A TIPS is maturing in Fidelity. What to do?

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VictoriaF
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A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 7:38 am

Ten years ago I have purchased a TIPS CUSIP 912828GX2 in my Fidelity Roth IRA account. Now, an email from Fidelity tells me:
Fidelity wrote:Maturity Date: 2017-07-15
Quantity: 35.00 (Quantity equals the number of bonds. 1 bond equals $1,000 in face value.)
Redemption Price: 100.00
Redemption Principal: $35,000.00
But when I check my online account, the value of this TIPS is ~$41,000.

Q1. How much will I receive on 15 July: $35k or $41k?

The Fidelity email further states:
Fidelity wrote:To discuss your investment or other fixed income opportunities, please visit Fidelity.com, visit your local Investor Center or call 1 (800) 544-6666.
I don't want to talk to Fidelity advisers. And I could not find a place in my Fidelity account where I could see what will happen when my TIPS matures.

Q2. Do you know where can I find in my Fidelity account instructions for maturing TIPS?
Q3. If I don't do anything, will Fidelity put the funds into my money market account? Or they could decide to buy a replacement TIPS for me?

With the new money, I want to buy a TIPS ETF: PIMCO's ETF LTPZ (er = 0.20%). The most natural place to do it is in Fidelity.

Q4. Are there any reasons not to get LTPZ in Fidelity, and do it in the Vanguard brokerage instead?

Thanks!
Victoria
Last edited by VictoriaF on Mon Jun 26, 2017 7:47 am, edited 1 time in total.
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Re: A TIPS is maturing in Fidelity. What to do?

Post by HueyLD » Mon Jun 26, 2017 7:47 am

Q1: the value will be approx. 41k and you can calculate the final value by looking up the inflation index ratio for the specific TIPS.

Q2 &3: no need to do anything as the maturity proceed will be credited to your MMF settlement account. There will be no reinvestment unless you initiate a buy.

Q4: if you want to consolidate your accounts, maybe. Otherwise, you can buy new TIPS in your Fido account.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 7:53 am

HueyLD wrote:Q1: the value will be approx. 41k and you can calculate the final value by looking up the inflation index ratio for the specific TIPS.
Thank you.

{Sigh of relief} I am still curious why people say that if you hold a TIPS to maturity you get the exact amount. How come that I am getting more than the exact amount? Is it the exact amount plus inflation? Is it the exact amount plus the fixed interest on the TIPS? I thought that Fidelity was depositing the interest from all my TIPS into my money market account, but I was not paying attention to the amounts.
HueyLD wrote:Q2 & Q3: no need to do anything as the maturity proceed will be credited to your MMF settlement account. There will be no reinvestment unless you initiate a buy.
{Another sigh of relief} Still, I am dismayed that Fidelity makes it difficult to do these instructions on line. I have recently made, and changed, and changed again the maturity instructions for my Ally CDs, and that was so easy.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by HueyLD » Mon Jun 26, 2017 8:07 am

At maturity, you get inflation adjusted principal plus accrued interest for the last six months. And you have received semiannual interest payments for almost 10 years.

And TIPS are complicated instruments unlike the simple plain vanilla CDs. That's why it is probably easier to invest in TIPS MF or ETF instead of individual TIPS.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 8:29 am

HueyLD wrote:At maturity, you get inflation adjusted principal plus accrued interest for the last six months. And you have received semiannual interest payments for almost 10 years.

And TIPS are complicated instruments unlike the simple plain vanilla CDs. That's why it is probably easier to invest in TIPS MF or ETF instead of individual TIPS.

Aha! I have been getting the interest but not inflation adjustments!

I have purchased several TIPS in 2007-2009 when the prices were great but was not paying attention to them since. I knew that I bought them well and assumed that Fidelity would manage them correctly. Now, I have to make maturity decisions, and I am inclined to buy LTPZ and forget about it for another 10 years.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 8:34 am

HueyLD wrote:Q4: if you want to consolidate your accounts, maybe. Otherwise, you can buy new TIPS in your Fido account.
I am lazy to investigate TIPS offerings and secondary market prices. Unless something pops-up in the Bogleheads in the next 3 weeks, I'll take an easy way out with the LTPZ.

My other thought is that, at some point, I may want to consolidate my Fidelity Roth IRA with my Vanguard Roth IRA, at Vanguard. In Roth, I don't worry about taxes, but I may not want to sell my Fidelity TIPS before closing the account.

And I don't think I can just transfer TIPS from one custodian to another.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Chip » Mon Jun 26, 2017 8:43 am

I have that same TIPS issue. I will be buying SCHP with the proceeds. It doesn't have the long duration of LTPZ but the ER is .05% vs. .20%.

In January I will swap the SCHP for a new 10 year TIPS issue at auction. 0% ER. :)

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Chip » Mon Jun 26, 2017 8:44 am

VictoriaF wrote:And I don't think I can just transfer TIPS from one custodian to another.

Victoria
Sure you can. I've done it.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Chip » Mon Jun 26, 2017 8:57 am

The Treasury is auctioning a 10 year TIPS new issue on 7/20. That would be another option for the proceeds.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by HueyLD » Mon Jun 26, 2017 9:00 am

VictoriaF wrote:Aha! I have been getting the interest but not inflation adjustments!
You have been receiving inflation adjusted interest payments for almost 10 years.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by #Cruncher » Mon Jun 26, 2017 9:02 am

VictoriaF in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3423408#p3423408]this post[/url] wrote:I am still curious why people say that if you hold a TIPS to maturity you get the exact amount. How come that I am getting more than the exact amount? Is it the exact amount plus inflation? Is it the exact amount plus the fixed interest on the TIPS?
I don't know what you mean by "exact" amount, Victoria. At maturity you receive the face value adjusted for inflation. That adjustment factor (aka index ratio) is 1.18027 (see 7/15/2017 row on this TreasuryDirect web page). You will also receive the regular semi-annual interest based on the 2.625% coupon.

Code: Select all

Principal 41,309.45 = 35000 * 1.18027
Interest     542.19 = 41309.45 * (2.625% / 2)
          ---------
Total     41,851.64
Fidelity will not automatically invest the proceeds in a new TIPS. If you wish, you can enter an order on its web site to buy one at auction. The next 10-year TIPS auction is tentatively scheduled for 7/20/2017. (Check the Upcoming Auctions web page about a week before that for the official announcement.) To reinvest the whole amount, you should order $41,000 or $42,000 face value.
VictoriaF in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3423471#p3423471]this post[/url] wrote:I am lazy to investigate TIPS offerings and secondary market prices. Unless something pops-up in the Bogleheads in the next 3 weeks, I'll take an easy way out with the LTPZ.
I can understand why you might want a TIPS fund instead of individual TIPS. But why the PIMCO LTPZ ETF? It currently holds only the eight TIPS maturing 2040 - 2047. A broad based fund like Fidelity's Fidelity® Inflation-Protected Bond Index Fund (FSIYX) or Vanguard's Inflation-Protected Securities Fund (VIPSX) would have an average duration much closer to a new 10-year TIPS.
VictoriaF in same post wrote:And I don't think I can just transfer TIPS from one custodian to another.
TIPS can be transferred in-kind from one broker to another. I've done it from Fidelity to Schwab.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by HueyLD » Mon Jun 26, 2017 9:08 am

There is an account closure fee of $50 for IRA accounts at Fidelity. I am not sure about fees associated with account closure via ACAT.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 9:29 am

HueyLD wrote:
VictoriaF wrote:Aha! I have been getting the interest but not inflation adjustments!
You have been receiving inflation adjusted interest payments for almost 10 years.
#Cruncher wrote:
VictoriaF in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3423408#p3423408]this post[/url] wrote:I am still curious why people say that if you hold a TIPS to maturity you get the exact amount. How come that I am getting more than the exact amount? Is it the exact amount plus inflation? Is it the exact amount plus the fixed interest on the TIPS?
I don't know what you mean by "exact" amount, Victoria. At maturity you receive the face value adjusted for inflation. That adjustment factor (aka index ratio) is 1.18027 (see 7/15/2017 row on this TreasuryDirect web page). You will also receive the regular semi-annual interest based on the 2.625% coupon.

Code: Select all

Principal 41,309.45 = 35000 * 1.18027
Interest     542.19 = 41309.45 * (2.625% / 2)
          ---------
Total     41,851.64
I think I got it: every six months I have been receiving inflation adjusted interest, and in July I will receive inflation adjusted principle. Thank you very much for doing the calculations for me!

#Cruncher wrote:Fidelity will not automatically invest the proceeds in a new TIPS. If you wish, you can enter an order on its web site to buy one at auction. The next 10-year TIPS auction is tentatively scheduled for 7/20/2017. (Check the Upcoming Auctions web page about a week before that for the official announcement.) To reinvest the whole amount, you should order $41,000 or $42,000 face value.
After buying great TIPS in 2007-2009, I am reluctant to get TIPS at the current rates. This is irrational, but it is what it is.

#Cruncher wrote:
VictoriaF in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3423471#p3423471]this post[/url] wrote:I am lazy to investigate TIPS offerings and secondary market prices. Unless something pops-up in the Bogleheads in the next 3 weeks, I'll take an easy way out with the LTPZ.
I can understand why you might want a TIPS fund instead of individual TIPS. But why the PIMCO LTPZ ETF? It currently holds only the eight TIPS maturing 2040 - 2047. A broad based fund like Fidelity's Fidelity® Inflation-Protected Bond Index Fund (FSIYX) or Vanguard's Inflation-Protected Securities Fund (VIPSX) would have an average duration much closer to a new 10-year TIPS.
VIPSX has the expense ratio of 0.2%. But VSIYX at 0.09% is not bad. Thanks!
#Cruncher wrote:
VictoriaF in same post wrote:And I don't think I can just transfer TIPS from one custodian to another.
TIPS can be transferred in-kind from one broker to another. I've done it from Fidelity to Schwab.
And Fidelity did not charge you for that?

Thanks a lot,
Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Dottie57 » Mon Jun 26, 2017 10:03 am

VictoriaF wrote:
HueyLD wrote:At maturity, you get inflation adjusted principal plus accrued interest for the last six months. And you have received semiannual interest payments for almost 10 years.

And TIPS are complicated instruments unlike the simple plain vanilla CDs. That's why it is probably easier to invest in TIPS MF or ETF instead of individual TIPS.

Aha! I have been getting the interest but not inflation adjustments!

I have purchased several TIPS in 2007-2009 when the prices were great but was not paying attention to them since. I knew that I bought them well and assumed that Fidelity would manage them correctly. Now, I have to make maturity decisions, and I am inclined to buy LTPZ and forget about it for another 10 years.

Victoria

Hi Victoria,

Why would you go with. A 15+ year maturity TIPS fund? Does it not have a lot of risk if the fed improves rates? NAV will go down.?

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 10:30 am

Dottie57 wrote:
VictoriaF wrote:
HueyLD wrote:At maturity, you get inflation adjusted principal plus accrued interest for the last six months. And you have received semiannual interest payments for almost 10 years.

And TIPS are complicated instruments unlike the simple plain vanilla CDs. That's why it is probably easier to invest in TIPS MF or ETF instead of individual TIPS.

Aha! I have been getting the interest but not inflation adjustments!

I have purchased several TIPS in 2007-2009 when the prices were great but was not paying attention to them since. I knew that I bought them well and assumed that Fidelity would manage them correctly. Now, I have to make maturity decisions, and I am inclined to buy LTPZ and forget about it for another 10 years.

Victoria

Hi Victoria,

Why would you go with. A 15+ year maturity TIPS fund? Does it not have a lot of risk if the fed improves rates? NAV will go down.?
Hi Dottie,

I am not saying that I am making a rational decision. I am getting $40k+ cash and need to do something with it. I don't want to buy equities, and getting replacement TIPS seems a natural course of action. Both individual TIPS and TIPS funds will decline if the rates increase, and funds/ETFs are easier to manage.

By the way, the rate increase will definitely affect normal bonds; I am not sure that TIPS will be similarly affected.

Another option is to park the money in a Roth-IRA CD at a nice rate. Until I started this thread I was assuming that I was stuck with Fidelity if I did not want to pay fees for transferring money out. Perhaps, I should consider bank and credit union CDs. As of today, NASA Federal Credit Union is paying 1.60% for a 15-months IRA CDs and 2.25% for a 4-year IRA CDs.

Victoria
Last edited by VictoriaF on Mon Jun 26, 2017 10:33 am, edited 2 times in total.
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Re: A TIPS is maturing in Fidelity. What to do?

Post by dbr » Mon Jun 26, 2017 10:30 am

Dottie57 wrote:

Hi Victoria,

Why would you go with. A 15+ year maturity TIPS fund? Does it not have a lot of risk if the fed improves rates? NAV will go down.?
Probably the most common choice would be intermediate durations such as VIPSX, and there is an intermediate TIPS ETF.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Kevin M » Mon Jun 26, 2017 11:09 am

VictoriaF wrote: After buying great TIPS in 2007-2009, I am reluctant to get TIPS at the current rates. This is irrational, but it is what it is.
If you buy a TIPS fund you are buying TIPS at current rates. The difference would be that you are buying multiple TIPS with different maturities and yields, and the fund will sell and buy TIPS (to maintain their target duration or whatever) rather than let them mature. If you buy the long-term TIPS fund you've mentioned, it's riskier than just buying another 10-year TIPS, since the duration will be longer, and the duration will not decline over time as it does for an individual TIPS.

Kevin
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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 11:14 am

Kevin M wrote:
VictoriaF wrote: After buying great TIPS in 2007-2009, I am reluctant to get TIPS at the current rates. This is irrational, but it is what it is.
If you buy a TIPS fund you are buying TIPS at current rates. The difference would be that you are buying multiple TIPS with different maturities and yields, and the fund will sell and buy TIPS (to maintain their target duration or whatever) rather than let them mature. If you buy the long-term TIPS fund you've mentioned, it's riskier than just buying another 10-year TIPS, since the duration will be longer, and the duration will not decline over time as it does for an individual TIPS.

Kevin
Great point, Kevin!

Do you think buying an IRA CD is a better move in today's environment of low, but rising, interest rates? NASA Federal Credit Union offers the best CD rates today. Ally does not offer 11-month no-penalty CDs in IRA; otherwise it would have been a good temporary solution.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Kevin M » Mon Jun 26, 2017 11:21 am

VictoriaF wrote: By the way, the rate increase will definitely affect normal bonds; I am not sure that TIPS will be similarly affected.
TIPS prices are linked to TIPS (real) yields. You can view TIPS yields here: Daily Treasury Real Yield Curve Rates. You can get more detailed TIPS quotes from the WSJ site, but the Treasury site is enough to get a good feel for the real yield curve.

Nominal and real yields don't move in lockstep, which is why the yield spreads (breakeven inflation rates) between nominal Treasuries and TIPS change over time. They do usually tend to move in the same direction, but not always, and not at the same rates:

Image
Another option is to park the money in a Roth-IRA CD at a nice rate. Until I started this thread I was assuming that I was stuck with Fidelity if I did not want to pay fees for transferring money out. Perhaps, I should consider bank and credit union CDs. As of today, NASA Federal Credit Union is paying 1.60% for a 15-months IRA CDs and 2.25% for a 4-year IRA CDs.
I have been choosing direct CDs over TIPS. First, I've been getting a nice yield premium over nominal Treasuries of same maturities--about 115 basis points average over last 6.5 years. This puts me ahead of institution investors in terms of breakeven inflation rate. Second, the early withdrawal option provides an additional inflation hedge, assuming that nominal rates increase with inflation, as they typically do.

TIPS provide more certainty in real terms, but I'm willing to accept the additional uncertainty for the juicy yield premium and low term risk (due to the early withdrawal option).

Kevin
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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 11:36 am

Kevin M wrote:I have been choosing direct CDs over TIPS. First, I've been getting a nice yield premium over nominal Treasuries of same maturities--about 115 basis points average over last 6.5 years. This puts me ahead of institution investors in terms of breakeven inflation rate. Second, the early withdrawal option provides an additional inflation hedge, assuming that nominal rates increase with inflation, as they typically do.

TIPS provide more certainty in real terms, but I'm willing to accept the additional uncertainty for the juicy yield premium and low term risk (due to the early withdrawal option).

Kevin
If Andrews Credit Union were still offering 7-year 3% IRA CDs, it would have been a no-brainer. Now, I am thinking of opening an IRA account at NASA Federal Credit Union at 1.60% for 1 year, or putting money into Andrews at 1.45%. The difference on $40,000 at 0.15% is $60.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Kevin M » Mon Jun 26, 2017 11:42 am

VictoriaF wrote: Do you think buying an IRA CD is a better move in today's environment of low, but rising, interest rates? NASA Federal Credit Union offers the best CD rates today. Ally does not offer 11-month no-penalty CDs in IRA; otherwise it would have been a good temporary solution.
Clearly that's my preference, and has been for the last 6.5 years.

The best rate for some time has been 2.50% for the 5-year at Mountain America Credit Union. I have IRA CDs there. Only downside is that the early withdrawal penalty (EWP) now is one year of interest, which has become more common than six months of interest. We periodically have seen 3% on 5-year or 7-year CDs with an EWP of six months of interest, so you might want to hold off a bit to see if something like that pops up.

Sometimes there are local deals that are better than the national deals, so also check in your area. I think I recently saw a local deal (not my location) for 5-year at 2.5% with EWP of six months of interest.

With the 5-year Treasury yield at 1.77%, 2.25% or 2.50% for a 5-year CD is pretty good, but below my average yield premium of more than 100 bps. Of course I got that average with buying some way under it and some way over it. I've been more selective (and lucky) over the last 1-2 years, with an average yield premium closer to 150 bps.

Kevin
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Angst » Mon Jun 26, 2017 12:38 pm

VictoriaF wrote:...in today's environment of low, but rising, interest rates...
Victoria,
people (including far too many Bogleheads) have been wringing their hands over an expected, imminent rise in interest rates for about 7 years now. Acting upon these kinds of crystal ball predictions is somewhat like market-timing your equity transactions. People who have stayed put rather than shortening their durations have done better, and we don't know any better now than we did over the past 7 years when rates will rise (or fall), let alone how quickly or how much. The current yield curve is the "best" predictor we have for future rates, and if 2017 has anything to say about the future, it's going to be much of the same. "Intermediate term" seems to be the happy compromise that many Bogleheads have been making; I'm a little longer overall. TIPS bonds held to maturity are perhaps one of the safest investments one can make. My alternative suggestion, Vanguard's TIPS fund VIPSX, provides the added feature of being able to easily reinvest one's dividend payments in the fund - not quite true for individual bonds. The ER of 0.20% is reasonable, but if you can invest $50k you will get the Admiral ER of 0.10%. If you should decide to invest in an ETF, you might want to confirm that your brokerage will do automatic reinvestment of dividends and capital gains for that particular ETF.

Angie

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 1:20 pm

Angst wrote:
VictoriaF wrote:...in today's environment of low, but rising, interest rates...
Victoria,
people (including far too many Bogleheads) have been wringing their hands over an expected, imminent rise in interest rates for about 7 years now. Acting upon these kinds of crystal ball predictions is somewhat like market-timing your equity transactions. People who have stayed put rather than shortening their durations have done better, and we don't know any better now than we did over the past 7 years when rates will rise (or fall), let alone how quickly or how much. The current yield curve is the "best" predictor we have for future rates, and if 2017 has anything to say about the future, it's going to be much of the same. "Intermediate term" seems to be the happy compromise that many Bogleheads have been making; I'm a little longer overall. TIPS bonds held to maturity are perhaps one of the safest investments one can make. My alternative suggestion, Vanguard's TIPS fund VIPSX, provides the added feature of being able to easily reinvest one's dividend payments in the fund - not quite true for individual bonds. The ER of 0.20% is reasonable, but if you can invest $50k you will get the Admiral ER of 0.10%. If you should decide to invest in an ETF, you might want to confirm that your brokerage will do automatic reinvestment of dividends and capital gains for that particular ETF.

Angie
I agree that market timing is a bad strategy, but it's more true for some markets than others. The stock market is the most efficient, the housing market is the least efficient, and the bond market is somewhere in-between. There is a truism that the bond return depends on the rate you buy it at, and thus the currently low rates should not be ignored.

Furthermore, individual investors have an advantage in being able to park money in CDs, including IRA CDs. And as Kevin has pointed out above, frequently CDs offer a clear advantage over TIPS.

Thank you for telling me about the Admiral version of the VIPSX, called VAIPX. I was not aware that it existed. I have compared VIPSX/VAIPX with VTIPX/VTAPX. Vanguard's longer-term TIPS funds (VIPSX/VAIPX) have a better 3-year and YTD performance, but shorter-term ones (VTIPX/VTAPX) had a better 1-year performance.

The longer funds have 39 bonds and average duration of 8.0 years.
The shorter funds have 15 bonds and average duration of 2.7 years.

The shorter term TIPS funds have 1-year performance comparable to that of currently available CDs. I am now inclined to use VTAPX as a temporary holder of my "TIPS money." But I may change my mind again after I read something else (or if some great IRA CDs appear in the next three weeks).

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by FelixTheCat » Mon Jun 26, 2017 1:26 pm

I have been trying to figure out my cash portion of my AA.

Can I ask why you are interested in TIPS? Vanguard's TIPS (VAIPX) 5 year return is .40%. Wouldn't it be better to have a 5 year CD ladder?
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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 1:32 pm

FelixTheCat wrote:I have been trying to figure out my cash portion of my AA.

Can I ask why you are interested in TIPS? Vanguard's TIPS (VAIPX) 5 year return is .40%. Wouldn't it be better to have a 5 year CD ladder?
I have plenty of CDs already, and I want to have sizeable inflation-protected holdings. When my TIPS bond matures I want to replace it with a similar investment.

VAIPX did not do well in 5 years, but it did well in 1 year. I attribute it to the Fed raising interest rates, and the Fed will continue raising rates. I can park the money in the VAIPX and in a year move it somewhere else. If in a year TIPS earnings improve, I may even buy individual TIPS at auctions.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Angst » Mon Jun 26, 2017 3:22 pm

VictoriaF wrote:Furthermore, individual investors have an advantage in being able to park money in CDs, including IRA CDs. And as Kevin has pointed out above, frequently CDs offer a clear advantage over TIPS.
Yes, of course this has been fairly true at times, but it's also premised on a bet that nominal rates will be going up and inflation isn't going to change. But if rates stay generally flat for the next 10 years, one would presumably have done better (and spent a lot less time and effort) buying a 10-yr nominal (or TIPS) once rather than rolling a 2-yr CD 5 times. (Or just having bought into an intermediate bond fund once and holding it for the 10 years.) And if rates generally trend down a bit over the next 10 years... well, we really don't know where rates are going today any more than we did 7 years ago... Nonetheless, one's safety and piece of mind are worth a lot, and you'll probably get a lot of that with short-term income investments. Personally though, the guaranteed long-term inflation protection of 10yr and longer-term TIPS buys me a lot more piece of mind than owning short-term TIPS (individually or in a fund) or CD's ever could. To each, her own. :happy

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Mon Jun 26, 2017 3:33 pm

Angst wrote:
VictoriaF wrote:Furthermore, individual investors have an advantage in being able to park money in CDs, including IRA CDs. And as Kevin has pointed out above, frequently CDs offer a clear advantage over TIPS.
Yes, of course this has been fairly true at times, but it's also premised on a bet that nominal rates will be going up and inflation isn't going to change. But if rates stay generally flat for the next 10 years, one would presumably have done better (and spent a lot less time and effort) buying a 10-yr nominal (or TIPS) once rather than rolling a 2-yr CD 5 times. (Or just having bought into an intermediate bond fund once and holding it for the 10 years.) And if rates generally trend down a bit over the next 10 years... well, we really don't know where rates are going today any more than we did 7 years ago... Nonetheless, one's safety and piece of mind are worth a lot, and you'll probably get a lot of that with short-term income investments. Personally though, the guaranteed long-term inflation protection of 10yr and longer-term TIPS buys me a lot more piece of mind than owning short-term TIPS (individually or in a fund) or CD's ever could. To each, her own. :happy
To be clear, I started this thread because I had no idea what to do about my expiring TIPS bond. And I am still thinking and considering various ideas.

And I don't have a clear notion of how much time I want to spend on managing my money. On one hand, I have better things to do with my time than watching CD and TIPS rates. On the other hand, once I start looking into something I want to bring it to a closure.

Putting the money into a short-term TIPS fund (VTAPX) would buy me some time. A bank or a credit union may offer a great rate, such as 7-year 3% recently available from Andrews. Or TIPS may start getting good rates at auctions. Or something else may happen.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Kevin M » Mon Jun 26, 2017 6:24 pm

VictoriaF wrote: Putting the money into a short-term TIPS fund (VTAPX) would buy me some time.
I wouldn't consider this fund to be a safe place to park money short term, if by safe we mean can't lose value (whether in real or nominal terms). The maximum drawdown for this fund was 3.33%; it began in April 2013 and as of the end of May 2017 had still not fully recovered. Backtest Portfolio Asset Allocation.

I certainly wouldn't base my decision on the most recent one-year return, which I doubt has much to do with increases in the federal funds rate.

If you really just want to park it while waiting for a great CD deal, I'd probably just use a money market fund. I don't know that I'd do that waiting for higher TIPS yields, but we've seen enough good CD deals over the last few years that I think it's fairly likely that one will come along within a few months.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by stlutz » Mon Jun 26, 2017 6:28 pm

What are you actually trying to accomplish with this money? You've suggested a few things and posters have suggested a few things. I think if you decide that the decision of what to do with it will be easy.

A few options:

1) Some folks use a TIPS ladder as liability matching portfolio. So, they want $X of TIPS maturing every year to fund base living expenses. That doesn't sound like what you are after. If it was and you didn't need the money now, you'd buy a new TIPS with a maturity year of when you specifically do need the money.

2) Some people just want to own TIPS as part of their fixed income allocation. In this case a generic TIPS fund or ETF like FSIYX or SCHP is the way to go. Sometimes TIPS outperform nominal bonds; sometimes they underperform. There was a recent period where they underperformed because inflation was less than expected and inflation expectations kept going down--a double negative for TIPS. In other environments, TIPS will do very well and nominal bonds won't.

3) Some people want to market time the bond market and pick the best fixed income investment at the moment. I'm not using "market time" in a pejorative way here since I do this. I was buying TIPS funds early last year when the inflation breakeven was showing them to be a great deal. I'll buy brokered CDs when the yield premium over nominal Treasuries is attractive. Kevin M regularly watches for great offers for direct CDs. If none of those options look good, well then you might just default to Total Bond. But the point here is that this does involve actively paying attention to the bond/CD market, which doesn't seem like your thing either.

As I write this, it seems like option #2 really is what you are wanting.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Tue Jun 27, 2017 2:56 pm

Kevin and stlutz,

Thank you for thoughtful responses. stlutz, you are right that I need to define what I want to do with these money, and I have not defined it yet. I'll wait a bit in hope that a solution crystallizes. There are worse things than keeping money in a money market fund.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Valuethinker » Wed Jun 28, 2017 12:56 pm

VictoriaF wrote:Kevin and stlutz,

Thank you for thoughtful responses. stlutz, you are right that I need to define what I want to do with these money, and I have not defined it yet. I'll wait a bit in hope that a solution crystallizes. There are worse things than keeping money in a money market fund.

Victoria
If you don't need the money in the next 5 years, then I would:

- split it something like 2/3rds the Vanguard TIPS fund and 1/3rd VG Short Term TIPS fund (or 60-40)

Why?

- for bonds, I generally prefer funds over ETFs, because the problem of the liquidity of the underlying assets in a major market disruption is not fully resolved (we'll find out when it happens).

- VG has a long term reputation of offering low fees to investors

- CDs are not appropriate because they term of your investment is less than your timing of need for the cash, thus you will have significant reinvestment risk, if rates are lower still when you come to renew

- if inflation exceeds expectations over the next few years, then you will be well protected

- if real interest rates rise, the longer term TIPS fund will not do as well (may fall in NAV, but you would have reinvestment of coupons). Conversely, in the meantime, the longer term TIPS bonds offer a positive real yield (at the long end of the maturities) whereas the short end (last I checked) does not

- the full VG TIPS fund has some degree of overlap with the ST TIPS fund, so you are roughly in balance between LT and ST TIPS (check that, I haven't -- I may have misunderstood the main VG TIPS fund)

My own view is that there are a lot of factors out there that could lead to higher US inflation. Granted, there are others that could lead to deflation or to sharply higher interest rates-- the latter would hit TIPS bonds as well as nominal US Treasuries.

Money that you have a need for in the less than 5 year period can appropriately be saved as bank CDs.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Kevin M » Wed Jun 28, 2017 3:05 pm

Valuethinker wrote: - CDs are not appropriate because they term of your investment is less than your timing of need for the cash, thus you will have significant reinvestment risk, if rates are lower still when you come to renew
Poppycock!

Any intermediate-term bond or bond fund has both term risk and reinvestment risk. You can buy 10-year CDs if you're more concerned about reinvestment risk than term risk. Personally, I'm more concerned about term risk, so I've been sticking with 5-7 year CDs. You can use a rolling ladder of CDs, which have about the same term risk and reinvestment risk as a rolling bond ladder or bond fund of same duration.

The thing is that you get a yield premium with CDs compared to Treasuries of same maturity, and the early withdrawal option of good direct CDs lowers the term risk significantly: win/win. My average yield premium over last 6.5 years is about 115 basis points, and over last year it's closer to 150 bps.

Currently there are no widely available CDs with those premiums, but there is a 5-year at 2.50%, so a yield premium of 67 bps over the 5-year Treasury yield of 1.83% as of yesterday.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Valuethinker » Wed Jun 28, 2017 4:30 pm

Kevin M wrote:
Valuethinker wrote: - CDs are not appropriate because they term of your investment is less than your timing of need for the cash, thus you will have significant reinvestment risk, if rates are lower still when you come to renew
Poppycock!
You use that quaint anglicism, but then you agree with me below?

I said
CDs are not appropriate because they term of your investment is less than your timing of need for the cash
Any intermediate-term bond or bond fund has both term risk and reinvestment risk.
Yes. But your need for money is 10 years. Your CD is 5 years. Do you have less reinvestment risk than a bond fund? (I think we don't have enough information to answer that question).
You can buy 10-year CDs if you're more concerned about reinvestment risk than term risk.
Now you are agreeing with me?
Personally, I'm more concerned about term risk, so I've been sticking with 5-7 year CDs. You can use a rolling ladder of CDs, which have about the same term risk and reinvestment risk as a rolling bond ladder or bond fund of same duration.
How are you defining term risk?
The thing is that you get a yield premium with CDs compared to Treasuries of same maturity, and the early withdrawal option of good direct CDs lowers the term risk significantly: win/win. My average yield premium over last 6.5 years is about 115 basis points, and over last year it's closer to 150 bps.

Currently there are no widely available CDs with those premiums, but there is a 5-year at 2.50%, so a yield premium of 67 bps over the 5-year Treasury yield of 1.83% as of yesterday.

Kevin
But what if you don't need the money for 10 years, say?

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Kevin M » Wed Jun 28, 2017 8:21 pm

Valuethinker, you said "CDs are not appropriate ...". I'm saying that you can use CDs to get similar term risk and reinvestment risk as an intermediate-term bond fund, if that's what you want. With direct CDs you actually have less term risk because of the early withdrawal option, and as I explained, you can get a juicy yield premium, so your risk-adjusted yield is better than any bond. So CDs can be very appropriate for a variety of time periods.

I'd say the majority of Bogleheads use intermediate-term bond funds with durations of 5-6 years, even though they may have a 20-50 year investment horizon. The common wisdom, based on research shared by Larry Swedroe and others, is that it's more efficient to keep term risk (duration, maturity) relatively low, and take risk on the equity side instead of the fixed-income side. So keeping term risk relatively low in a balanced portfolio is more efficient than keeping reinvestment risk low.

Victoria clearly is concerned about jumping into longer-term fixed-income at current yields; i.e., she's worried about taking on much term risk at this point. Since you can get a higher yield on a 5-year CD than the yield on a 10-year Treasury, a 5-year CD is an excellent way to get a higher risk-adjusted yield without taking much term risk. Institutional investors would love to be getting 10-year yields while only taking 5-year term risk (actually much less term risk than that with good direct CDs).

For someone who wants to take the absolute least amount of risk to meet a real liability in 10 years, the 10-year TIPS with a real yield of about 0.5% is the best choice. With the nominal 10-year Treasury yield at about 2.2%, we see that institutional investors are betting on 10-year inflation of about 1.7%. With the 5-year TIPS yield at about 0.2% and the nominal 5-year Treasury yield at about 1.8%, the 5-year inflation bet is 1.6%. A 5-year CD at 2.5% gives you an extra 70 basis points of buffer against unexpected inflation, and the early withdrawal option gives you an additional buffer. Again, most institutional investors would love to have the extra yield and breakeven inflation buffer without the extra term risk.

But if you're more worried about reinvestment risk than term risk, you can buy a 10-year CD at about the same yield--I see 2.6% for a brokered 10-year CD at Vanguard, and 2.5% for a direct 10-year CD. So you still get a yield premium of 30-40 bps over a 10-year Treasury. I don't think most investors are going to want to extend maturity from five years to 10 years for little to no additional yield, but the option is there if that's what you want.

The bottom line is that CDs, especially direct CDs (bought directly from banks or credit unions), provide a large risk-adjusted yield premium to retail investors who can take advantage of the federal deposit insurance, unlike institutional investors who cannot. CDs can be a very appropriate choice regardless of your investment horizon.

Kevin
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Re: A TIPS is maturing in Fidelity. What to do?

Post by itworks » Wed Jun 28, 2017 10:37 pm

Maybe buying individual muni bonds, issued by your state, considering you do not need the money any time soon, and you can hold the bonds until maturity.

I am also interested in buying individual bond in Fidelity, but haven't had the time to research how to do it. Now, if someone from this great community can spoon feed me :?

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Valuethinker » Thu Jun 29, 2017 5:05 am

Kevin M wrote:Valuethinker, you said "CDs are not appropriate ...". I'm saying that you can use CDs to get similar term risk and reinvestment risk as an intermediate-term bond fund, if that's what you want. With direct CDs you actually have less term risk because of the early withdrawal option, and as I explained, you can get a juicy yield premium, so your risk-adjusted yield is better than any bond. So CDs can be very appropriate for a variety of time periods.
Thank you for your clarifications, which are helpful.

Let me be clear what I think. If one has a fixed need for cash, then holding CDs with maturities up to that date works-- your portfolio is immunized.

If you have say a 10 year need for cash, and you are holding 5 year CDs, then you have reinvestment risk. You can avoid (reduce) that risk by holding bond funds (of longer term to maturity bonds).
I'd say the majority of Bogleheads use intermediate-term bond funds with durations of 5-6 years, even though they may have a 20-50 year investment horizon. The common wisdom, based on research shared by Larry Swedroe and others, is that it's more efficient to keep term risk (duration, maturity) relatively low, and take risk on the equity side instead of the fixed-income side. So keeping term risk relatively low in a balanced portfolio is more efficient than keeping reinvestment risk low.
The yield curve is traditionally upward sloping and certainly Bill Gross at Pimco built a career around that "sweet spot" of 7 years. However the yield curve is now unusually flat (has been for a number of years). It's not clear the strategy still works.

Conversely, interest rates have gone *down* rather than up, contrary to (most of our) expectations. At which point, the reinvestment risk has been higher than we expected. We can't bank on "normal circumstances" returning.

Victoria clearly is concerned about jumping into longer-term fixed-income at current yields; i.e., she's worried about taking on much term risk at this point. Since you can get a higher yield on a 5-year CD than the yield on a 10-year Treasury, a 5-year CD is an excellent way to get a higher risk-adjusted yield without taking much term risk. Institutional investors would love to be getting 10-year yields while only taking 5-year term risk (actually much less term risk than that with good direct CDs).
That's fair enough-- it's an exploitable anomaly in the market for small savers.
For someone who wants to take the absolute least amount of risk to meet a real liability in 10 years, the 10-year TIPS with a real yield of about 0.5% is the best choice. With the nominal 10-year Treasury yield at about 2.2%, we see that institutional investors are betting on 10-year inflation of about 1.7%. With the 5-year TIPS yield at about 0.2% and the nominal 5-year Treasury yield at about 1.8%, the 5-year inflation bet is 1.6%. A 5-year CD at 2.5% gives you an extra 70 basis points of buffer against unexpected inflation, and the early withdrawal option gives you an additional buffer. Again, most institutional investors would love to have the extra yield and breakeven inflation buffer without the extra term risk.

But if you're more worried about reinvestment risk than term risk, you can buy a 10-year CD at about the same yield--I see 2.6% for a brokered 10-year CD at Vanguard, and 2.5% for a direct 10-year CD. So you still get a yield premium of 30-40 bps over a 10-year Treasury. I don't think most investors are going to want to extend maturity from five years to 10 years for little to no additional yield, but the option is there if that's what you want.

The bottom line is that CDs, especially direct CDs (bought directly from banks or credit unions), provide a large risk-adjusted yield premium to retail investors who can take advantage of the federal deposit insurance, unlike institutional investors who cannot. CDs can be a very appropriate choice regardless of your investment horizon.

Kevin
I am OK with all that. Except that in Victoria's case, she is giving up inflation protection for an amount of money she might need in 10+ years time (my assumption, I don't think she explicitly stated it). She also needs simplicity.

For that reason, I think a TIPS bond fund is probably appropriate to her position, over CDs. Out beyond 5 years on CDs, I think inflation risk is starting to be a significant factor.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by bayview » Thu Jun 29, 2017 6:40 am

VictoriaF wrote:Kevin and stlutz,

Thank you for thoughtful responses. stlutz, you are right that I need to define what I want to do with these money, and I have not defined it yet. I'll wait a bit in hope that a solution crystallizes. There are worse things than keeping money in a money market fund.

Victoria
Victoria, I think I read elsewhere (probably the thread announcing possible changes in withdrawal options from TSP) that you were on the verge of moving your TSP elsewhere, perhaps delaying the decision in hopes of more flexibility.

If I may ask, if you have some portion of your TSP in the G fund, what were you planning to do with it once it was out of TSP? Since G fund is somewhat TIPS-ish (very -ish, but it has traditionally beaten inflation), I've been trying to get a feel for what equivalent non-G investments there might be.

I'd appreciate any of your thoughts on this.
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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Thu Jun 29, 2017 10:20 am

Valuethinker wrote:
Kevin M wrote:Valuethinker, you said "CDs are not appropriate ...". I'm saying that you can use CDs to get similar term risk and reinvestment risk as an intermediate-term bond fund, if that's what you want. With direct CDs you actually have less term risk because of the early withdrawal option, and as I explained, you can get a juicy yield premium, so your risk-adjusted yield is better than any bond. So CDs can be very appropriate for a variety of time periods.
Thank you for your clarifications, which are helpful.

Let me be clear what I think. If one has a fixed need for cash, then holding CDs with maturities up to that date works-- your portfolio is immunized.

If you have say a 10 year need for cash, and you are holding 5 year CDs, then you have reinvestment risk. You can avoid (reduce) that risk by holding bond funds (of longer term to maturity bonds).
I'd say the majority of Bogleheads use intermediate-term bond funds with durations of 5-6 years, even though they may have a 20-50 year investment horizon. The common wisdom, based on research shared by Larry Swedroe and others, is that it's more efficient to keep term risk (duration, maturity) relatively low, and take risk on the equity side instead of the fixed-income side. So keeping term risk relatively low in a balanced portfolio is more efficient than keeping reinvestment risk low.
The yield curve is traditionally upward sloping and certainly Bill Gross at Pimco built a career around that "sweet spot" of 7 years. However the yield curve is now unusually flat (has been for a number of years). It's not clear the strategy still works.

Conversely, interest rates have gone *down* rather than up, contrary to (most of our) expectations. At which point, the reinvestment risk has been higher than we expected. We can't bank on "normal circumstances" returning.

Victoria clearly is concerned about jumping into longer-term fixed-income at current yields; i.e., she's worried about taking on much term risk at this point. Since you can get a higher yield on a 5-year CD than the yield on a 10-year Treasury, a 5-year CD is an excellent way to get a higher risk-adjusted yield without taking much term risk. Institutional investors would love to be getting 10-year yields while only taking 5-year term risk (actually much less term risk than that with good direct CDs).
That's fair enough-- it's an exploitable anomaly in the market for small savers.
For someone who wants to take the absolute least amount of risk to meet a real liability in 10 years, the 10-year TIPS with a real yield of about 0.5% is the best choice. With the nominal 10-year Treasury yield at about 2.2%, we see that institutional investors are betting on 10-year inflation of about 1.7%. With the 5-year TIPS yield at about 0.2% and the nominal 5-year Treasury yield at about 1.8%, the 5-year inflation bet is 1.6%. A 5-year CD at 2.5% gives you an extra 70 basis points of buffer against unexpected inflation, and the early withdrawal option gives you an additional buffer. Again, most institutional investors would love to have the extra yield and breakeven inflation buffer without the extra term risk.

But if you're more worried about reinvestment risk than term risk, you can buy a 10-year CD at about the same yield--I see 2.6% for a brokered 10-year CD at Vanguard, and 2.5% for a direct 10-year CD. So you still get a yield premium of 30-40 bps over a 10-year Treasury. I don't think most investors are going to want to extend maturity from five years to 10 years for little to no additional yield, but the option is there if that's what you want.

The bottom line is that CDs, especially direct CDs (bought directly from banks or credit unions), provide a large risk-adjusted yield premium to retail investors who can take advantage of the federal deposit insurance, unlike institutional investors who cannot. CDs can be a very appropriate choice regardless of your investment horizon.

Kevin
I am OK with all that. Except that in Victoria's case, she is giving up inflation protection for an amount of money she might need in 10+ years time (my assumption, I don't think she explicitly stated it). She also needs simplicity.

For that reason, I think a TIPS bond fund is probably appropriate to her position, over CDs. Out beyond 5 years on CDs, I think inflation risk is starting to be a significant factor.
Kevin and Valuethinker,

Thank you very much for the discussion! It is very helpful to me.

Here is the essence of my fixed-income situation:
1. In 2007-2009 I have purchased a number of TIPS at over 2% real rates. These TIPS were excellent investments but they created an anchoring bias. It's psychologically hard for me to replace a 2% TIPS with a 0.5% TIPS.
.
2. For many years my fixed income strategy was the TSP G-fund. Now I am moving money from the G Fund to other custodians and making conversions. Some of my recent conversions went into the Andrews Federal Credit Union 7-year 3% CDs. My second anchoring bias is the expectation that Andrews would offer these rates again soon.
.
3. I started this thread because I had to make a decision about a maturing TIPS bond. From the responses, I have learned two practical facts that
(a) if I don't do anything, Fidelity will move the money into my Roth money market, and
(b) I can transfer money and even ETFs from Fidelity to Vanguard without penalty.
.
4. While I don't need to act on the maturing TIPS immediately, I need to develop a long-term strategy.
.
5. For the next several years I am inclined to opportunistically buy CDs and TIPS when making annual Roth conversions and cashing maturing CDs and TIPS.
.
6. After the age of 70, I will reach a steady state. I will start receiving Social Security and all my retirement funds will be in Roth. At that time, I will design my investment strategy to do liability matching.

These are my thoughts as of this writing. I can be swayed by good arguments.

Victoria
Last edited by VictoriaF on Thu Jun 29, 2017 10:27 am, edited 2 times in total.
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Re: A TIPS is maturing in Fidelity. What to do?

Post by Valuethinker » Thu Jun 29, 2017 10:23 am

VictoriaF wrote:
Valuethinker wrote:
Kevin M wrote:Valuethinker, you said "CDs are not appropriate ...". I'm saying that you can use CDs to get similar term risk and reinvestment risk as an intermediate-term bond fund, if that's what you want. With direct CDs you actually have less term risk because of the early withdrawal option, and as I explained, you can get a juicy yield premium, so your risk-adjusted yield is better than any bond. So CDs can be very appropriate for a variety of time periods.
Thank you for your clarifications, which are helpful.

Let me be clear what I think. If one has a fixed need for cash, then holding CDs with maturities up to that date works-- your portfolio is immunized.

If you have say a 10 year need for cash, and you are holding 5 year CDs, then you have reinvestment risk. You can avoid (reduce) that risk by holding bond funds (of longer term to maturity bonds).
I'd say the majority of Bogleheads use intermediate-term bond funds with durations of 5-6 years, even though they may have a 20-50 year investment horizon. The common wisdom, based on research shared by Larry Swedroe and others, is that it's more efficient to keep term risk (duration, maturity) relatively low, and take risk on the equity side instead of the fixed-income side. So keeping term risk relatively low in a balanced portfolio is more efficient than keeping reinvestment risk low.
The yield curve is traditionally upward sloping and certainly Bill Gross at Pimco built a career around that "sweet spot" of 7 years. However the yield curve is now unusually flat (has been for a number of years). It's not clear the strategy still works.

Conversely, interest rates have gone *down* rather than up, contrary to (most of our) expectations. At which point, the reinvestment risk has been higher than we expected. We can't bank on "normal circumstances" returning.

Victoria clearly is concerned about jumping into longer-term fixed-income at current yields; i.e., she's worried about taking on much term risk at this point. Since you can get a higher yield on a 5-year CD than the yield on a 10-year Treasury, a 5-year CD is an excellent way to get a higher risk-adjusted yield without taking much term risk. Institutional investors would love to be getting 10-year yields while only taking 5-year term risk (actually much less term risk than that with good direct CDs).
That's fair enough-- it's an exploitable anomaly in the market for small savers.
For someone who wants to take the absolute least amount of risk to meet a real liability in 10 years, the 10-year TIPS with a real yield of about 0.5% is the best choice. With the nominal 10-year Treasury yield at about 2.2%, we see that institutional investors are betting on 10-year inflation of about 1.7%. With the 5-year TIPS yield at about 0.2% and the nominal 5-year Treasury yield at about 1.8%, the 5-year inflation bet is 1.6%. A 5-year CD at 2.5% gives you an extra 70 basis points of buffer against unexpected inflation, and the early withdrawal option gives you an additional buffer. Again, most institutional investors would love to have the extra yield and breakeven inflation buffer without the extra term risk.

But if you're more worried about reinvestment risk than term risk, you can buy a 10-year CD at about the same yield--I see 2.6% for a brokered 10-year CD at Vanguard, and 2.5% for a direct 10-year CD. So you still get a yield premium of 30-40 bps over a 10-year Treasury. I don't think most investors are going to want to extend maturity from five years to 10 years for little to no additional yield, but the option is there if that's what you want.

The bottom line is that CDs, especially direct CDs (bought directly from banks or credit unions), provide a large risk-adjusted yield premium to retail investors who can take advantage of the federal deposit insurance, unlike institutional investors who cannot. CDs can be a very appropriate choice regardless of your investment horizon.

Kevin
I am OK with all that. Except that in Victoria's case, she is giving up inflation protection for an amount of money she might need in 10+ years time (my assumption, I don't think she explicitly stated it). She also needs simplicity.

For that reason, I think a TIPS bond fund is probably appropriate to her position, over CDs. Out beyond 5 years on CDs, I think inflation risk is starting to be a significant factor.
Kevin and Valuethinker,

Thank you very much for the discussion! It is very helpful to me.

Here is the essence of my fixed-income situation:
1. In 2007-2009 I have purchased a number of TIPS at over 2% real rates. These TIPS were excellent investments but they created an anchoring bias. It's psychologically hard for me to replace a 2% TIPS with a 0.5% TIPS.
2. For many years my fixed income strategy was the TSP G-fund. Now I am moving money from the G Fund to other custodians and making conversions. Some of my recent conversions went into the Andrews Federal Credit Union 7-year 3% CDs. My second anchoring bias is the expectation that Andrews would offer these rates again soon.
3. I started this thread because I had to make a decision about a maturing TIPS bond. I have learned two practical facts that
(a) if I don't do anything, Fidelity will move the money into my Roth money market, and
(b) I can transfer money and even ETFs from Fidelity to Vanguard without penalty.
4. While I don't need to act on the maturing TIPS immediately, I need to develop a long-term strategy.
5. For the next several years I am inclined to opportunistically buy CDs and TIPS when making annual Roth conversions and cashing maturing TIPS.
6. After the age of 70, I will reach a steady state. I will start receiving Social Security and all my retirement funds will be in Roth. At that time, I will design my investment strategy to do liability matching.

These are my thoughts as of this writing. I can be swayed by good arguments.

Victoria
None of that is unreasonable.

A mistake that I have made (repeatedly) is to keep cash around "waiting for the right opportunity". As interest rates have fallen constantly, almost, that has never come. A bond fund would have been a better investment.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Thu Jun 29, 2017 10:44 am

bayview wrote:
VictoriaF wrote:Kevin and stlutz,

Thank you for thoughtful responses. stlutz, you are right that I need to define what I want to do with these money, and I have not defined it yet. I'll wait a bit in hope that a solution crystallizes. There are worse things than keeping money in a money market fund.

Victoria
Victoria, I think I read elsewhere (probably the thread announcing possible changes in withdrawal options from TSP) that you were on the verge of moving your TSP elsewhere, perhaps delaying the decision in hopes of more flexibility.

If I may ask, if you have some portion of your TSP in the G fund, what were you planning to do with it once it was out of TSP? Since G fund is somewhat TIPS-ish (very -ish, but it has traditionally beaten inflation), I've been trying to get a feel for what equivalent non-G investments there might be.

I'd appreciate any of your thoughts on this.
bayview,

The TSP G-Fund is one reason for my poor fixed-income strategy. I was hoping that the TSP would allow in-plan Roth conversions, but that is not happening. I was also delaying transferring my TSP money to other custodians hoping that the TSP would allow multiple withdrawals. This may happen before I have to make my second and final withdrawal.

1) IF I could keep some money in the TSP while annually withdrawing and converting elsewhere.
2) IF the TSP at some point allowed in-plan Roth conversions.
3) IF the TSP at some point allowed to transfer Roth funds from other custodians back into the TSP.
---> I would be happy to keep all my fixed income in the Roth-TSP-G fund.

However my conditions 1, 2, and 3 may never happen. Or they may happen when it's too late for me.

As I wrote in the post above, after the age of 70, I will reach a steady state of my income and assets. At that time I will define a steady fixed-income strategy. At the DC Bogleheads meetings we had several discussions of liability matching. Bob K recommends getting TIPS and equivalents (TIPS funds, TIPS ETFs) that in combination match a half of one's life expectancy. After the age of 70, I will do something like that.

In the mean time, I am investing my fixed income in whatever looks good at the moment. This approach has flaws, as Valuethinker has pointed out, but I have a good buffer and with Roth I can make changes without incurring tax consequences.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: A TIPS is maturing in Fidelity. What to do?

Post by bayview » Thu Jun 29, 2017 11:24 am

VictoriaF wrote:
bayview wrote:
VictoriaF wrote:Kevin and stlutz,

Thank you for thoughtful responses. stlutz, you are right that I need to define what I want to do with these money, and I have not defined it yet. I'll wait a bit in hope that a solution crystallizes. There are worse things than keeping money in a money market fund.

Victoria
Victoria, I think I read elsewhere (probably the thread announcing possible changes in withdrawal options from TSP) that you were on the verge of moving your TSP elsewhere, perhaps delaying the decision in hopes of more flexibility.

If I may ask, if you have some portion of your TSP in the G fund, what were you planning to do with it once it was out of TSP? Since G fund is somewhat TIPS-ish (very -ish, but it has traditionally beaten inflation), I've been trying to get a feel for what equivalent non-G investments there might be.

I'd appreciate any of your thoughts on this.
bayview,

The TSP G-Fund is one reason for my poor fixed-income strategy. I was hoping that the TSP would allow in-plan Roth conversions, but that is not happening. I was also delaying transferring my TSP money to other custodians hoping that the TSP would allow multiple withdrawals. This may happen before I have to make my second and final withdrawal.

1) IF I could keep some money in the TSP while annually withdrawing and converting elsewhere.
2) IF the TSP at some point allowed in-plan Roth conversions.
3) IF the TSP at some point allowed to transfer Roth funds from other custodians back into the TSP.
---> I would be happy to keep all my fixed income in the Roth-TSP-G fund.

However my conditions 1, 2, and 3 may never happen. Or they may happen when it's too late for me.

Victoria
Thanks for your reply. I'm glad I'm not the only one who perhaps excessively loves the G fund. At the moment, our plans are to have everything else Roth and accept the taxable RMDs from a TSP account made up mostly of G fund. (We have the advantage of not having a ton of money in TSP :D, so the taxes won't screw up tax brackets, Medicare B, SS, etc.)
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: A TIPS is maturing in Fidelity. What to do?

Post by Kevin M » Thu Jun 29, 2017 12:07 pm

Valuethinker wrote: Let me be clear what I think. If one has a fixed need for cash, then holding CDs with maturities up to that date works-- your portfolio is immunized.
Yes, if you have a known nominal liability, then a CD or Treasury with a maturity matching the liability is a risk-free asset. Unless there are other relevant factors, the security with the higher yield is preferable (and this has consistently been CDs over at least the last seven years for maturities out to 10 years). If the liability is real, then a TIPS of matching maturity is the riskless asset.

So if what you' want is a riskless asset for your particular needs, we know how to select that. However, you may be willing to take some risk in return for higher expected return. This is why most of us hold some stocks, which have no maturity date, and therefore are never riskless in terms of meeting a known liability. Many of us also take some credit risk in our fixed-income holdings, even though this adds uncertainty to our expected return over any given time period.

Similarly, many of us take term risk and/or reinvestment risk and/or inflation risk that may cause our fixed income to not be riskless given a timeframe and nature (nominal or real) for future liabilities. Again, many Bogleheads hold nominal, intermediate-term bond funds (or even short term), even though the liabilities that these will eventually be used to fund are long-term and real, and they count on their stocks to provide the long-term, real growth that they need. They have chosen to take certain risks in return for a higher expected (but uncertain) return than they can get with long-term TIPS, which would be the more appropriate asset if minimizing risk were the only objective.
If you have say a 10 year need for cash, and you are holding 5 year CDs, then you have reinvestment risk. You can avoid (reduce) that risk by holding bond funds (of longer term to maturity bonds).
As discussed above, a 10-year Treasury, either nominal or real, is the riskless asset for a 10-year liability, either nominal or real. Any typical bond fund introduces some risk, since the fund does not mature, and hence can't be used to precisely match a 10-year liability. There is wide variation in the 10-year returns of intermediate-term bond funds relative to the initial yield--+/-50 basis points annualized is common, and it can be +/- 1 percentage point or more, which adds up to a lot over 10 years.

You can mitigate this by matching the duration of your bond funds to the duration of your liabilities, but this requires frequently exchanging shares from a longer-term fund to a shorter-term fund to match the decreasing duration of the liabilities. This approach is used by some forum members, using long-term and short-term TIPS funds in lieu of a TIPS ladder, while others stick with the ladder since it can be more reliable in matching liabilities precisely, and less maintenance is required.

The problem with using TIPS funds or ladders is the low yields. If you believe low yields are here to stay, or you simply don't want to take any risk in return for the prospect of higher returns, then a duration-matched TIPS ladder or set of funds is the way to go. Higher future yields (i.e., the term risk shows up) in this case are realized as opportunity cost--you would have been able to have even more money by rolling shorter-duration TIPS or sticking with shorter-duration TIPS funds--but if safety is your only concern, then you accept this as the price for safety. You're not taking any significant reinvestment risk, and you have decided that the term risk is irrelevant to your needs.

But some of us with investment horizons of much longer than 5-7 years prefer to take some reinvestment risk while keeping term risk to a minimum in return for a large yield premium over Treasuries. This is what CDs--especially really good direct CDs--provide. Expected inflation is built into the yields of nominal Treasuries (other than at the very short end in recent years), and I'm willing to take some unexpected inflation risk (and reinvestment risk) in return for a yield premium of 100 basis points or more along with very low term risk.

So I'm making what I consider to be a fairly low risk bet that I'll do better with my 5-7 year CDs than I would with a 20-30 year TIPS ladder. I essentially get intermediate-term yields with short-term risk, so get the benefit of being able to quickly roll to higher yields if they occur (as with short-term nominal Treasuries), but without giving up the higher yields of intermediate-term Treasuries. I think it's a pretty good bet, given the 100 bps advantage over institutional investors making a similar bet.
The yield curve is traditionally upward sloping and certainly Bill Gross at Pimco built a career around that "sweet spot" of 7 years. However the yield curve is now unusually flat (has been for a number of years). It's not clear the strategy still works.
Not sure your premise is correct, but let's look at some actual data to check. Here is the historical yield spread between the 10-year and 2-year Treasuries, which is a common metric of yield curve steepness:

Image

Although the yield curve has been flattening over the last few years, it was at one of its steeper points as recently as December 2013, and the recent period of flattening doesn't look particularly unusual, nor is the current curve particularly flat compared to many previous periods. Of course is also is not particularly steep.

Also, I think you may have your thinking backwards. The strategy I'm familiar with, as explained by Larry Swedroe, for example, is to extend maturity when the yield curve is steep (but still not much beyond 10 years), since that's when the additional term risk is most likely to be rewarded, but otherwise stick with shorter maturities (perhaps closer to 5-7 years max). Since the yield curve is not now particularly steep, I'd think this would be even more of an argument to keep maturities relatively short (unless you want a strict, liability matching fixed-income portfolio).
Conversely, interest rates have gone *down* rather than up, contrary to (most of our) expectations. At which point, the reinvestment risk has been higher than we expected. We can't bank on "normal circumstances" returning.
Well, it depends on exactly what time period we're considering as well as what maturities. Let's look at some data. First let's look at the 5-year and 10-year Treasury yields over the last five years--a fairly common time period to consider, and one that's relevant if we're talking about 5-year CDs.

Image
We see that the 10-year yield is higher now than five years ago, but certainly lower than it's highs in 2013/2014. The 5-year yield also is significantly higher than five years ago, and although not at a peak, it's also higher than it was during most of the last five years. So it looks like term risk has shown up more than reinvestment risk over the last five years.

As a personal datapoint, one of the first direct CDs I bought was near the end of 2010--a 5-year CD with an APY of about 2.75%. The last CD I bought late last year was also a 5-year CD with an APY of about 2.75%. Along the way I bought a number of 5-year CDs at about 2%, but my more recent purchases have all been at higher yields. So for me personally, reinvestment risk has not shown up over the last 6-7 years.

But this is all backward looking. What matters to us in making investment decisions is ex-ante risk, not ex-post risk. I don't see anything that much different looking forward now than I did 6-7 years ago. Yields are historically low, and CDs offer good yield premiums over Treasuries--especially if you are patient and jump on the good deals that seem to come along on a fairly regular but unpredictable basis. The 5-year breakeven inflation rate is almost exactly what it was five years ago, so inflation expectations remain muted.

Kevin
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Re: A TIPS is maturing in Fidelity. What to do?

Post by BigJohn » Thu Jun 29, 2017 5:44 pm

VictoriaF wrote:And I don't have a clear notion of how much time I want to spend on managing my money. On one hand, I have better things to do with my time than watching CD and TIPS rates. On the other hand, once I start looking into something I want to bring it to a closure.

Putting the money into a short-term TIPS fund (VTAPX) would buy me some time. A bank or a credit union may offer a great rate, such as 7-year 3% recently available from Andrews. Or TIPS may start getting good rates at auctions. Or something else may happen.
Victoria, I'm not the bond expert that Kevin M, ValueThinker and other are but here's the question I'd ask. How are your other bond holdings invested? If, like many, you've invested or are moving to Total Bond or some other high quality, intermediate term bond fund as "good enough" for your purposes, wouldn't the analogous decision for your TIPS allocation be VIPSX or something similar? A lot of the other strategies you are contemplating will require not just time now to make a decision but a time commitment for years to come to monitor and react.

Since we are in the same retirement class I know you have lots better ways to spend your retirement so my advice would be to keep it simple and go enjoy life.

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Re: A TIPS is maturing in Fidelity. What to do?

Post by VictoriaF » Thu Jun 29, 2017 6:08 pm

BigJohn wrote:
VictoriaF wrote:And I don't have a clear notion of how much time I want to spend on managing my money. On one hand, I have better things to do with my time than watching CD and TIPS rates. On the other hand, once I start looking into something I want to bring it to a closure.

Putting the money into a short-term TIPS fund (VTAPX) would buy me some time. A bank or a credit union may offer a great rate, such as 7-year 3% recently available from Andrews. Or TIPS may start getting good rates at auctions. Or something else may happen.
Victoria, I'm not the bond expert that Kevin M, ValueThinker and other are but here's the question I'd ask. How are your other bond holdings invested? If, like many, you've invested or are moving to Total Bond or some other high quality, intermediate term bond fund as "good enough" for your purposes, wouldn't the analogous decision for your TIPS allocation be VIPSX or something similar? A lot of the other strategies you are contemplating will require not just time now to make a decision but a time commitment for years to come to monitor and react.

Since we are in the same retirement class I know you have lots better ways to spend your retirement so my advice would be to keep it simple and go enjoy life.
BigJohn,

Most of my fixed income is still in the TSP G-Fund. The TSP is a Federal equivalent of 401(k), and the G-Fund is TSP's guaranteed income equivalent. My other fixed income is in CDs from various credit unions and banks, EE bonds, I bonds, and individual TIPS. I don't hold any nominal bond funds.

I would be happy to keep TSP G-Fund for all my fixed income if I could have it in the Roth form, but as I wrote earlier, it's currently impossible and may not become possible in my Roth conversion time frame.

I like to make decisions and forget about it, even if my decisions are only "good enough." However, I will be facing fixed-income related decisions in the foreseeable future as I will be watching out for the TSP news and converting from regular retirement accounts to Roth. Eventually, I will get one or two TIPS funds and leave it alone.

Victoria
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Re: A TIPS is maturing in Fidelity. What to do?

Post by jdb » Sat Jul 01, 2017 7:15 pm

So I was reading this interesting discussion about reinvesting TIPS ladder maturities without personal involvement until just received message from Vanguard that have same TIPS issue redemption on July 15. Small world. Was one of first purchases of my TIPS ladder. I plan to use most of proceeds to buy new 10 year issues at July 20 auction. One of the good things about this site is never know when it will be of practical and immediate use. Thanks.

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