TIPS go Crazy!

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vtMaps
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Re: TIPS are going crazy!

Post by vtMaps » Thu Mar 26, 2020 2:20 pm

willthrill81 wrote:
Thu Mar 26, 2020 12:01 pm
Any clue on what's going on here? Has the market's expectation of forward inflation been that volatile? Is the relatively illiquidity of TIPS at work? Both? Something else?
The something else may be risk of deflation. Unlike a TIPS purchased at auction, a previously issued bond (with an accrued inflation adjustment) can lose principal at redemption.

--vtMaps
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vineviz
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Re: TIPS are going crazy!

Post by vineviz » Thu Mar 26, 2020 5:32 pm

vtMaps wrote:
Thu Mar 26, 2020 2:20 pm
willthrill81 wrote:
Thu Mar 26, 2020 12:01 pm
Any clue on what's going on here? Has the market's expectation of forward inflation been that volatile? Is the relatively illiquidity of TIPS at work? Both? Something else?
The something else may be risk of deflation. Unlike a TIPS purchased at auction, a previously issued bond (with an accrued inflation adjustment) can lose principal at redemption.

--vtMaps
In nominal terms, yes. However a TIPS bond held to maturity does not lose principal in real terms, no matter how it is purchased
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: TIPS are going crazy!

Post by vineviz » Thu Mar 26, 2020 5:35 pm

gmaynardkrebs wrote:
Thu Mar 26, 2020 1:57 pm
305pelusa wrote:
Thu Mar 26, 2020 1:36 pm
willthrill81 wrote:
Thu Mar 26, 2020 12:01 pm
Has the market's expectation of forward inflation been that volatile?
I would think the market’s expectation of forward inflation would have no effect on TIPs prices.
I think think the market’s current expectation of low forward inflation is quite important. When inflation is zero, real rates can't go lower than 0%, which is about where we are now. But, suppose we had 5% inflation now, at ZIRP. The Fed could give get negative real rates of -5% at ZIRP. That would also significantly boost TIPS prices.
Why do you think real rates can’t be negative? They’ve done so before and often.
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Northern Flicker
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Re: TIPS go Crazy!

Post by Northern Flicker » Thu Mar 26, 2020 6:04 pm

Risk provides no guarantee of return.

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willthrill81
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Re: TIPS are going crazy!

Post by willthrill81 » Thu Mar 26, 2020 6:14 pm

vineviz wrote:
Thu Mar 26, 2020 5:35 pm
gmaynardkrebs wrote:
Thu Mar 26, 2020 1:57 pm
305pelusa wrote:
Thu Mar 26, 2020 1:36 pm
willthrill81 wrote:
Thu Mar 26, 2020 12:01 pm
Has the market's expectation of forward inflation been that volatile?
I would think the market’s expectation of forward inflation would have no effect on TIPs prices.
I think think the market’s current expectation of low forward inflation is quite important. When inflation is zero, real rates can't go lower than 0%, which is about where we are now. But, suppose we had 5% inflation now, at ZIRP. The Fed could give get negative real rates of -5% at ZIRP. That would also significantly boost TIPS prices.
Why do you think real rates can’t be negative? They’ve done so before and often.
I'm afraid that many don't realize that negative real bond yields have occurred as often in the past as they have.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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305pelusa
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Re: TIPS go Crazy!

Post by 305pelusa » Thu Mar 26, 2020 6:27 pm

willthrill81 wrote:
Thu Mar 26, 2020 1:47 pm
305pelusa wrote:
Thu Mar 26, 2020 1:45 pm
willthrill81 wrote:
Thu Mar 26, 2020 1:38 pm
305pelusa wrote:
Thu Mar 26, 2020 1:36 pm
willthrill81 wrote:
Thu Mar 26, 2020 12:01 pm
Has the market's expectation of forward inflation been that volatile?
I would think the market’s expectation of forward inflation would have no effect on TIPs prices.
I'm not so sure.
Why would it have an effect? What’s the reason you’re unsure?
I would assume that if the market expected forward inflation to increase that TIPS would gain popularity and real yields would decline.
If forward inflation expectations increase, then nominal bond yields would increase to make them equally attractive to before. Why would TIPs be more attractive if the nominal bonds would account for that additional inflation?

Just trying to learn a bit about TIPs. Thanks.

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watchnerd
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Re: TIPS go Crazy!

Post by watchnerd » Thu Mar 26, 2020 6:37 pm

305pelusa wrote:
Thu Mar 26, 2020 6:27 pm

If forward inflation expectations increase, then nominal bond yields would increase to make them equally attractive to before. Why would TIPs be more attractive if the nominal bonds would account for that additional inflation?

Just trying to learn a bit about TIPs. Thanks.
Are you asking about bond funds or individual bonds?

Over what kind of duration?

Yes, my long Treasuries fund can increase in yield by dropping NAV. But it's not like that extra yield is free.
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Jayhawker
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Re: TIPS go Crazy!

Post by Jayhawker » Thu Mar 26, 2020 7:11 pm

For those of us who hold our TIPS in funds, like Vanguard’s VIPSX, what’s the best way to estimate the return we might expect going forward? I know funds don’t hold to maturity so nothing is exact here, just expectations. I usually use the SEC yield, but I have noticed during this crisis that the info seems stale. For example currently the webpage for the fund shows -.36% as of 3/19/20.

https://investor.vanguard.com/mutual-fu ... file/VIPSX

Would it be more useful to use the Treasury’s real yield curve page for the approximate average maturity of the fund one holds and subtract the expense ratio?

https://www.treasury.gov/resource-cente ... =realyield

I generally buy and hold, but if there’s a day or a week where TIPS yields seem abnormally high I’d like to know and potentially act. Thanks all.

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305pelusa
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Re: TIPS go Crazy!

Post by 305pelusa » Thu Mar 26, 2020 7:35 pm

watchnerd wrote:
Thu Mar 26, 2020 6:37 pm
305pelusa wrote:
Thu Mar 26, 2020 6:27 pm

If forward inflation expectations increase, then nominal bond yields would increase to make them equally attractive to before. Why would TIPs be more attractive if the nominal bonds would account for that additional inflation?

Just trying to learn a bit about TIPs. Thanks.
Are you asking about bond funds or individual bonds?

Over what kind of duration?

Yes, my long Treasuries fund can increase in yield by dropping NAV. But it's not like that extra yield is free.
Both individual treasuries and treasury bond funds, of all maturities, should decrease in NAV (increase in yield) upon an increase in forward-looking inflation all else equal.

The increase in yield directly offsets the increase in inflation. The drop in NAV is just a loss.

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watchnerd
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Re: TIPS go Crazy!

Post by watchnerd » Thu Mar 26, 2020 7:37 pm

305pelusa wrote:
Thu Mar 26, 2020 7:35 pm


Both individual treasuries and treasury bond funds, of all maturities, should decrease in NAV (increase in yield) upon an increase in forward-looking inflation all else equal.

The increase in yield directly offsets the increase in inflation. The drop in NAV is just a loss.
Yes.

I guess I'm not understanding the nature of your question.

Is your question: why do people bother with TIPS at all?
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305pelusa
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Re: TIPS go Crazy!

Post by 305pelusa » Thu Mar 26, 2020 7:39 pm

watchnerd wrote:
Thu Mar 26, 2020 7:37 pm
305pelusa wrote:
Thu Mar 26, 2020 7:35 pm


Both individual treasuries and treasury bond funds, of all maturities, should decrease in NAV (increase in yield) upon an increase in forward-looking inflation all else equal.

The increase in yield directly offsets the increase in inflation. The drop in NAV is just a loss.
Yes.

I guess I'm not understanding the nature of your question.

Is your question: why do people bother with TIPS at all?
I don’t have a question. I’m just stating that a change in future expected inflation has a huge effect on nominal bonds and should have little (and theoretically no) effect on bonds indexed to inflation (TIPs).

If that’s not the case, then feel free to correct me.

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watchnerd
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Re: TIPS go Crazy!

Post by watchnerd » Thu Mar 26, 2020 7:43 pm

305pelusa wrote:
Thu Mar 26, 2020 7:39 pm
watchnerd wrote:
Thu Mar 26, 2020 7:37 pm
305pelusa wrote:
Thu Mar 26, 2020 7:35 pm


Both individual treasuries and treasury bond funds, of all maturities, should decrease in NAV (increase in yield) upon an increase in forward-looking inflation all else equal.

The increase in yield directly offsets the increase in inflation. The drop in NAV is just a loss.
Yes.

I guess I'm not understanding the nature of your question.

Is your question: why do people bother with TIPS at all?
I don’t have a question. I’m just stating that a change in future expected inflation has a huge effect on nominal bonds and should have little (and theoretically no) effect on bonds indexed to inflation (TIPs).

If that’s not the case, then feel free to correct me.
TIPS fluctuate according to both CPI and duration risk.

Long TIPS movements are less CPI dominated (i.e. have more duration noise) than short TIPS (which are more CPI dominated).
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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305pelusa
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Re: TIPS go Crazy!

Post by 305pelusa » Thu Mar 26, 2020 7:50 pm

watchnerd wrote:
Thu Mar 26, 2020 7:43 pm
305pelusa wrote:
Thu Mar 26, 2020 7:39 pm
watchnerd wrote:
Thu Mar 26, 2020 7:37 pm
305pelusa wrote:
Thu Mar 26, 2020 7:35 pm


Both individual treasuries and treasury bond funds, of all maturities, should decrease in NAV (increase in yield) upon an increase in forward-looking inflation all else equal.

The increase in yield directly offsets the increase in inflation. The drop in NAV is just a loss.
Yes.

I guess I'm not understanding the nature of your question.

Is your question: why do people bother with TIPS at all?
I don’t have a question. I’m just stating that a change in future expected inflation has a huge effect on nominal bonds and should have little (and theoretically no) effect on bonds indexed to inflation (TIPs).

If that’s not the case, then feel free to correct me.
TIPS fluctuate according to both CPI and duration risk.

Long TIPS movements are less CPI dominated (i.e. have more duration noise) than short TIPS (which are more CPI dominated).
I don’t understand why the price or yield of a TIP would change at all from changes in CPI. Can you explain why?

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FIREchief
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Re: TIPS go Crazy!

Post by FIREchief » Thu Mar 26, 2020 7:57 pm

305pelusa wrote:
Thu Mar 26, 2020 7:39 pm
watchnerd wrote:
Thu Mar 26, 2020 7:37 pm
305pelusa wrote:
Thu Mar 26, 2020 7:35 pm


Both individual treasuries and treasury bond funds, of all maturities, should decrease in NAV (increase in yield) upon an increase in forward-looking inflation all else equal.

The increase in yield directly offsets the increase in inflation. The drop in NAV is just a loss.
Yes.

I guess I'm not understanding the nature of your question.

Is your question: why do people bother with TIPS at all?
I don’t have a question. I’m just stating that a change in future expected inflation has a huge effect on nominal bonds and should have little (and theoretically no) effect on bonds indexed to inflation (TIPs).

If that’s not the case, then feel free to correct me.
If I understand what you're saying, than I agree with you. That said, it goes beyond the current breakeven inflation rate between TIPS and nominals. A large number (vast majority?) of folks currently have close to zero fear or expectation of runaway inflation. As a result, the insurance premium with TIPS right now is negligible. If breakeven inflation rates suddenly double, I would expect that a large number would "wake up" and suddenly value the inflation protection with TIPS much higher, thus being willing to pay a higher insurance premium. This would affect the price of TIPS.
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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watchnerd
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Re: TIPS go Crazy!

Post by watchnerd » Thu Mar 26, 2020 7:58 pm

305pelusa wrote:
Thu Mar 26, 2020 7:50 pm

I don’t understand why the price or yield of a TIP would change at all from changes in CPI. Can you explain why?
Because the inflation adjustment of TIPS comes from adjusting the principal according to CPI.
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305pelusa
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Re: TIPS go Crazy!

Post by 305pelusa » Thu Mar 26, 2020 8:33 pm

watchnerd wrote:
Thu Mar 26, 2020 7:58 pm
305pelusa wrote:
Thu Mar 26, 2020 7:50 pm

I don’t understand why the price or yield of a TIP would change at all from changes in CPI. Can you explain why?
Because the inflation adjustment of TIPS comes from adjusting the principal according to CPI.
That’s over the life of the bond. I’m not sure I’m explaining myself well. Fire chief understood though. A change in CPI has little effect immediately on a TIP yield since the TIP yield is a real yield.

One way where inflation might affect the price or yield of a TIP would be a change in the premium for the inflation protection. That point is well taken.
FIREchief wrote:
Thu Mar 26, 2020 7:57 pm
305pelusa wrote:
Thu Mar 26, 2020 7:39 pm
watchnerd wrote:
Thu Mar 26, 2020 7:37 pm
305pelusa wrote:
Thu Mar 26, 2020 7:35 pm


Both individual treasuries and treasury bond funds, of all maturities, should decrease in NAV (increase in yield) upon an increase in forward-looking inflation all else equal.

The increase in yield directly offsets the increase in inflation. The drop in NAV is just a loss.
Yes.

I guess I'm not understanding the nature of your question.

Is your question: why do people bother with TIPS at all?
I don’t have a question. I’m just stating that a change in future expected inflation has a huge effect on nominal bonds and should have little (and theoretically no) effect on bonds indexed to inflation (TIPs).

If that’s not the case, then feel free to correct me.
If I understand what you're saying, than I agree with you. That said, it goes beyond the current breakeven inflation rate between TIPS and nominals. A large number (vast majority?) of folks currently have close to zero fear or expectation of runaway inflation. As a result, the insurance premium with TIPS right now is negligible. If breakeven inflation rates suddenly double, I would expect that a large number would "wake up" and suddenly value the inflation protection with TIPS much higher, thus being willing to pay a higher insurance premium. This would affect the price of TIPS.

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watchnerd
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Re: TIPS go Crazy!

Post by watchnerd » Thu Mar 26, 2020 8:52 pm

305pelusa wrote:
Thu Mar 26, 2020 8:33 pm
watchnerd wrote:
Thu Mar 26, 2020 7:58 pm
305pelusa wrote:
Thu Mar 26, 2020 7:50 pm

I don’t understand why the price or yield of a TIP would change at all from changes in CPI. Can you explain why?
Because the inflation adjustment of TIPS comes from adjusting the principal according to CPI.
That’s over the life of the bond. I’m not sure I’m explaining myself well. Fire chief understood though. A change in CPI has little effect immediately on a TIP yield since the TIP yield is a real yield.
Yep.

But if you have a bond fund of TIPS, the bonds are continuously maturing (well, twice a year), reflecting that CPI adjustment.
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Angst
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Re: TIPS go Crazy!

Post by Angst » Thu Mar 26, 2020 10:34 pm

305pelusa wrote:
Thu Mar 26, 2020 7:39 pm
I don’t have a question. I’m just stating that a change in future expected inflation has a huge effect on nominal bonds and should have little (and theoretically no) effect on bonds indexed to inflation (TIPs).

If that’s not the case, then feel free to correct me.
First, I don't think it's taken as fact or law that any given change in future inflation expectations necessarily means an equal change in the spread between nominal and real yields, or vice versa. I'd say that it's simply considered a reasonable interpretation or insight. I DO think this has a lot of the "chicken and the egg" going on in it though, and so one does not necessarily imply or lead to the other. Perhaps, each of them reflects the other, like an identity.

Second, it's solely the spread that matters, not the movement of nominals vis à vis static TIPS as you seem to want to frame it. TIPS rates could drop 1% while nominals stay the same, or nominals could go up 1% while TIPS stay the same, it doesn't matter. More likely, they both move, and it still doesn't matter what direction either of them go. As long as they simply net out to an increase in spread of 1%, then all of these examples suggest the same 1% increase in future inflation expectations.

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gmaynardkrebs
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Re: TIPS are going crazy!

Post by gmaynardkrebs » Thu Mar 26, 2020 10:59 pm

vineviz wrote:
Thu Mar 26, 2020 5:35 pm
gmaynardkrebs wrote:
Thu Mar 26, 2020 1:57 pm
305pelusa wrote:
Thu Mar 26, 2020 1:36 pm
willthrill81 wrote:
Thu Mar 26, 2020 12:01 pm
Has the market's expectation of forward inflation been that volatile?
I would think the market’s expectation of forward inflation would have no effect on TIPs prices.
I think think the market’s current expectation of low forward inflation is quite important. When inflation is zero, real rates can't go lower than 0%, which is about where we are now. But, suppose we had 5% inflation now, at ZIRP. The Fed could give get negative real rates of -5% at ZIRP. That would also significantly boost TIPS prices.
Why do you think real rates can’t be negative? They’ve done so before and often.
Real rates can't be negative when inflation is expected to be zero or less than zero (ie., deflation) and where the entire nominal yield curve is at the zero bound. That's why the EU has had to impose negative nominal rates -- to eliminate the lower bound and allow even lower real rates.

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305pelusa
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Re: TIPS go Crazy!

Post by 305pelusa » Thu Mar 26, 2020 11:27 pm

Angst wrote:
Thu Mar 26, 2020 10:34 pm
Second, it's solely the spread that matters, not the movement of nominals vis à vis static TIPS as you seem to want to frame it. TIPS rates could drop 1% while nominals stay the same, or nominals could go up 1% while TIPS stay the same, it doesn't matter. More likely, they both move, and it still doesn't matter what direction either of them go. As long as they simply net out to an increase in spread of 1%, then all of these examples suggest the same 1% increase in future inflation expectations.
I argue it's not just the spread that matters; I am saying all of the change in spread must come from the nominal bonds increasing that 1%. The TIPs yield is a real yield, theoretically unaffected by nominal numbers. Imagine we were in Venezuela and the government offered 5% inflation-adjusted bonds. Then they proceeded to print money like they do, leading to 1000% inflation. I argue the real yield of any investment should remain unaffected by this. Why would it change? The 5% figure simply means your money will grow, inflation-adjusted, by 5% CAGR. An increase in inflation is simply met by an increasingly larger TIP principal amount such that its constant 5% yield provides an inflation-adjusted stream. On the other hand, rates on nominal bonds would skyrocket by 1000%.

I'm getting tripped up because, fundamentally, real rates simply represent the cost of safe capital in terms of goods and services. It should be unaffected by a government printing more or less currency. Now, there might be second-order effects, like how taming down hyperinflation would lead to a more productive society, which would raise real yields. But to first order, I don't the influence an inflation expectation would have on real yields.

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Re: TIPS go Crazy!

Post by willthrill81 » Thu Mar 26, 2020 11:44 pm

305pelusa wrote:
Thu Mar 26, 2020 11:27 pm
Angst wrote:
Thu Mar 26, 2020 10:34 pm
Second, it's solely the spread that matters, not the movement of nominals vis à vis static TIPS as you seem to want to frame it. TIPS rates could drop 1% while nominals stay the same, or nominals could go up 1% while TIPS stay the same, it doesn't matter. More likely, they both move, and it still doesn't matter what direction either of them go. As long as they simply net out to an increase in spread of 1%, then all of these examples suggest the same 1% increase in future inflation expectations.
I argue it's not just the spread that matters; I am saying all of the change in spread must come from the nominal bonds increasing that 1%. The TIPs yield is a real yield, theoretically unaffected by nominal numbers. Imagine we were in Venezuela and the government offered 5% inflation-adjusted bonds. Then they proceeded to print money like they do, leading to 1000% inflation. I argue the real yield of any investment should remain unaffected by this. Why would it change? The 5% figure simply means your money will grow, inflation-adjusted, by 5% CAGR. An increase in inflation is simply met by an increasingly larger TIP principal amount such that its constant 5% yield provides an inflation-adjusted stream. On the other hand, rates on nominal bonds would skyrocket by 1000%.

I'm getting tripped up because, fundamentally, real rates simply represent the cost of safe capital in terms of goods and services. It should be unaffected by a government printing more or less currency. Now, there might be second-order effects, like how taming down hyperinflation would lead to a more productive society, which would raise real yields. But to first order, I don't the influence an inflation expectation would have on real yields.
The value of TIPS that were already purchased would not change in your example. But given the choice between nominal bonds paying less than 1005% interest, everyone would prefer TIPS, and the resulting yield on new TIPS would plummet.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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gmaynardkrebs
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Re: TIPS go Crazy!

Post by gmaynardkrebs » Thu Mar 26, 2020 11:51 pm

305pelusa wrote:
Thu Mar 26, 2020 11:27 pm
Imagine we were in Venezuela and the government offered 5% inflation-adjusted bonds. Then they proceeded to print money like they do, leading to 1000% inflation. I argue the real yield of any investment should remain unaffected by this. Why would it change? The 5% figure simply means your money will grow, inflation-adjusted, by 5% CAGR. An increase in inflation is simply met by an increasingly larger TIP principal amount such that its constant 5% yield provides an inflation-adjusted stream.
Which is why a government, such as Venezuela, that wants to monetize the debt would not issue TIPS -- defeats the entire purpose of the high unexpected inflation, which is to confiscate the purchasing power of creditors.

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gmaynardkrebs
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Re: TIPS go Crazy!

Post by gmaynardkrebs » Fri Mar 27, 2020 12:11 am

willthrill81 wrote:
Thu Mar 26, 2020 11:44 pm
305pelusa wrote:
Thu Mar 26, 2020 11:27 pm
Angst wrote:
Thu Mar 26, 2020 10:34 pm
Second, it's solely the spread that matters, not the movement of nominals vis à vis static TIPS as you seem to want to frame it. TIPS rates could drop 1% while nominals stay the same, or nominals could go up 1% while TIPS stay the same, it doesn't matter. More likely, they both move, and it still doesn't matter what direction either of them go. As long as they simply net out to an increase in spread of 1%, then all of these examples suggest the same 1% increase in future inflation expectations.
I argue it's not just the spread that matters; I am saying all of the change in spread must come from the nominal bonds increasing that 1%. The TIPs yield is a real yield, theoretically unaffected by nominal numbers. Imagine we were in Venezuela and the government offered 5% inflation-adjusted bonds. Then they proceeded to print money like they do, leading to 1000% inflation. I argue the real yield of any investment should remain unaffected by this. Why would it change? The 5% figure simply means your money will grow, inflation-adjusted, by 5% CAGR. An increase in inflation is simply met by an increasingly larger TIP principal amount such that its constant 5% yield provides an inflation-adjusted stream. On the other hand, rates on nominal bonds would skyrocket by 1000%.

I'm getting tripped up because, fundamentally, real rates simply represent the cost of safe capital in terms of goods and services. It should be unaffected by a government printing more or less currency. Now, there might be second-order effects, like how taming down hyperinflation would lead to a more productive society, which would raise real yields. But to first order, I don't the influence an inflation expectation would have on real yields.
The value of TIPS that were already purchased would not change in your example. But given the choice between nominal bonds paying less than 1005% interest, everyone would prefer TIPS, and the resulting yield on new TIPS would plummet.
If the nominal bond is priced to offer 1005% interest, TIPS would be priced to offer 1000% + the 5% coupon, minus the premium for unexpected inflation. It would not plunge.

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Re: TIPS go Crazy!

Post by Angst » Fri Mar 27, 2020 5:16 am

305pelusa wrote:
Thu Mar 26, 2020 11:27 pm
Angst wrote:
Thu Mar 26, 2020 10:34 pm
Second, it's solely the spread that matters, not the movement of nominals vis à vis static TIPS as you seem to want to frame it. TIPS rates could drop 1% while nominals stay the same, or nominals could go up 1% while TIPS stay the same, it doesn't matter. More likely, they both move, and it still doesn't matter what direction either of them go. As long as they simply net out to an increase in spread of 1%, then all of these examples suggest the same 1% increase in future inflation expectations.
I argue it's not just the spread that matters; I am saying all of the change in spread must come from the nominal bonds increasing that 1%. The TIPs yield is a real yield, theoretically unaffected by nominal numbers. Imagine we were in Venezuela and the government offered 5% inflation-adjusted bonds. Then they proceeded to print money like they do, leading to 1000% inflation. I argue the real yield of any investment should remain unaffected by this. Why would it change? The 5% figure simply means your money will grow, inflation-adjusted, by 5% CAGR. An increase in inflation is simply met by an increasingly larger TIP principal amount such that its constant 5% yield provides an inflation-adjusted stream. On the other hand, rates on nominal bonds would skyrocket by 1000%.

I'm getting tripped up because, fundamentally, real rates simply represent the cost of safe capital in terms of goods and services. It should be unaffected by a government printing more or less currency. Now, there might be second-order effects, like how taming down hyperinflation would lead to a more productive society, which would raise real yields. But to first order, I don't the influence an inflation expectation would have on real yields.
Just woke up, and gotta go to work! So this makes my head spin a bit... But my quick thought is simply that the 5% coupon (regardless of it's amount) is a distraction. Focus on a zero coupon real bond at auction. It's the marketplace that determines this bond's real return, not its coupon. But no time to think this through right now. When the clouds clear I might change my mind, sorry.

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Re: TIPS go Crazy!

Post by Chip » Fri Mar 27, 2020 6:27 am

Doc wrote:
Thu Mar 26, 2020 2:03 pm
[In 2008] I took losses because I had to sell Treasuries to rebalnce. And TIPS prices tanked while nominal prices soared. And that is exactly what is happening now. And the chart is for funds not ladders.
To use an old Will Rogers quote that's been circulating around the forum, I've peed on that electric fence myself. :oops:

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Re: TIPS go Crazy!

Post by grayfox » Fri Mar 27, 2020 6:28 am

305pelusa wrote:
Thu Mar 26, 2020 7:50 pm

I don’t understand why the price or yield of a TIP would change at all from changes in CPI. Can you explain why?
I will explain. There are two components to actual inflation that you observe: expect inflation and unexpected inflation. The yield on a nominal Treasury bond is real yield + expected inflation.

Let's say the real yield is 2% and the bond market expects 2% inflation. The yield on the Treasury will be 2% +2% = 4%.
Suppose actual inflation comes in at 2%. There is no surprise. You expected 2% inflation and got 2% inflation.
Instead supposed actual inflation comes in at 3%. That is a surprise. Unexpected inflation was 1%.

:idea: Nominal Treasuries have inflation expectations built into the yield. You don't need TIPS to protect against expected inflation. But nominal Treasuries don't protect against unexpected inflation.

Now let's say there is increased uncertainty about future inflation, and you want to protect against any inflation surprises. TIPS increase with actual inflation = expected + unexpected, so TIPS will protect you against the unexpected inflation. So there is a demand for TIPS, which drives the price up and the TIPS yield down. This widens the spread between nominal Treasuries and TIPS.

In the example, if real yield required is 2% and inflation expectations are 2%, the nominal will yield 4%. But if people want protection against unexpected inflation and buy more TIPS, instead of yielding 2%, TIPS might only yield 1.5%. That's the insurance premium for unexpected inflation. Nothing comes free.

For completeness, I should mention another component to the TIPS price. First there is the real yield. Second there is the unexpected-inflation insurance premium. And then there is a liquidity discount. TIPS are less liquid than nominal Treasures, so you should demand a discount on the price. The insurance premium adds to the price. Maybe the insurance premium and liquidity discount cancel each other out. But it is hard to say because you can't really measure them separately. All you know is the total price and yield.
Last edited by grayfox on Fri Mar 27, 2020 7:34 am, edited 1 time in total.
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Re: TIPS are going crazy!

Post by vineviz » Fri Mar 27, 2020 6:54 am

gmaynardkrebs wrote:
Thu Mar 26, 2020 10:59 pm
vineviz wrote:
Thu Mar 26, 2020 5:35 pm
Why do you think real rates can’t be negative? They’ve done so before and often.
Real rates can't be negative when inflation is expected to be zero or less than zero (ie., deflation) and where the entire nominal yield curve is at the zero bound. That's why the EU has had to impose negative nominal rates -- to eliminate the lower bound and allow even lower real rates.
Okay, but as you point out here there is no "zero bound" to nominal yields and thus no zero bound to real yields either.
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Re: TIPS go Crazy!

Post by vineviz » Fri Mar 27, 2020 7:07 am

Doc wrote:
Thu Mar 26, 2020 2:11 pm
watchnerd wrote:
Thu Mar 26, 2020 1:55 pm
Yeah, I don't get the concern about mark-to-market pricing concerns about individual bonds held to maturity for most people.
The only Treasuries I hold to maturity are T-Bills and a lot of the time I sell them early despite the added bookkeeping.

Most Treasury funds do not hold their assets to maturity.
With TIPS especially, I can see no good reason to go to the trouble of buying individual bonds if you're NOT going to hold them to maturity. This is a willing sacrifice of a benefit that you've explicitly paid for. With a rolling ladder of TIPS you're effectively replicating a mark-to-market TIPS fund, with all the additional complexity that introduces.

I'm swinging around to the conclusion that nominal and inflation-linked bonds are different enough that they are effectively different asset classes (as much as I despise that term).

I might even go so far as to say that an asset allocation should generally hold enough nominal LTTs that the portfolio would never need to rebalance out of TIPS and into equities, though I'm still pondering this notion.
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Re: TIPS go Crazy!

Post by 305pelusa » Fri Mar 27, 2020 7:36 am

willthrill81 wrote:
Thu Mar 26, 2020 11:44 pm
The value of TIPS that were already purchased would not change in your example... everyone would prefer TIPS, and the resulting yield on new TIPS would plummet.
What is a “resulting yield”?

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Re: TIPS go Crazy!

Post by 305pelusa » Fri Mar 27, 2020 7:39 am

vineviz wrote:
Fri Mar 27, 2020 7:07 am
With TIPS especially, I can see no good reason to go to the trouble of buying individual bonds if you're NOT going to hold them to maturity.
Individuals with long-term horizons, that want inflation-protection, and rebalance, individual TIPs make sense. And provided equities drop enough while TIPs increase enough, you might rebalance (selling them before maturity).

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Re: TIPS go Crazy!

Post by 305pelusa » Fri Mar 27, 2020 7:49 am

grayfox wrote:
Fri Mar 27, 2020 6:28 am
Now let's say there is increased uncertainty about future inflation, and you want to protect against any inflation surprises.
I appreciate the long explanation but I've agreed with that since the beginning
305pelusa wrote:
Thu Mar 26, 2020 8:33 pm
One way where inflation might affect the price or yield of a TIP would be a change in the premium for the inflation protection. That point is well taken.
gmaynardkrebs wrote:
Thu Mar 26, 2020 11:51 pm
Which is why a government, such as Venezuela, that wants to monetize the debt would not issue TIPS -- defeats the entire purpose of the high unexpected inflation, which is to confiscate the purchasing power of creditors.
Explain to me how high unexpected inflation in the Bolivar would confiscate the purchasing power of Venezuelan creditors, when the Venezuelan debt has been generated in dollars since the very beginning.

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Re: TIPS are going crazy!

Post by gmaynardkrebs » Fri Mar 27, 2020 7:50 am

vineviz wrote:
Fri Mar 27, 2020 6:54 am
gmaynardkrebs wrote:
Thu Mar 26, 2020 10:59 pm
vineviz wrote:
Thu Mar 26, 2020 5:35 pm
Why do you think real rates can’t be negative? They’ve done so before and often.
Real rates can't be negative when inflation is expected to be zero or less than zero (ie., deflation) and where the entire nominal yield curve is at the zero bound. That's why the EU has had to impose negative nominal rates -- to eliminate the lower bound and allow even lower real rates.
Okay, but as you point out here there is no "zero bound" to nominal yields and thus no zero bound to real yields either.
Correct, but just to add one point, the consensus even among proponents in the EU of negative nominal yields seems to be that -1% to -2% is about the maximum negative rate they could achieve and still allow the banking system to function. So, while -2% or -1% is better than zero, they are the lower bound for all practical purposes.

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Re: TIPS go Crazy!

Post by gmaynardkrebs » Fri Mar 27, 2020 7:54 am

305pelusa wrote:
Fri Mar 27, 2020 7:49 am
gmaynardkrebs wrote:
Thu Mar 26, 2020 11:51 pm
Which is why a government, such as Venezuela, that wants to monetize the debt would not issue TIPS -- defeats the entire purpose of the high unexpected inflation, which is to confiscate the purchasing power of creditors.
Explain to me how high unexpected inflation in the Bolivar would confiscate the purchasing power of Venezuelan creditors, when the Venezuelan debt has been generated in dollars since the very beginning.
Oh sorry, if it's denominated in dollars, you are correct. What they would do then is default, if they can get away with it, which apparently, so far they cannot.

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Re: TIPS go Crazy!

Post by Gufomel » Fri Mar 27, 2020 8:19 am

When a TIPS fund has a negative yield, do you actually have money pulled out of the fund at distribution dates rather than receive a distribution?

This is probably a really ignorant question. I’m learning a lot about nominal treasuries/TIPS right now. Well, the “learning” part might not be accurate - “consuming a lot of information” may be more accurate 8-)

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Re: TIPS go Crazy!

Post by vineviz » Fri Mar 27, 2020 8:22 am

305pelusa wrote:
Fri Mar 27, 2020 7:39 am
vineviz wrote:
Fri Mar 27, 2020 7:07 am
With TIPS especially, I can see no good reason to go to the trouble of buying individual bonds if you're NOT going to hold them to maturity.
Individuals with long-term horizons, that want inflation-protection, and rebalance, individual TIPs make sense. And provided equities drop enough while TIPs increase enough, you might rebalance (selling them before maturity).
The reality, though, is that TIPS only actually provide inflation protection when held to maturity. And any bond only provides real interest rate protection when the bond's duration matches the duration of the liability. So by definition any investor who uses either a TIPS fund or a rolling TIPS ladder is making an EXPLICIT choice to forego interest rate protection and some/most of their inflation protection.

Likewise, an investor who is willing to rebalance from TIPS (which, again, are inflation protected only when held to maturity) into stocks (which are not explicitly inflation linked) is EXPLICITLY agreeing to sacrifice inflation protection in exchange for something else by doing that rebalance.

I'd need to work through the proof, but it seems to me that it would be a rare investor who would allocate exclusively to stocks and TIPS: some combination of equity, TIPS, and nominal Treasuries is almost always going be a more efficient portfolio than one that is restricted to just equity and TIPS. And if the investor is being thoughtful about managing all the risks in the portfolio, rebalancing from TIPS into equity would be suboptimal compared to rebalancing from nominal Treasuries into equity.
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Re: TIPS go Crazy!

Post by gmaynardkrebs » Fri Mar 27, 2020 8:28 am

Gufomel wrote:
Fri Mar 27, 2020 8:19 am
When a TIPS fund has a negative yield, do you actually have money pulled out of the fund at distribution dates rather than receive a distribution?

This is probably a really ignorant question. I’m learning a lot about nominal treasuries/TIPS right now. Well, the “learning” part might not be accurate - “consuming a lot of information” may be more accurate 8-)
No, if the net yield (with inflation) is still positive, which is likely. However, in the past, in the rare quarters when there was deflation that reduced the net return to less than the coupon, Vanguard did pull some money out and send it to you, but it was treated as a "return of capital," and there were no tax consequences.

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Re: TIPS go Crazy!

Post by Gufomel » Fri Mar 27, 2020 8:31 am

gmaynardkrebs wrote:
Fri Mar 27, 2020 8:28 am
Gufomel wrote:
Fri Mar 27, 2020 8:19 am
When a TIPS fund has a negative yield, do you actually have money pulled out of the fund at distribution dates rather than receive a distribution?

This is probably a really ignorant question. I’m learning a lot about nominal treasuries/TIPS right now. Well, the “learning” part might not be accurate - “consuming a lot of information” may be more accurate 8-)
No, if the net yield (with inflation) is still positive, which is likely. However, in the past, in the rare quarters when there was deflation that reduced the net return to less than the coupon, Vanguard did pull some money out and send it to you, but it was treated as a "return of capital," and there were no tax consequences.
Thanks. I’m probably confusing yield with 30-day SEC yield. When the 30-day SEC yield is negative, what does that actually mean?

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Re: TIPS go Crazy!

Post by vineviz » Fri Mar 27, 2020 8:32 am

Gufomel wrote:
Fri Mar 27, 2020 8:19 am
When a TIPS fund has a negative yield, do you actually have money pulled out of the fund at distribution dates rather than receive a distribution?

This is probably a really ignorant question. I’m learning a lot about nominal treasuries/TIPS right now. Well, the “learning” part might not be accurate - “consuming a lot of information” may be more accurate 8-)
A TIPS fund might have a negative real yield but the total yield is a product of both the real yield and the expected rate of inflation.

So if a fund had a reported real yield of -0.2% but the bonds are currently pricing in an expectation of future inflation of 1%, you should still get a positive NOMINAL return: with dividends reinvested, your fund will be worth more in the future than it is now when measured in $$.
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Re: TIPS go Crazy!

Post by jeffyscott » Fri Mar 27, 2020 8:35 am

Gufomel wrote:
Fri Mar 27, 2020 8:19 am
When a TIPS fund has a negative yield, do you actually have money pulled out of the fund at distribution dates rather than receive a distribution?
In case of TIPS, it would be a negative real yield, so if inflation is 2% and real yield is -0.2%, you still get a positive nominal yield of 1.8%.

In the case of a nominal, when they have a negative yield it is not that you making periodic payments for the privilege of holding them, it is that the high price results in a negative return. If a 10 year bond has a face value of $1000 and a coupon of 1%, but it sells for $1200, you will have a negative return. You will be paid $10 per year for 10 years and then get the $1000 face value at maturity. So in that example you have paid $1200 now in order to get $1100 back over the next 10 years.
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Re: TIPS go Crazy!

Post by vineviz » Fri Mar 27, 2020 8:39 am

Gufomel wrote:
Fri Mar 27, 2020 8:31 am
gmaynardkrebs wrote:
Fri Mar 27, 2020 8:28 am
Gufomel wrote:
Fri Mar 27, 2020 8:19 am
When a TIPS fund has a negative yield, do you actually have money pulled out of the fund at distribution dates rather than receive a distribution?

This is probably a really ignorant question. I’m learning a lot about nominal treasuries/TIPS right now. Well, the “learning” part might not be accurate - “consuming a lot of information” may be more accurate 8-)
No, if the net yield (with inflation) is still positive, which is likely. However, in the past, in the rare quarters when there was deflation that reduced the net return to less than the coupon, Vanguard did pull some money out and send it to you, but it was treated as a "return of capital," and there were no tax consequences.
Thanks. I’m probably confusing yield with 30-day SEC yield. When the 30-day SEC yield is negative, what does that actually mean?
Thats the real yield: so-called "break-even" (or expected) inflation is currently about 0.9%, so a fund with a SEC yield of -0.2% would have an expected total yield of about 0.7%,
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Re: TIPS go Crazy!

Post by gmaynardkrebs » Fri Mar 27, 2020 8:39 am

vineviz wrote:
Fri Mar 27, 2020 8:22 am
305pelusa wrote:
Fri Mar 27, 2020 7:39 am
vineviz wrote:
Fri Mar 27, 2020 7:07 am
With TIPS especially, I can see no good reason to go to the trouble of buying individual bonds if you're NOT going to hold them to maturity.
Individuals with long-term horizons, that want inflation-protection, and rebalance, individual TIPs make sense. And provided equities drop enough while TIPs increase enough, you might rebalance (selling them before maturity).
The reality, though, is that TIPS only actually provide inflation protection when held to maturity. And any bond only provides real interest rate protection when the bond's duration matches the duration of the liability. So by definition any investor who uses either a TIPS fund or a rolling TIPS ladder is making an EXPLICIT choice to forego interest rate protection and some/most of their inflation protection.

Likewise, an investor who is willing to rebalance from TIPS (which, again, are inflation protected only when held to maturity) into stocks (which are not explicitly inflation linked) is EXPLICITLY agreeing to sacrifice inflation protection in exchange for something else by doing that rebalance.

I'd need to work through the proof, but it seems to me that it would be a rare investor who would allocate exclusively to stocks and TIPS: some combination of equity, TIPS, and nominal Treasuries is almost always going be a more efficient portfolio than one that is restricted to just equity and TIPS. And if the investor is being thoughtful about managing all the risks in the portfolio, rebalancing from TIPS into equity would be suboptimal compared to rebalancing from nominal Treasuries into equity.
I think you are right, but another factor is Treasury's unfortunate decision to reduce the principal during the term if there's deflation. That, combined with the reduction to the bond factor, made TIPS funds a less than perfect substitute for actual TIPS held to maturity. Of course, the advantage of the funds is that the increase in principal generates real cash flow to pay the tax on the "phantom" income.

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Re: TIPS go Crazy!

Post by jeffyscott » Fri Mar 27, 2020 8:58 am

Gufomel wrote:
Fri Mar 27, 2020 8:31 am
Thanks. I’m probably confusing yield with 30-day SEC yield. When the 30-day SEC yield is negative, what does that actually mean?
SEC yield is, more or less, a version of yield to maturity. But, I think it can be confusing with TIPS funds, I believe Vanguard reports it as a real yield for their TIPS funds but others do not. Vanguard shows -0.1% for VAIPX, while Fidelity shows -1.4% for FIPDX, but Vanguard is reporting some sort of real SEC yield and Fido, instead, is doing the calculation the same way as they would for a nominal bond fund.

In the nominal example that I gave, the bond has a 1% coupon, but a negative YTM. If you put a bunch of those bonds in a fund, the distributions would be the 1% coupons and my understanding is that the SEC yield should be about the same as the YTM. And the NAV would be based on the $1200 value of the bonds.
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Re: TIPS go Crazy!

Post by Gufomel » Fri Mar 27, 2020 9:04 am

jeffyscott wrote:
Fri Mar 27, 2020 8:58 am
Gufomel wrote:
Fri Mar 27, 2020 8:31 am
Thanks. I’m probably confusing yield with 30-day SEC yield. When the 30-day SEC yield is negative, what does that actually mean?
SEC yield is, more or less, a version of yield to maturity. But, I think it can be confusing with TIPS funds, I believe Vanguard reports it as a real yield for their TIPS funds but others do not. Vanguard shows -0.1% for VAIPX, while Fidelity shows -1.4% for FIPDX, but Vanguard is reporting some sort of real SEC yield and Fido, instead, is doing the calculation the same way as they would for a nominal bond fund.

In the nominal example that I gave, the bond has a 1% coupon, but a negative YTM. If you put a bunch of those bonds in a fund, the distributions would be the 1% coupons and my understanding is that the SEC yield should be about the same as the YTM. And the NAV would be based on the $1200 value of the bonds.
Thanks, ok yes I was very confused by the negative SEC yield (still am). Part of it is just trying to shift my thinking to real terms instead of nominal, which I’m not used to.

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Re: TIPS go Crazy!

Post by watchnerd » Fri Mar 27, 2020 9:38 am

vineviz wrote:
Fri Mar 27, 2020 7:07 am


I might even go so far as to say that an asset allocation should generally hold enough nominal LTTs that the portfolio would never need to rebalance out of TIPS and into equities, though I'm still pondering this notion.
That's the exactly rebalancing rule I use for LTT vs short TIPS.
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Re: TIPS go Crazy!

Post by willthrill81 » Fri Mar 27, 2020 10:08 am

305pelusa wrote:
Fri Mar 27, 2020 7:36 am
willthrill81 wrote:
Thu Mar 26, 2020 11:44 pm
The value of TIPS that were already purchased would not change in your example... everyone would prefer TIPS, and the resulting yield on new TIPS would plummet.
What is a “resulting yield”?
The new yield. Everyone would want TIPS instead of nominal bonds because the real yield would be higher for them.
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Re: TIPS go Crazy!

Post by Gufomel » Fri Mar 27, 2020 11:47 am

watchnerd wrote:
Fri Mar 27, 2020 9:38 am
vineviz wrote:
Fri Mar 27, 2020 7:07 am


I might even go so far as to say that an asset allocation should generally hold enough nominal LTTs that the portfolio would never need to rebalance out of TIPS and into equities, though I'm still pondering this notion.
That's the exactly rebalancing rule I use for LTT vs short TIPS.
Could you help me understand the logic here? Is it that your 15% allocation to LTT (based on your sig) is large enough that in the event of a down equity market, the LTT would increase in value enough to rebalance LTT to Equity and still maintain 15% in LTT and not have to tap into TIPS at all?

That seems like a large assumption to make (I’m not challenging, just trying to understand if it’s really that straight forward). Couldn’t Equity markets drop without having a sufficiently large enough run-up in LTT to compensate for it? Or is the inverse correlation really so strong that you can count on it?

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Re: TIPS go Crazy!

Post by watchnerd » Fri Mar 27, 2020 12:51 pm

Gufomel wrote:
Fri Mar 27, 2020 11:47 am

Could you help me understand the logic here? Is it that your 15% allocation to LTT (based on your sig) is large enough that in the event of a down equity market, the LTT would increase in value enough to rebalance LTT to Equity and still maintain 15% in LTT and not have to tap into TIPS at all?

That seems like a large assumption to make (I’m not challenging, just trying to understand if it’s really that straight forward). Couldn’t Equity markets drop without having a sufficiently large enough run-up in LTT to compensate for it? Or is the inverse correlation really so strong that you can count on it?
Actually, it's not really as simple as you're describing.

It's an axis of compromise.

Holding enough LTT to make them a complete hedge for equities would involve holding more LTT than I would want to own given they have significant risks of their own (duration). A simple 50/50 stock/LTT split *might* offset equity losses nearly completely in bad times, but it has a *huge* exposure to duration risk. And, at current yields, LTT may not have great returns outside of crisis times.

LTT tends to do well in a crisis, but holding enough to offset a maximal equity decline (e.g. -90%) comes at too high of a price during normal times.

Thus, the goal isn't to completely offset equities losses, but to create a more efficient frontier by using a long/short barbell than what you would get vs Intermediate Treasuries.

Plus, the barbell can be split between long nominals vs short TIPS, allowing for a deflation::inflation hedge.

The rebalancing point I was alluding to is the "need to rebalance":

1. How wide are your rebalancing bands?

My IPS defines 10% absolute bands.

2. How deep of a marketing decline are you planning for?

My IPS defines by current portfolio with an assumption of -50%. Anything beyond that is 'Plan B'.


So far this year, with 15% LTT, I only hit the rebalancing band briefly, and my existing LTT allocation was 'enough' to rebalance without touching short TIPS.
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Re: TIPS go Crazy!

Post by Gufomel » Fri Mar 27, 2020 1:58 pm

watchnerd wrote:
Fri Mar 27, 2020 12:51 pm
Gufomel wrote:
Fri Mar 27, 2020 11:47 am

Could you help me understand the logic here? Is it that your 15% allocation to LTT (based on your sig) is large enough that in the event of a down equity market, the LTT would increase in value enough to rebalance LTT to Equity and still maintain 15% in LTT and not have to tap into TIPS at all?

That seems like a large assumption to make (I’m not challenging, just trying to understand if it’s really that straight forward). Couldn’t Equity markets drop without having a sufficiently large enough run-up in LTT to compensate for it? Or is the inverse correlation really so strong that you can count on it?
Actually, it's not really as simple as you're describing.

It's an axis of compromise.

Holding enough LTT to make them a complete hedge for equities would involve holding more LTT than I would want to own given they have significant risks of their own (duration). A simple 50/50 stock/LTT split *might* offset equity losses nearly completely in bad times, but it has a *huge* exposure to duration risk. And, at current yields, LTT may not have great returns outside of crisis times.

LTT tends to do well in a crisis, but holding enough to offset a maximal equity decline (e.g. -90%) comes at too high of a price during normal times.

Thus, the goal isn't to completely offset equities losses, but to create a more efficient frontier by using a long/short barbell than what you would get vs Intermediate Treasuries.

Plus, the barbell can be split between long nominals vs short TIPS, allowing for a deflation::inflation hedge.

The rebalancing point I was alluding to is the "need to rebalance":

1. How wide are your rebalancing bands?

My IPS defines 10% absolute bands.

2. How deep of a marketing decline are you planning for?

My IPS defines by current portfolio with an assumption of -50%. Anything beyond that is 'Plan B'.


So far this year, with 15% LTT, I only hit the rebalancing band briefly, and my existing LTT allocation was 'enough' to rebalance without touching short TIPS.
Thank you for the explanation, makes sense. I’ve learned a lot from your posts throughout the forum over the past few days regarding LTT and TIPS. Your plan was definitely excellent for this crisis (and possibly for many situations as well). I’ve found out during this crisis that I’m perfectly happy with my stock allocation, but got nervous about my fixed income (largely Total Bond). As a long-term investor with pretty high equity allocation, I’ve come around very quickly to see the logic in LTT and TIPS, but I understand so little about it at this point. Don’t want to invest in something I don’t understand. It feels like selling low / buying high to shift to LTT at this point (probably not true if it’s a plan that I stick to, but I feel like it’s behavioral bias that’s pushing me to LTT).

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Re: TIPS go Crazy!

Post by vineviz » Fri Mar 27, 2020 2:30 pm

Gufomel wrote:
Fri Mar 27, 2020 1:58 pm
It feels like selling low / buying high to shift to LTT at this point (probably not true if it’s a plan that I stick to, but I feel like it’s behavioral bias that’s pushing me to LTT).
Unlike with stocks, it's pretty easy to get a pretty accurate estimate of future bond returns: just check the current yield-to-maturity (YTM).

Vanguard Total Bond Market ETF (BND) and Vanguard Long-Term Treasury ETF (VGLT) have nearly identical YTMs right now, so switching is arguably neither performance chasing nor market timing (I hope). VGLT is unlikely to outperform BND over your investment horizon, but it should definitely create a smoother ride.

My advice is to put the first 20% of your bond allocation in LTTs, and after that decide what makes the most sense. The default option - in the absence of other information - for the "next 20%" should probably be individual long-term TIPS or an intermediate-term TIPS fund like Schwab US TIPS ETF (SCHP) or Vanguard Inflation-Protected Securities Fund (VAIPX).
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Re: TIPS go Crazy!

Post by Gufomel » Fri Mar 27, 2020 2:46 pm

vineviz wrote:
Fri Mar 27, 2020 2:30 pm
Vanguard Total Bond Market ETF (BND) and Vanguard Long-Term Treasury ETF (VGLT) have nearly identical YTMs right now, so switching is arguably neither performance chasing nor market timing (I hope). VGLT is unlikely to outperform BND over your investment horizon, but it should definitely create a smoother ride.

My advice is to put the first 20% of your bond allocation in LTTs, and after that decide what makes the most sense. The default option - in the absence of other information - for the "next 20%" should probably be individual long-term TIPS or an intermediate-term TIPS fund like Schwab US TIPS ETF (SCHP) or Vanguard Inflation-Protected Securities Fund (VAIPX).
I assume by “smoother ride” you’re referring to total portfolio performance - not that VGLT itself is a smoother ride than BND?

The “first 20% in LTT” makes sense at some level - I’ve seen the post you linked recently. The part I struggle with is that I have an EF, but outside of that I look at my total portfolio as one portfolio. And while my EF is there in the case of job loss, the fixed income portion of my portfolio would be there as a 2nd level EF if necessary. Having that in LTT seems...risky. I kind of look at it the other way. The first x% should be in shorter-term fixed income and then the next x% should be in LTT. But that’s where I’m trying to learn and re-shape my thinking if needed.

But we’re way outside the scope of this thread, so this is probably suited for a portfolio review.

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