TIPS Yield Curve & Changing Inflation Expectations

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FIREchief
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by FIREchief » Sat Apr 18, 2020 3:45 pm

Thanks #cruncher! Great info. That inflation insurance sure looks like a great bargain right now.
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#Cruncher
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by #Cruncher » Fri May 15, 2020 7:39 pm

I've updated the breakeven calculation in this post [*] from Friday 4/17/2020 to Friday 5/15/2020 to cover 21 TIPS maturing from Jan 2021 to Feb 2050 using Friday's WSJ TIPS and nominal Treasury quotes. They range from -0.5% for the Jan 2021 TIPS maturing in about eight months, to +0.9% for the Jan 2025 five years from now, to +1.2% for both the Jan 2030 in ten years and the Feb 2040 in 20 years, to +1.5% for the Feb 2050 maturing 30 years from now.

Code: Select all

               Date        CPI
Settlement  05/18/2020  258.36926
Last known  07/01/2020  256.38900 (0.120 years)
----------- TIPS ---------    --------- Nominal --------                   BrkEven
 Matures    Coupon   Yield      Matures   Coupon   Yield   Years    CPI     Inflat

Code: Select all

01/15/2021  1.125%  1.651%    01/15/2021  2.000%  0.080%   0.663  255.717  (0.48%) <===
01/15/2022  0.125%  0.371%    01/15/2022  2.500%  0.156%   1.662  257.450   0.27% 
01/15/2023  0.125% (0.042%)   01/15/2023  1.500%  0.174%   2.661  259.858   0.53% 
01/15/2024  0.625% (0.225%)   12/31/2023  2.625%  0.221%   3.661  262.622   0.68% 
01/15/2025  0.250% (0.381%)   12/31/2024  2.250%  0.297%   4.663  266.671   0.87%  <===
01/15/2026  0.625% (0.399%)   12/31/2025  2.625%  0.389%   5.662  270.158   0.95% 
01/15/2027  0.375% (0.427%)   12/31/2026  1.750%  0.465%   6.661  274.183   1.03% 
01/15/2028  0.500% (0.429%)   02/15/2028  2.750%  0.520%   7.661  277.843   1.07% 
01/15/2029  0.875% (0.421%)   02/15/2029  2.625%  0.580%   8.663  281.754   1.11% 
01/15/2030  0.125% (0.467%)   02/15/2030  1.500%  0.628%   9.662  287.178   1.20%  <===
02/15/2040  2.125% (0.152%)   02/15/2040  4.625%  1.031%  19.745  326.020   1.23%  <===
02/15/2041  2.125% (0.144%)   02/15/2041  4.750%  1.096%  20.747  333.767   1.29% 
02/15/2042  0.750% (0.104%)   02/15/2042  3.125%  1.168%  21.747  340.205   1.32% 
02/15/2043  0.625% (0.099%)   02/15/2043  3.125%  1.224%  22.746  348.501   1.37% 
02/15/2044  1.375% (0.098%)   02/15/2044  3.625%  1.239%  23.745  354.274   1.38% 
02/15/2045  0.750% (0.104%)   02/15/2045  2.500%  1.279%  24.747  363.091   1.42% 
02/15/2046  1.000% (0.108%)   02/15/2046  2.500%  1.288%  25.747  369.338   1.43% 
02/15/2047  0.875% (0.110%)   02/15/2047  3.000%  1.272%  26.746  373.117   1.42% 
02/15/2048  1.000% (0.112%)   02/15/2048  3.000%  1.296%  27.745  380.982   1.44% 
02/15/2049  1.000% (0.121%)   02/15/2049  3.000%  1.299%  28.747  387.695   1.46% 
02/15/2050  0.250% (0.123%)   02/15/2050  2.000%  1.307%  29.747  394.363   1.46%  <===
From the above figures we can back into the implicit breakeven inflation rates for specific periods. For the two years Jan 2021 to Jan 2023 the CPI can only increase about 0.8% annually to produce the breakeven inflation rates for the corresponding TIPS. For the seven years from 1/15/2023 to 1/15/2030 in can only increase +1.4% annually and +1.3% for the ten years to 2/15/2040. For the ten years from 2/15/2040 to 2/15/2050 the breakeven inflation rate is 1.9%.

Code: Select all

  Matures    Years    CPI    Inflat
01/15/2021   0.542  255.717  (0.48%)
01/15/2023   1.999  259.858   0.81%  = (259.858 / 255.717) ^ (1 / 1.999) - 1
01/15/2030   7.001  287.178   1.44% 
02/15/2040  10.084  326.020   1.27% 
02/15/2050  10.001  394.363   1.92%
I've also updated the graphs from my previous post to show 5/15 as well as 4/17 and 3/17 2020. Breakeven inflation rates are slightly higher, and yields slightly lower, than they were a month ago.
Image

Image

* See footnote 2 from this post for the calculation method.

Edited 5/17/2020 2:45 PM. Improved lookup of corresponding nominal Treasury to pick nearest maturity even when later than the TIPS maturity. Increases breakeven inflation slightly on three Jan issues: 2028, 2029, & 2030 to use following Feb 15 nominals instead of preceding Nov 15. Also updated graph.
Last edited by #Cruncher on Sun May 17, 2020 1:45 pm, edited 1 time in total.

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gasman
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by gasman » Fri May 15, 2020 9:20 pm

#cruncher,

Thanks for the work. For those of us sitting on a pile of cash, What are your thoughts on deploying Short TIPS fund vs short treasury vs best online CDs vs short treasury vs fund AT THIS TIME?

rlangford
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by rlangford » Sat May 16, 2020 10:05 am

Anyone planning to participate in this week's 10 year TIPS auction with negative real yields, albeit with such low implied inflation breakeven rates?

jajlrajrf
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by jajlrajrf » Sat May 16, 2020 11:57 am

I've been mulling this over and...am having a hard time convincing myself that it's worth it.

Even if it was literally 0% + inflation protection I'm sure I'd do it. Paying a negative nominal rate hurts though.

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FIREchief
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by FIREchief » Sat May 16, 2020 12:26 pm

rlangford wrote:
Sat May 16, 2020 10:05 am
Anyone planning to participate in this week's 10 year TIPS auction with negative real yields, albeit with such low implied inflation breakeven rates?
Yep. I'm in heavy. Working on the last leg of my ten year ladder. I bought a considerable amount in the January auction and just a small amount in the March reopening. This buy will constitute 61% of the final leg and 6% of the overall ladder. The negative yield doesn't impact my strategy. It's simply what the market is offering right now. Who knows what it will be offering one, three, five years down the road? Buying this TIPS is the only thing I can do right now to guarantee that the monies invested will retain 95% of their purchasing power ten years from now. Would I prefer 100%? 105%.... Sure, but that's not available right now. I can get 100% in about three years or 95% in about ten years. I don't need this purchasing power in three years (I already have other TIPS that will mature for that). I need it in ten years. I see little difference between this and investing in equities. Regardless of what we prefer, we're going to get just what the market gives us.

(note: those percentages are in the ballpark, but not rigorously calculated)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

rlangford
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by rlangford » Sat May 16, 2020 4:32 pm

FIREchief wrote:
Sat May 16, 2020 12:26 pm
rlangford wrote:
Sat May 16, 2020 10:05 am
Anyone planning to participate in this week's 10 year TIPS auction with negative real yields, albeit with such low implied inflation breakeven rates?
Yep. I'm in heavy. Working on the last leg of my ten year ladder. I bought a considerable amount in the January auction and just a small amount in the March reopening. This buy will constitute 61% of the final leg and 6% of the overall ladder. The negative yield doesn't impact my strategy. It's simply what the market is offering right now. Who knows what it will be offering one, three, five years down the road? Buying this TIPS is the only thing I can do right now to guarantee that the monies invested will retain 95% of their purchasing power ten years from now. Would I prefer 100%? 105%.... Sure, but that's not available right now. I can get 100% in about three years or 95% in about ten years. I don't need this purchasing power in three years (I already have other TIPS that will mature for that). I need it in ten years. I see little difference between this and investing in equities. Regardless of what we prefer, we're going to get just what the market gives us.

(note: those percentages are in the ballpark, but not rigorously calculated)
I'm in the middle of building my ladder. Purchased most of my allocation for the 2030's in the last auction at a nice real yield of around 0.6% due to market turmoil. I think I will just go ahead and fill up this leg and be done with it.

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FIREchief
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by FIREchief » Sat May 16, 2020 5:06 pm

rlangford wrote:
Sat May 16, 2020 4:32 pm
FIREchief wrote:
Sat May 16, 2020 12:26 pm
rlangford wrote:
Sat May 16, 2020 10:05 am
Anyone planning to participate in this week's 10 year TIPS auction with negative real yields, albeit with such low implied inflation breakeven rates?
Yep. I'm in heavy. Working on the last leg of my ten year ladder. I bought a considerable amount in the January auction and just a small amount in the March reopening. This buy will constitute 61% of the final leg and 6% of the overall ladder. The negative yield doesn't impact my strategy. It's simply what the market is offering right now. Who knows what it will be offering one, three, five years down the road? Buying this TIPS is the only thing I can do right now to guarantee that the monies invested will retain 95% of their purchasing power ten years from now. Would I prefer 100%? 105%.... Sure, but that's not available right now. I can get 100% in about three years or 95% in about ten years. I don't need this purchasing power in three years (I already have other TIPS that will mature for that). I need it in ten years. I see little difference between this and investing in equities. Regardless of what we prefer, we're going to get just what the market gives us.

(note: those percentages are in the ballpark, but not rigorously calculated)
I'm in the middle of building my ladder. Purchased most of my allocation for the 2030's in the last auction at a nice real yield of around 0.6% due to market turmoil. I think I will just go ahead and fill up this leg and be done with it.
Yep. I only had a few grand liquid at the time and just figured, "what the heck, I'll toss it into the auction." That yield was a really strange anomaly. Maybe we'll get lucky again next Thursday! :D
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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FIREchief
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by FIREchief » Thu May 21, 2020 1:19 pm

The ten year reopening auctioned today at a real yield of -0.47%. That's about two basis points lower higher than the secondary market was trading just before the auction. The secondary market now dropped increased to align with the auction results. Pretty much as expected and (again) #cruncher's spreadsheet formulas allowed me to predict my final cost very closely.

Edit: clarified negative basis points. The auction came in 2 basis points more favorable than the secondary market was yielding just before the auction.
Last edited by FIREchief on Fri May 22, 2020 2:11 pm, edited 1 time in total.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Pam01
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Pam01 » Thu May 21, 2020 6:59 pm

FIREchief wrote:
Thu May 21, 2020 1:19 pm
The ten year reopening auctioned today at a real yield of -0.47%. That's about two basis points lower than the secondary market was trading just before the auction. The secondary market now dropped to align with the auction results. Pretty much as expected and (again) #cruncher's spreadsheet formulas allowed me to predict my final cost very closely.
Where can I find #cruncher's spreadsheet?

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FIREchief
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by FIREchief » Thu May 21, 2020 7:23 pm

Pam01 wrote:
Thu May 21, 2020 6:59 pm
FIREchief wrote:
Thu May 21, 2020 1:19 pm
The ten year reopening auctioned today at a real yield of -0.47%. That's about two basis points lower than the secondary market was trading just before the auction. The secondary market now dropped to align with the auction results. Pretty much as expected and (again) #cruncher's spreadsheet formulas allowed me to predict my final cost very closely.
Where can I find #cruncher's spreadsheet?
Here you go!

viewtopic.php?f=10&t=300900
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Pam01
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Re: TIPS Yield Curve & Changing Inflation Expectations

Post by Pam01 » Fri May 22, 2020 11:28 am

FIREchief wrote:
Thu May 21, 2020 7:23 pm
Pam01 wrote:
Thu May 21, 2020 6:59 pm
FIREchief wrote:
Thu May 21, 2020 1:19 pm
The ten year reopening auctioned today at a real yield of -0.47%. That's about two basis points lower than the secondary market was trading just before the auction. The secondary market now dropped to align with the auction results. Pretty much as expected and (again) #cruncher's spreadsheet formulas allowed me to predict my final cost very closely.
Where can I find #cruncher's spreadsheet?
Here you go!

viewtopic.php?f=10&t=300900
Thank you FIREchief. I'll review that thread.

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