Leveraged TIPS?

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aristotelian
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Leveraged TIPS?

Post by aristotelian »

Reading through the various threads on the use of leveraged ETFs, I got the idea of leveraging TIPS. The problem with TIPS is that they earn little rwal return over inflation, but with leverage you could amplify the yield. Setting aside that such a thing does not appear to exist, what would be the risk of, say, a 10X leveraged TIPS ETF to attain stock like returns with no risk? I guess a deflation scenario would be problematic?
gtwhitegold
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Re: Leveraged TIPS?

Post by gtwhitegold »

I don't think that this will be likely in the near future. There is not a futures market for TIPS and I'm not sure how many banks want to take the counterparty risk on TIPS swaps.
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Phineas J. Whoopee
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Re: Leveraged TIPS?

Post by Phineas J. Whoopee »

I don't see much likelihood of a 10x leveraged TIPS ETF coming out any time soon, but of course one can always load up on margin and other debt and use the proceeds to buy TIPS, directly or via funds.

I'm not advocating such an approach, but merely pointing out it's possible.

It's also important to note leveraged and inverse funds do not behave in the way many investors might expect them to based solely on their names.

As to what results one might reasonably expect, it's the same as all other leverage. In this case the risk is market changes in real yields. Using borrowed money increases potential rewards and potential losses, but the latter can be catastrophic. The market can remain irrational longer than you can remain solvent.

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MotoTrojan
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Re: Leveraged TIPS?

Post by MotoTrojan »

The risk is your borrowing cost being greater than your TIP return, which seems quite likely. Free leverage isn’t a thing, nor are risk-free equity like returns.
ThrustVectoring
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Re: Leveraged TIPS?

Post by ThrustVectoring »

As a retail investor, you likely can't get leverage costs low enough to expect to make money. If you have a family office with the right regulatory approval and trading permissions then you can lever up in the repo market, but that's the sort of thing that needs like $100M+ in assets to handle.

If you can get your leverage at low cost elsewhere and hold TIPS with the cash that frees up, then it can be worth looking into. Specifically, the futures market for equities (S&P 500) and nominal treasuries (likely the 2-year contract) has implied financing costs that roughly mirror the 3-month treasury bill rate, which is good enough to make the strategy work.

All that said, my standard advice on leverage applies - if you haven't heard of the Kelley Criterion and don't have a good risk management plan, being too aggressive with leverage is an easy way to guarantee that you'll eventually lose all your money.
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David Jay
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Re: Leveraged TIPS?

Post by David Jay »

aristotelian wrote: Tue Apr 09, 2019 9:42 am...stock like returns with no risk
No risk? I think not.
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long_gamma
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Re: Leveraged TIPS?

Post by long_gamma »

Best way to do this is by using long dated TIPS like LTPZ.

Theoretically you can lever up easily 10 times in Portfolio Margin account at Interactive Brokers. But the margin rates costs more than the expected return of TIPs
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ThrustVectoring
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Re: Leveraged TIPS?

Post by ThrustVectoring »

long_gamma wrote: Tue Apr 09, 2019 5:22 pm Best way to do this is by using long dated TIPS like LTPZ.

Theoretically you can lever up easily 10 times in Portfolio Margin account at Interactive Brokers. But the margin rates costs more than the expected return of TIPs
For nominal treasuries, the difference between levering up short-term bonds and owning long-term bonds is mostly convexity and differing sensitivities to economic events along the yield curve. This is because nominal are pretty much entirely interest rate risk, and are fairly well modeled by duration alone. TIPS are a combination of duration risk and inflation risk: if there's unexpected inflation, two five-year TIPS will have twice the inflation adjustment as one ten-year TIPS.

And yeah, it's definitely difficult to borrow money cheaply enough that you can expect to make money off TIPS. Margin loans at IB don't get you there, and that's an absolutely fantastic interest rate being offered.
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Dialectical Investor
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Re: Leveraged TIPS?

Post by Dialectical Investor »

ThrustVectoring wrote: Tue Apr 09, 2019 6:56 pm
TIPS are a combination of duration risk and inflation risk: if there's unexpected inflation, two five-year TIPS will have twice the inflation adjustment as one ten-year TIPS.
TIPS do not have inflation risk. Two five-year TIPS will have "twice" the inflation adjustment as one ten-year TIPS only if you have twice as much money (or thereabouts) to invest. Can you elaborate?
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Re: Leveraged TIPS?

Post by long_gamma »

ThrustVectoring wrote: Tue Apr 09, 2019 6:56 pm
long_gamma wrote: Tue Apr 09, 2019 5:22 pm Best way to do this is by using long dated TIPS like LTPZ.

Theoretically you can lever up easily 10 times in Portfolio Margin account at Interactive Brokers. But the margin rates costs more than the expected return of TIPs
TIPS are a combination of duration risk and inflation risk: if there's unexpected inflation, two five-year TIPS will have twice the inflation adjustment as one ten-year TIPS.
I am not sure, I agree with this. Rolling 12 month returns of longer dated TIPS are much better than shorter dated TIPS when compared against changes in CPI.

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ThrustVectoring
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Re: Leveraged TIPS?

Post by ThrustVectoring »

Dialectical Investor wrote: Tue Apr 09, 2019 7:05 pm TIPS do not have inflation risk. Two five-year TIPS will have "twice" the inflation adjustment as one ten-year TIPS only if you have twice as much money (or thereabouts) to invest. Can you elaborate?
A fully funded TIPS position have a net inflation risk of zero - the inflation adjustment exactly offsets the deflation of the equity in the position. If you're using leverage to buy $10 of TIPS for every dollar of equity, then inflation starts working for you instead of against.
long_gamma wrote: Tue Apr 09, 2019 7:29 pm
I am not sure, I agree with this. Rolling 12 month returns of longer dated TIPS are much better than shorter dated TIPS when compared against changes in CPI.
You're comparing different amounts of interest rate risk, and I thought you were talking about using less long-dated TIPS in lieu of more short-dated TIPS, while keeping exposure to real interest rate changes relatively constant.
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Dialectical Investor
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Re: Leveraged TIPS?

Post by Dialectical Investor »

ThrustVectoring wrote: Tue Apr 09, 2019 7:38 pm
Dialectical Investor wrote: Tue Apr 09, 2019 7:05 pm TIPS do not have inflation risk. Two five-year TIPS will have "twice" the inflation adjustment as one ten-year TIPS only if you have twice as much money (or thereabouts) to invest. Can you elaborate?
A fully funded TIPS position have a net inflation risk of zero - the inflation adjustment exactly offsets the deflation of the equity in the position. If you're using leverage to buy $10 of TIPS for every dollar of equity, then inflation starts working for you instead of against.
That makes sense, but still not seeing the 2x5 vs. 10. The inflation adjustment is the same for both 5-yr and 10-yr TIPS.
long_gamma
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Re: Leveraged TIPS?

Post by long_gamma »

ThrustVectoring wrote: Tue Apr 09, 2019 7:38 pm
You're comparing different amounts of interest rate risk, and I thought you were talking about using less long-dated TIPS in lieu of more short-dated TIPS, while keeping exposure to real interest rate changes relatively constant.
I was. Another way to compare is to check the performance of STIP vs LTPZ. CAGR since 2011 of LTPZ is roughly 3 times that of STIP, which is roughly equivalent to their duration ratio. In my opinion, extending the duration is probably the best option unless investor comes up with sweet deal for the margin loan.
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asset_chaos
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Re: Leveraged TIPS?

Post by asset_chaos »

During 2008 Tips (in the form of vaipx, the Vanguard Tips fund) went down about 12%. M* chart. Wouldn't that have meant a 10x leveraged Tips portfolio likely would have been wiped out? If so, that may be more risk than most would want to take with bonds. Certainly equity like returns with no risk would not be the correct characterization of such an investment.
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ThrustVectoring
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Re: Leveraged TIPS?

Post by ThrustVectoring »

Dialectical Investor wrote: Tue Apr 09, 2019 8:03 pm
ThrustVectoring wrote: Tue Apr 09, 2019 7:38 pm
Dialectical Investor wrote: Tue Apr 09, 2019 7:05 pm TIPS do not have inflation risk. Two five-year TIPS will have "twice" the inflation adjustment as one ten-year TIPS only if you have twice as much money (or thereabouts) to invest. Can you elaborate?
A fully funded TIPS position have a net inflation risk of zero - the inflation adjustment exactly offsets the deflation of the equity in the position. If you're using leverage to buy $10 of TIPS for every dollar of equity, then inflation starts working for you instead of against.
That makes sense, but still not seeing the 2x5 vs. 10. The inflation adjustment is the same for both 5-yr and 10-yr TIPS.
But to have the same duration risk with shorter term bonds, you end up with more of them. $2 of 5-year TIPS for every $1 of 10-yr TIPS, and the face value is what gets the inflation adjustment applied to it.
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Dialectical Investor
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Re: Leveraged TIPS?

Post by Dialectical Investor »

ThrustVectoring wrote: Wed Apr 10, 2019 5:04 am
Dialectical Investor wrote: Tue Apr 09, 2019 8:03 pm
ThrustVectoring wrote: Tue Apr 09, 2019 7:38 pm
Dialectical Investor wrote: Tue Apr 09, 2019 7:05 pm TIPS do not have inflation risk. Two five-year TIPS will have "twice" the inflation adjustment as one ten-year TIPS only if you have twice as much money (or thereabouts) to invest. Can you elaborate?
A fully funded TIPS position have a net inflation risk of zero - the inflation adjustment exactly offsets the deflation of the equity in the position. If you're using leverage to buy $10 of TIPS for every dollar of equity, then inflation starts working for you instead of against.
That makes sense, but still not seeing the 2x5 vs. 10. The inflation adjustment is the same for both 5-yr and 10-yr TIPS.
But to have the same duration risk with shorter term bonds, you end up with more of them. $2 of 5-year TIPS for every $1 of 10-yr TIPS, and the face value is what gets the inflation adjustment applied to it.
Ahh, right. Thanks for explaining.
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Re: Leveraged TIPS?

Post by skierincolorado »

I think some folk in this thread are missing the fact that TIPS pricing is not just the CPI adjustment, but also about changes in future expectations about CPI. Thus short-term inflation could affect short-term TIPS more or less than long-term TIPS depending on changes in the long-term inflation outlook. A few quarters of high CPI could give a good bump to short-term TIPS, but long-term TIPS could suffer if the FED takes aggressive action/language against longer-term inflation. The opposite could happen as well.. low short-term inflation could hit short-term TIPS but long-term TIPS could do fine or go up if the FED increased the long-term inflation target, for example.

These are actively traded instruments, and the trading is based on future expectations of value not just the current month CPI adjustment.

Generally speaking, long-term TIPS will be more sensitive to changes in the overall long-run inflation environment (or perceptions thereof).

You can really see how short and long term TIPS diverged in the chart above. Short-term inflation kept missing expectations and expectations eventually cratered in 2012, but long-term expectations of inflation kept going up as the FED expanded its balance sheet.
gtwhitegold
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Re: Leveraged TIPS?

Post by gtwhitegold »

After reading about inflation swaps in another thread, I looked online to see if there was a market for them. It doesn't look like there is a market except between large banks.
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Re: Leveraged TIPS?

Post by Stormbringer »

Right now TIPS have a negative real return. Levering that is just going to magnify the loss, with the added bonus of borrowing costs.
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Re: Leveraged TIPS?

Post by skierincolorado »

Stormbringer wrote: Thu Apr 22, 2021 4:01 am Right now TIPS have a negative real return. Levering that is just going to magnify the loss, with the added bonus of borrowing costs.
If inflation is zero and there is no CPI adjustment.
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Re: Leveraged TIPS?

Post by nisiprius »

Stormbringer wrote: Thu Apr 22, 2021 4:01 am Right now TIPS have a negative real return. Levering that is just going to magnify the loss, with the added bonus of borrowing costs.
No, because you are borrowing nominal dollars, not real dollars. The effect of levering TIPS is to magnify the nominal return. You won't magnify a loss unless it is a nominal loss.

Of course levering TIPS that gives you something that is no longer paralleling inflation, but something that is neither fish, flesh, fowl nor good red herring.
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