancing my TIP allocation down to a smaller amount is the right thing to do. Now if the price will just stay above $119 while I do this.

Anyone think houses are cheap now?

Bill
I agree with your logic. I sold 2019 TIPS last month at gain of 18.5% and reinvested in GNMA and IG Intermediate Corporate. The gov't's intervention has artificially skewed market pricing.

John

User avatar
Noobvestor
Posts: 4676
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Re: Anyone selling TIPs now?

Post by Noobvestor » Fri Feb 03, 2012 1:09 pm

Government intervention or no, I keep my TIPS for the same reason I bought them - to have something that reacts on a dime to unexpected inflation. Amazed that others are willing to cash in theirs for something with nominal returns - guess some things just change?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

User avatar
Doc
Posts: 8304
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Anyone selling TIPs now?

Post by Doc » Fri Feb 03, 2012 1:10 pm

Lbill wrote:I just took a snapshot of the present value of my TIPS holdings in the following way: First, I determined the total current adjusted principal value of my bonds. Next, I determined the total cumulative interest payments I'd receive on these bond at their current principal value if held to maturity. I added these two sums together to determine the total value of my TIPS holdings. I compared this to the total current market value of my TIPS and found that the market value is about 4% higher than the estimated current value. That doesn't seem like much. In other words, if I sold all my TIPS today, I'd receive net 4% more than I'd receive if I hung onto them until they matured, receiving the interest payments.
There's a TV game show with a title something like "Are you smarter than a bond trader?"

The problem with you analysis is that you didn't discount those future interest payments to get their net present value. You were going in the right direction when you started looking at how to reinvest those interest payments. But you don't need to do any of this. Mr. Market has done it all for you. This is fixed income. Once you sign the contract (make the purchase) your return is fixed for the duration and absent tax issues you can't get any higher return by selling those bonds and buying something else unless what you buy has a higher risk.

In a taxable account there can be some trade off between capital gains rate if you sell and ordinary tax rates if you hold but these are usually not all that much and of course are zero if you hold your TIPS in a tax advantaged account.

This selling TIPS now question is pretty irrelevant. If you have a nice gain just pat yourself on the back for your excellent market timing when you made the purchase and celebrate that decision :beer
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Sammy_M
Posts: 1882
Joined: Sun Nov 25, 2007 8:30 am

Re: Anyone selling TIPs now?

Post by Sammy_M » Fri Feb 03, 2012 1:36 pm

Code: Select all

Decision Table	
		
Real	LT TIPS/  CDs/
Rate	I-Bonds   StbVal	
> 3%	 100%	  0%	   When real rates are high, lock in for long duration
2-3%	 75%	   25%	
1-2%	 50%	   50%	
< 1%	 25%	   75%	  When real rates are low, shorten duration
You can label this two ways:

1. Market timing. You think you know where TIPS pricing is heading and you're trying to be smarter than the market.

2. Risk management. You realize that you don't know where TIPS are heading, but when rates are zero, real interest rate risk is high. You react and shorten duration.

With my fixed income allocation, I want near zero credit risk, no currency risk, little inflation risk, and actively managed interest rate risk. I'm not trying to be smarter than anyone. I'm just trying to avoid significant losses in this portion of my portfolio.

DickBenson
Posts: 809
Joined: Sun Apr 08, 2007 7:27 pm

Re: Anyone selling TIPs now?

Post by DickBenson » Fri Feb 03, 2012 3:20 pm

Sometimes there can arise some unusual situations where a normal "buy and hold" policy, or your normal asset allocation can be challenged.

When I bonds were over 3% real, everyone loaded up (over-loaded?).

About three years ago there was some artificial selling of TIPS (not based upon unexpected inflation issues or individual portfolio balancing) by major institutions. Many of us took advantage of this anomaly and "over bought" TIPS.

Now it appears there is some artificial over-buying of TIPS by the government, and perhaps this is another time for one to take advantage of this anomaly by "over-selling" these bonds.

Dick

User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: Anyone selling TIPs now?

Post by Lbill » Fri Feb 03, 2012 5:33 pm

Doc wrote:
The problem with you analysis is that you didn't discount those future interest payments to get their net present value. You were going in the right direction when you started looking at how to reinvest those interest payments. But you don't need to do any of this. Mr. Market has done it all for you. This is fixed income. Once you sign the contract (make the purchase) your return is fixed for the duration and absent tax issues you can't get any higher return by selling those bonds and buying something else unless what you buy has a higher risk.

In a taxable account there can be some trade off between capital gains rate if you sell and ordinary tax rates if you hold but these are usually not all that much and of course are zero if you hold your TIPS in a tax advantaged account.

This selling TIPS now question is pretty irrelevant. If you have a nice gain just pat yourself on the back for your excellent market timing when you made the purchase and celebrate that decision
Doc - I generally get what you're saying here. I think what hangs me (and others) up is that we're sitting on some nice cap gains on these TIPS because interest rates have come down so much. People are thinking they'd like to harvest those gains, and also that they'll give them back if (as seems likely) interest rates start rising. Ergo --> sell the TIPS. Actually "sell" may be the wrong word - "trade" is more accurate. We can trade for cash, for other bonds, for CDs, or any other asset including stocks. If the TIPS represent all or part of one's low-risk, fixed-income, allocation then we have to decide whether we should trade TIPS for some functionally equivalent holding such as money market, nominal bonds, CDs, etc. IMO, there doesn't seem to be a persuasive case for doing that because all these alternatives also have low or negative real returns (based on current inflation expectations). That leaves the alternative you mentioned: trade TIPS for higher risk assets such as stocks, or perhaps bonds with a longer duration than presently held.

This seems to be an example of Morton's Fork.
Morton's Fork is a logical dilemma in which people are faced with two equally bad options. You could think of it as being "between the devil and the deep blue sea," as the saying goes. Unless the victim of the dilemma manages to find an exception, the outcome of the situation will most probably be undesirable, as there can be no good outcome from any of the choices the victim is faced with. Many people find themselves struggling with Morton's Fork at some point in their lives.

This term is named after Lord Chancellor John Morton, who worked in England under Henry VII. According to Morton's logic, wealthy subjects of the Crown obviously had money to be spared for taxes, and poor subjects were clearly sitting on savings, so they could also bear high taxes. Rich and poor alike found themselves at the points of "Morton's Fork," paying high taxes
.
http://www.wisegeek.com/what-is-mortons-fork.htm
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

User avatar
Doc
Posts: 8304
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Anyone selling TIPs now?

Post by Doc » Fri Feb 03, 2012 6:45 pm

Lbill wrote: I think what hangs me (and others) up is that we're sitting on some nice cap gains on these TIPS because interest rates have come down so much. People are thinking they'd like to harvest those gains, and also that they'll give them back if (as seems likely) interest rates start rising. Ergo --> sell the TIPS. Actually "sell" may be the wrong word - "trade" is more accurate. We can trade for cash, for other bonds, for CDs, or any other asset including stocks. If the TIPS represent all or part of one's low-risk, fixed-income, allocation then we have to decide whether we should trade TIPS for some functionally equivalent holding such as money market, nominal bonds, CDs, etc. IMO, there doesn't seem to be a persuasive case for doing that because all these alternatives also have low or negative real returns (based on current inflation expectations). That leaves the alternative you mentioned: trade TIPS for higher risk assets such as stocks, or perhaps bonds with a longer duration than presently held.
I think you have the idea right you just are having a hard time grasping what it means. I have trouble explaining it in words even to myself. I need to go through the discounted cash flow calculations and they can get gnarly for those not mathematically inclined. Let me try another way to explain it.

The price of your bonds is up because interest rate are down. Therefore your bonds are paying you extra interest over what you can get in the market today. Mr. Market is willing to take that future extra interest off your hands and in return give you a lump sum amount of money. That's not really capital gains except for perhaps the tax treatment. You are just selling a future income stream for a lump sum now. But that doesn't do you any good if you can't reinvest at a higher return unless you want to take on more risk. If you wanted to take on that higher risk to get the higher returns you could do that whether your TIPS had "capital gains" or not.

Perhaps a good way to look at FI trades as you suggest is just to remove the term "capital gains" from your vocabulary and just look at the yield alternatives. The nominal YTM for a TIPS is going to be very close to the YTM on a nominal Treasury with similar maturity. Maybe that number is 3% and the yield on your CD is 4%. Is that 1% difference enough to want you to take on the extra risk of the CD which is mostly inflation risk but may have a little liquidity risk depending on the bank?

I think it is Larry that says take your risk on the equity side. Following that advice the answer to my rhetorical question is no. It is better just to let my rebalancing bands creep up to a little higher equity ratio. (Which I had done up to a few days ago when I rebalanced from equites into a short TIPS ETF. :lol )
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Sammy_M
Posts: 1882
Joined: Sun Nov 25, 2007 8:30 am

Re: Anyone selling TIPs now?

Post by Sammy_M » Fri Feb 03, 2012 7:29 pm

Doc wrote:Maybe that number is 3% and the yield on your CD is 4%. Is that 1% difference enough to want you to take on the extra risk of the CD which is mostly inflation risk but may have a little liquidity risk depending on the bank?
If the CD allows you to redeem at par at any time, there is an additional consideration here, no? If inflation is on the rise, newly issued fixed income instruments would need to compensate the investor with higher interest rates. One could redeem the existing CD with a small penalty and buy a new one with higher yield.

On the other hand if interest rates rise for a reason other than increasing inflation, longer term TIPS would suffer.

User avatar
Lbill
Posts: 4997
Joined: Thu Mar 13, 2008 11:25 pm
Location: Somewhere between Up and Down

Re: Anyone selling TIPs now?

Post by Lbill » Fri Feb 03, 2012 7:36 pm

Thanks Doc. Your comments are helpful (I think :confused ) but this stuff is hard to get my brain cells around, as you said. I keep coming back to the following conclusions:

1) yes, I've had some nice gains on my TIPS figured in terms of what I'd get if I sold them vs. what I paid for them initially.
2) but, those gains are just "paper" gains because I can't take the money and run - I've got to reinvest them somewhere and the "somewhere" is a Morton's Fork.
3) I might as well just sit tight with those TIPS, because my asset allocation hasn't changed and I still need XX% in fixed-income. If I didn't already own TIPS, I'd probably have to buy them (or something with an equivalent crappy YTM).
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

PB
Posts: 191
Joined: Sat Oct 30, 2010 1:59 pm

Re: Anyone selling TIPs now?

Post by PB » Fri Feb 03, 2012 11:16 pm

I'm far from expert, closer to a newbie really, but over the past year my Vanguard TIPS fund is up 16.3%.

If I understand the concept of rebalancing correctly, how can I not sell a chunk right now?

Isn't 5% the standard for rebalancing? Or 10% if you really want to push it? Am I missing something?

PS: I do understand that I then have to "buy" something. But if I don't want to increase my equity holdings, isn't it legitimate to diversity across different types of bond funds, that aren't doing as well in the current climate? Or even cash for a little while?

User avatar
#Cruncher
Posts: 2580
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Anyone selling TIPs now?

Post by #Cruncher » Fri Feb 03, 2012 11:26 pm

Bongleur wrote:The Fed has been purchasing 60% of the 20-30 year TIPS: http://www.zerohedge.com/news/under-twi ... -treasurys
Bongleur, do you know where the 60% in the table comes from? From what I can tell the correct figure is 20%. Here is what the Fed's System Open Market Account (SOMA) holds of the five 20-year and the five 30-year TIPS: (1)

Code: Select all

Matures     Coupon     Held by Fed     % Total
---------   ------     -----------      ------
1/15/2025    2.375       6,458,899      23.06%
1/15/2026    2.000       3,532,993      17.66%
1/15/2027    2.375       3,048,379      18.49%
1/15/2028    1.750       1,637,238      10.47%
4/15/2028    3.625       4,158,000      24.77%
1/15/2029    2.500         282,301       1.99%
4/15/2029    3.875       4,412,000      22.63%
4/15/2032    3.375         401,000       8.00%
2/15/2040    2.125       5,365,388      35.36%
2/15/2041    2.125       6,156,902      25.67%
Total                   35,453,100 <-- Face value in $000
The $35b of face value that the Fed holds is 20% of the $175b face value that has been issued (2) (3). Much of this has been purchased on the secondary market. For example, SOMA has bought $5,365m of the Feb 2040; but only $171m was bought at the two auctions held in 2010 (4) (5).

(1) System Open Market Account Holdings 2/1/2012 TIPS tab
(2) 20-year TIPS Auctions -- $94b issued
(3) 30-year TIPS Auctions -- $81b issued
(4) February 22, 2010 Auction Results PDF File
(5) August 23, 2010 Auction Results PDF File

User avatar
Noobvestor
Posts: 4676
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Re: Anyone selling TIPs now?

Post by Noobvestor » Sat Feb 04, 2012 12:42 am

PB wrote:I'm far from expert, closer to a newbie really, but over the past year my Vanguard TIPS fund is up 16.3%.
Sounds right.
PB wrote:If I understand the concept of rebalancing correctly, how can I not sell a chunk right now?
You could, for example, have equal gains on the equity side, thus leaving you with the same allocation - or higher gains, let's say, on equities, requiring rebalancing in the *other* direction (into TIPS).
PB wrote:Isn't 5% the standard for rebalancing? Or 10% if you really want to push it? Am I missing something?
There is no single answer to this. Some people do it by time period (e.g. once a year), or only with new money for tax reasons, etc... but those are relatively typical I would guess.
PB wrote:PS: I do understand that I then have to "buy" something. But if I don't want to increase my equity holdings, isn't it legitimate to diversity across different types of bond funds, that aren't doing as well in the current climate? Or even cash for a little while?
Errr, 'legitimate' in what sense? Some people do that, yes, but that's market timing, which most Bogleheads-types (myself included) try to avoid. Bill Gross, manager of the world's largest bond fund, said to cash in US govt bonds mid last year, and he got hosed for doing it (as did anyone who took his advice).

Moreover, one of the things I think people keep missing in this discussion is that TIPS have a component the alternatives don't: they track inflation. To me, it's even harder to imagine what I would trade TIPS for than, say, intermediate nominals, etc... because nothing else really has this unique characteristic, save I Bonds, which have per-year limits.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

PB
Posts: 191
Joined: Sat Oct 30, 2010 1:59 pm

Re: Anyone selling TIPs now?

Post by PB » Sat Feb 04, 2012 12:58 am

Thanks, Noobvestor - appreciate your substantive response.

Post Reply