TIPS Funds vs Direct Purchase from Treasury Direct

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LyrehcLover
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TIPS Funds vs Direct Purchase from Treasury Direct

Post by LyrehcLover »

Hi everyone. I have been reading about TIPS Funds (like VIPSX) and purchasing direct TIPS from Treasury Direct. It has come to my attention that it is possible for funds, such as VIPSX, to actually go down in value. I am not sure how this is possible, because I thought TIPS were almost guaranteed to (at least) keep up with inflation, and could virtually not lose value. Is it possible for someone to explain such fluctuation in the value of TIPS funds? Thank you!
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by LadyGeek »

FYI - The OP is requesting portfolio help here: Cash on hand for two year horizon - suggested placement

LyrehcLover, Welcome!
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FIREchief
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by FIREchief »

LyrehcLover wrote: Sun Sep 13, 2020 3:10 pm Hi everyone. I have been reading about TIPS Funds (like VIPSX) and purchasing direct TIPS from Treasury Direct. It has come to my attention that it is possible for funds, such as VIPSX, to actually go down in value. I am not sure how this is possible, because I thought TIPS were almost guaranteed to (at least) keep up with inflation, and could virtually not lose value. Is it possible for someone to explain such fluctuation in the value of TIPS funds? Thank you!
Individual TIPS can also go down in value if real interest rates increase. That said, you'll always receive the inflation adjusted principal if held to maturity. When real rates are negative (as they are now), you'll pay a premium when you purchase them to allow you to still receive the minimum .125% annual coupon (paid bi-annually).

I don't like TIPS funds because they charge an expense ratio while buying individual TIPS is free at any major brokerage and I can control maturity dates. I believe that the majority of us prefer to buy them through a brokerage (I use Fidelity) instead of through Treasury Direct. Treasury Direct can be a bit "archaic" at times.
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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Watty
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by Watty »

Something to consider in your choice between individual TIPS and a TIPS mutual fund is how difficult individual TIPS will be to manage as you age or if a spouse that might know less about investing has to manage it some day.
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by Tortuga »

LyrehcLover:
Treasury Direct can only be used for purchases of TIPS in taxable accounts, so if you want to hold them in a tax-deferred account, as many recommend, you should use a broker to purchase them. It is an easy process at either Fidelity or Vanguard and there is no expense of either purchase or sale.

Tortuga
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HueyLD
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by HueyLD »

LyrehcLover wrote: Sun Sep 13, 2020 3:10 pm Hi everyone. I have been reading about TIPS Funds (like VIPSX) and purchasing direct TIPS from Treasury Direct. It has come to my attention that it is possible for funds, such as VIPSX, to actually go down in value. I am not sure how this is possible, because I thought TIPS were almost guaranteed to (at least) keep up with inflation, and could virtually not lose value. Is it possible for someone to explain such fluctuation in the value of TIPS funds? Thank you!
You don’t want to own TIPS in a taxable account such as the TD. The phantom tax along will erode inflation protection.

Highly recommend that you read this TIPS book https://www.amazon.com/Explore-TIPS-Pra ... /ref=nodl_
000
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by 000 »

Have you considered Series I Bonds?

I would rather hold Treasury bonds at Treasury Direct than take on the custodial risk of holding them elsewhere.
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jeffyscott
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by jeffyscott »

Perhaps this might help you understand how any bond fund, including TIPS, values can change:
https://www.bogleheads.org/wiki/Individ ... _bond_fund

If I wanted to be sure to not lose anything over a 2 year period, I would use a savings account or CD. The current yield might be as much as about 0.8 to 1% from a savings account or about the same from a 2 year CD, but with more certainty: https://www.depositaccounts.com/savings/

Even when you don't have to pay a premium (as you would with TIPS from treasury direct at this time), you can lose money on individual bonds sold prior to maturity. So to avoid that, you would want a 2 year bond or TIPS. The shortest individual TIPS that you can buy from TD is 5 year. I don't know when the next auction is, but a 5 year TIPS would not seem to be appropriate for your 2 year time frame. If you wanted to buy a TIPS maturing in about 2 years, you would have to buy on the secondary market. There's a July 2022 maturity, which will get you a yield of about 1.35% less than inflation, based on the current real YTM of -1.35%: https://www.wsj.com/market-data/bonds/tips
Break-even inflation for that ~2 year TIPS vs. a two year CD at 1% would be about 2.35%, if inflation is less than that the CD comes out ahead.

I-bonds, mentioned above could work too. There would a 3 month penalty for cashing them in prior to 5 years, but the real yield is not negative like TIPS are at this time. It would take a little over 1% annual inflation (due to the 3 month penalty) for I-bonds to beat a 1% CD.
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gmaynardkrebs
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by gmaynardkrebs »

HueyLD wrote: Sun Sep 13, 2020 5:24 pm
LyrehcLover wrote: Sun Sep 13, 2020 3:10 pm Hi everyone. I have been reading about TIPS Funds (like VIPSX) and purchasing direct TIPS from Treasury Direct. It has come to my attention that it is possible for funds, such as VIPSX, to actually go down in value. I am not sure how this is possible, because I thought TIPS were almost guaranteed to (at least) keep up with inflation, and could virtually not lose value. Is it possible for someone to explain such fluctuation in the value of TIPS funds? Thank you!
You don’t want to own TIPS in a taxable account such as the TD. The phantom tax along will erode inflation protection.

Highly recommend that you read this TIPS book https://www.amazon.com/Explore-TIPS-Pra ... /ref=nodl_
That's true of any bond.
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by tipswatcher »

HueyLD wrote: Sun Sep 13, 2020 5:24 pm You don’t want to own TIPS in a taxable account such as the TD. The phantom tax along will erode inflation protection.
I totally get the reluctance to hold individual TIPS in a taxable account, because of the "phantom tax," which actually isn't much different from owning any bond mutual fund in a taxable account and reinvesting the dividends. You have to pay the tax out of current cash flow.

I have been violating this rule for many years, and I have a TIPS ladder with TIPS maturing every year out to 2029. I am now retired, so I can count on those TIPS maturing each year, and I can collect the proceeds with pretty much zero tax due because of the payout. That is reassuring, and I can plan on that non-taxable income that also won't push me over a Medicare IRMAA level.

That said, I will no longer buy TIPS in a taxable account, because I'm retired and I can't raise cash without creating a taxable event. So I will from now on buy TIPS in a tax-deferred account, most likely the traditional IRA I can create after I roll over my 401k in January, because I can't roll it over this year, because I have done Roth conversions and .... oh forget it, being retired is a trip.

The main point is ... if you are planning for future income, year by year (let's say to get to age 70 to take Social Security) having these TIPS mature in a taxable account can be a good strategy.
TIPS: Perfect investment for imperfect times?
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by Robot Monster »

If you're considering participating in the TIPS auction on Thursday for the 10yr, you might be interested in this article.
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gmaynardkrebs
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by gmaynardkrebs »

You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by FIREchief »

gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
What will you do with that money if you don’t buy the 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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gmaynardkrebs
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by gmaynardkrebs »

FIREchief wrote: Mon Sep 14, 2020 3:46 pm
gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
What will you do with that money if you don’t buy the TIPS?
FDIC savings account, and regular donation to church for novenas asking lord for higher in real rates ASAP. :wink:
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by Robot Monster »

gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
Probably the most important lesson I've learned, when it comes to investing, is to not listen to that irrational voice. When I made my initial TIPS purchases not that long ago, it seemed like an awful investment. The 5yr TIPS yield was almost zero! Atrocious, right? Funny thing. What seemed atrocious yesterday is beautiful today.

We don't know how things are going to play out over the next ten years. A 10yr TIPS gives you a guarantee within a sea of uncertainty. That's a valuable thing.

Let's say unemployment goes significantly higher, and, unexpectedly, inflation drifts up to 3%. Who's to say what the Fed would do? There's certainly no guarantee they would raise rates, or allow nominal bond yields to go higher (which they could opt to control via yield curve control.) In such a scenario, a TIPS investment would pay off nicely.
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by jeffyscott »

Robot Monster wrote: Tue Sep 15, 2020 9:55 am
gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
Probably the most important lesson I've learned, when it comes to investing, is to not listen to that irrational voice. When I made my initial TIPS purchases not that long ago, it seemed like an awful investment. The 5yr TIPS yield was almost zero! Atrocious, right? Funny thing. What seemed atrocious yesterday is beautiful today.

We don't know how things are going to play out over the next ten years. A 10yr TIPS gives you a guarantee within a sea of uncertainty. That's a valuable thing.

Let's say unemployment goes significantly higher, and, unexpectedly, inflation drifts up to 3%. Who's to say what the Fed would do? There's certainly no guarantee they would raise rates, or allow nominal bond yields to go higher (which they could opt to control via yield curve control.) In such a scenario, a TIPS investment would pay off nicely.
I don't like either TIPS or nominals at these rates, but I think if I had to choose between the 10 year bonds, I would rather lock in -1% real than lock in 0.68% nominal. Partly that's because we are unlikely to need the money unless there were to be both high inflation and low stock market returns (this is due to the way our pensions work).

But it's completely rational for me to reject both since, if I wanted to I could do any or all of the following:
Buy $20K in I-bonds now and another $20K in 4 months
Add to a CD at 2% for 17 remaining months
Roll money back into my former employer plan's stable value fund at about 2.1%, currently
Buy $20K in EE bonds now and another $20K in 4 months, hold them for 20 years
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by gmaynardkrebs »

Robot Monster wrote: Tue Sep 15, 2020 9:55 am
gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
There's certainly no guarantee [the Fed] would raise rates, or allow nominal bond yields to go higher.
That's been my argument against those here who say that rolling short T-bills are a good substitute for TIPS over the long run, and it's a good one. But, I think it's ok to be a little bit "irrational" -- sometimes. :wink:
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by rockstar »

gmaynardkrebs wrote: Tue Sep 15, 2020 10:19 am
Robot Monster wrote: Tue Sep 15, 2020 9:55 am
gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
There's certainly no guarantee [the Fed] would raise rates, or allow nominal bond yields to go higher.
That's been my argument against those here who say that rolling short T-bills are a good substitute for TIPS over the long run, and it's a good one. But, I think it's ok to be a little bit "irrational" -- sometimes. :wink:
Makes no sense at current yields.
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by gmaynardkrebs »

rockstar wrote: Tue Sep 15, 2020 4:57 pm
gmaynardkrebs wrote: Tue Sep 15, 2020 10:19 am
Robot Monster wrote: Tue Sep 15, 2020 9:55 am
gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
There's certainly no guarantee [the Fed] would raise rates, or allow nominal bond yields to go higher.
That's been my argument against those here who say that rolling short T-bills are a good substitute for TIPS over the long run, and it's a good one. But, I think it's ok to be a little bit "irrational" -- sometimes. :wink:
Makes no sense at current yields.
Stock returns are just the lousy real safe rate plus the risk premium. You never escape from the real rate; you just take more risk, and fool yourself into thinking you're taking less risk than you actually are.
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by rockstar »

gmaynardkrebs wrote: Tue Sep 15, 2020 6:10 pm
rockstar wrote: Tue Sep 15, 2020 4:57 pm
gmaynardkrebs wrote: Tue Sep 15, 2020 10:19 am
Robot Monster wrote: Tue Sep 15, 2020 9:55 am
gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
There's certainly no guarantee [the Fed] would raise rates, or allow nominal bond yields to go higher.
That's been my argument against those here who say that rolling short T-bills are a good substitute for TIPS over the long run, and it's a good one. But, I think it's ok to be a little bit "irrational" -- sometimes. :wink:
Makes no sense at current yields.
Stock returns are just the lousy real safe rate plus the risk premium. You never escape from the real rate; you just take more risk, and fool yourself into thinking you're taking less risk than you actually are.
It's just as ridiculous. The ten year as of this afternoon is 68bps. The S&P 500 yields about a point higher with the potential to grow or shrink in the short term. Earnings sucked (due to COVID closures) last quarter, so the multiples make no sense backward looking or forward looking. Trying to value this mess makes my head spin. Volatility is also elevated since COVID started. Both the VXN and VIX has been in the 30s when both were in the 20s prior to this mess. I can see why people panic and go to cash. Markets don't make sense.

I also received a quote to refinance my home for 30 years below 3%. That's just as crazy.

This feels like we're becoming Japan with some high flying tech companies. My biggest fear right now is that rates go up and crush asset values.
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by Robot Monster »

gmaynardkrebs wrote: Tue Sep 15, 2020 10:19 am
Robot Monster wrote: Tue Sep 15, 2020 9:55 am
gmaynardkrebs wrote: Mon Sep 14, 2020 12:34 pm You're locking in a roughly 10% real loss over ten years. I'm willing to risk a 10% real loss on an investment, but the idea of locking one in in advance rubs me the wrong way. Yes, I know it's irrational to think that way. But....I do,
There's certainly no guarantee [the Fed] would raise rates, or allow nominal bond yields to go higher.
That's been my argument against those here who say that rolling short T-bills are a good substitute for TIPS over the long run, and it's a good one. But, I think it's ok to be a little bit "irrational" -- sometimes. :wink:
Here's another thing to consider, the possibility the Fed changes its inflation target, and it seems it's their choice, nothing is stopping them. How did they arrive at 2 percent to begin with? Well,

"In 1996, Fed policymakers privately agreed that their target for inflation was 2 percent, but, at Greenspan’s insistence, they didn’t tell anyone. In 2012, at the urging of then-Chair Ben Bernanke, the Fed formally and publicly announced that they were targeting a 2 percent inflation rate."
Source

So, the Fed could very well choose to do something like the following idea,
"One alternative to the Fed’s current approach would be to keep targeting the inflation rate, but to raise the target from the current 2 percent, perhaps to 3 percent or 4 percent."
Source

If the Fed switched to a 4% target, and decided to suppress yields till they reached it, you would be very happy to have TIPS!
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

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Robot Monster wrote: Thu Sep 17, 2020 1:13 pm If the Fed switched to a 4% target, and decided to suppress yields till they reached it, you would be very happy to have TIPS!
:sharebeer
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by gmaynardkrebs »

FIREchief wrote: Thu Sep 17, 2020 1:48 pm
Robot Monster wrote: Thu Sep 17, 2020 1:13 pm If the Fed switched to a 4% target, and decided to suppress yields till they reached it, you would be very happy to have TIPS!
:sharebeer
Since they haven't been able to hit even 2%.....
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FIREchief
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by FIREchief »

gmaynardkrebs wrote: Thu Sep 17, 2020 2:07 pm
FIREchief wrote: Thu Sep 17, 2020 1:48 pm
Robot Monster wrote: Thu Sep 17, 2020 1:13 pm If the Fed switched to a 4% target, and decided to suppress yields till they reached it, you would be very happy to have TIPS!
:sharebeer
Since they haven't been able to hit even 2%.....
Yep! That's the thing about unexpected inflation. It's unexpected!! :sharebeer
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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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by gmaynardkrebs »

FIREchief wrote: Thu Sep 17, 2020 2:17 pm
gmaynardkrebs wrote: Thu Sep 17, 2020 2:07 pm
FIREchief wrote: Thu Sep 17, 2020 1:48 pm
Robot Monster wrote: Thu Sep 17, 2020 1:13 pm If the Fed switched to a 4% target, and decided to suppress yields till they reached it, you would be very happy to have TIPS!
:sharebeer
Since they haven't been able to hit even 2%.....
Yep! That's the thing about unexpected inflation. It's unexpected!! :sharebeer
Hey, I'll share a beer any time, :sharebeer but the Fed targets expected inflation, which by definition is not "unexpected."
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Re: TIPS Funds vs Direct Purchase from Treasury Direct

Post by FIREchief »

gmaynardkrebs wrote: Thu Sep 17, 2020 3:08 pm
FIREchief wrote: Thu Sep 17, 2020 2:17 pm
gmaynardkrebs wrote: Thu Sep 17, 2020 2:07 pm
FIREchief wrote: Thu Sep 17, 2020 1:48 pm
Robot Monster wrote: Thu Sep 17, 2020 1:13 pm If the Fed switched to a 4% target, and decided to suppress yields till they reached it, you would be very happy to have TIPS!
:sharebeer
Since they haven't been able to hit even 2%.....
Yep! That's the thing about unexpected inflation. It's unexpected!! :sharebeer
Hey, I'll share a beer any time, :sharebeer but the Fed targets expected inflation, which by definition is not "unexpected."
It's unexpected if you don't expect the fed to hit their target, right??
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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