Jan 2018 TIPS Auction

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antiqueman
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Jan 2018 TIPS Auction

Post by antiqueman » Sat Jan 13, 2018 8:44 pm

Anyone considering buying at the 10 year tips auction next week?

Based on the yield of the current tips maturing in 2028, the yield next week should be between.50 and.60.

Thanks

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auntie
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Re: Jan 2018 TIPS Auction

Post by auntie » Sat Jan 13, 2018 8:53 pm

I'm buying, just like always.
High risk does not equal high reward. It equals high risk of no reward.

Gill
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Re: Jan 2018 TIPS Auction

Post by Gill » Sat Jan 13, 2018 8:54 pm

Already have my order in. This completes a ten year ladder.
Gill

antiqueman
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Re: Jan 2018 TIPS Auction

Post by antiqueman » Sat Jan 13, 2018 8:56 pm

As a follow up to my original question, will someone explain to me how the "break even " inflation rate is determined. I know determining the break even inflation rate should be simple, but for some reason I have trouble with the concept.

Thanks

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FIREchief
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Re: Jan 2018 TIPS Auction

Post by FIREchief » Sun Jan 14, 2018 12:24 am

auntie wrote:
Sat Jan 13, 2018 8:53 pm
I'm buying, just like always.
+1
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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saltycaper
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Re: Jan 2018 TIPS Auction

Post by saltycaper » Sun Jan 14, 2018 1:21 am

antiqueman wrote:
Sat Jan 13, 2018 8:56 pm
As a follow up to my original question, will someone explain to me how the "break even " inflation rate is determined. I know determining the break even inflation rate should be simple, but for some reason I have trouble with the concept.

Thanks
The breakeven inflation rate is just the rate of inflation that would cause a nominal Treasury bond to have the same return as a TIPS of equal maturity. If the nominal bond is yielding 3% and the TIPS is yielding 0.5%, the breakeven inflation rate is 2.5% (nominal yield minus TIPS yield). If inflation is less than 2.5%, the nominal bond will have a higher return. If inflation is greater than 2.5%, the TIPS will have a higher return. (Whether one should care about which security will have a higher before purchasing is a different matter.)

Trying to figure anything else from the breakeven rate, such as using it as a measure of expected inflation, gets a little hairier.

I, too, already put my order in for the upcoming auction.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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HueyLD
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Re: Jan 2018 TIPS Auction

Post by HueyLD » Sun Jan 14, 2018 9:45 am

antiqueman wrote:
Sat Jan 13, 2018 8:44 pm
Anyone considering buying at the 10 year tips auction next week?

Based on the yield of the current tips maturing in 2028, the yield next week should be between.50 and.60.
Fidelity's current YTW is 0.57% and that's usually a good estimate of the auction yield.

antiqueman
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Re: Jan 2018 TIPS Auction

Post by antiqueman » Sun Jan 14, 2018 2:27 pm

The breakeven inflation rate is just the rate of inflation that would cause a nominal Treasury bond to have the same return as a TIPS of equal maturity. If the nominal bond is yielding 3% and the TIPS is yielding 0.5%, the breakeven inflation rate is 2.5% (nominal yield minus TIPS yield). If inflation is less than 2.5%, the nominal bond will have a higher return. If inflation is greater than 2.5%, the TIPS will have a higher return. (Whether one should care about which security will have a higher before purchasing is a different matter.)

Trying to figure anything else from the breakeven rate, such as using it as a measure of expected inflation, gets a little hairier.

I, too, already put my order in for the upcoming auction.


Thank you saltycaper. It appear then that the estimated breakeven rate is around 2 % presently.

I do not believe that inflation will be that low over the next ten years. It seems that a lot of things are becoming more expensive.

I do have another question. When the term "break even inflation rate " is used is that referring to the CPI . I am assume its not Chained CPI.

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saltycaper
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Re: Jan 2018 TIPS Auction

Post by saltycaper » Sun Jan 14, 2018 2:56 pm

antiqueman wrote:
Sun Jan 14, 2018 2:27 pm

I do have another question. When the term "break even inflation rate " is used is that referring to the CPI . I am assume its not Chained CPI.
Yes, currently, the principal of a TIPS is adjusted by the Consumer Price Index for All Urban Consumers (CPI-U), not the chained CPI-U (C-CPI-U). You can read more here:

Summary of Marketable Treasury Inflation-Protected Securities
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

gilgamesh
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Re: Jan 2018 TIPS Auction

Post by gilgamesh » Sun Jan 14, 2018 4:50 pm

The 10-year break even inflation rate has been inching up and is indeed at 2% recently

https://fred.stlouisfed.org/series/T10YIE
Last edited by gilgamesh on Sun Jan 14, 2018 7:31 pm, edited 1 time in total.

mt
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Re: Jan 2018 TIPS Auction

Post by mt » Sun Jan 14, 2018 4:57 pm

I am also building a 10 year ladder and will be placing an order next week.

antiqueman
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Re: Jan 2018 TIPS Auction

Post by antiqueman » Sun Jan 14, 2018 8:54 pm

Thank you to all who replied.

Saltycaper, thank you for the CPI-U breakeven inflation rate information.

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