30-Day Yield Negative on TIPS Mutual Fund

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justsomeguy2018
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30-Day Yield Negative on TIPS Mutual Fund

Post by justsomeguy2018 »

Does this mean I am losing money by being invested in the fund?

I am referring to FIPDX. 30-day yield is -0.96%. Am I paying money to own this fund? Lol.
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David Jay
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by David Jay »

“SEC Yield” has a specific definition. SEC Yield assumes all bonds will pay out including all coupons and maturity redemption value. But a major source of TIP yield is the inflation index. And since future inflation is unknown, SEC yield can’t make any assumptions about that portion of the yield.

Best estimate of fund yield is: [ -.96% + future inflation]. So if we take a projected inflation rate of, say, 2% then yield is 1.04%. But one can’t know that in advance, only in retrospect, so SEC Yield has no way to include it.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Northern Flicker
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by Northern Flicker »

I’m curious how they come up with a 30-day SEC average real yield of -0.96% given the real yield of actual TIPS over the last 30 days:

https://www.treasury.gov/resource-cente ... &year=2020
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#Cruncher
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by #Cruncher »

Northern Flicker wrote: Wed May 27, 2020 3:37 amI’m curious how they come up with a 30-day SEC average real yield of -0.96% ...
It appears the Fidelity® Inflation-Protected Bond Index Fund (FIPDX) combines the real yield with the annualized change in the CPI over the previous 30 days. When I do this for three dates I get results fairly close to what Fidelity reports. (The estimated real yield is for the 1+ index from my post, Re: Consistent Yield & Duration to Help Choose TIPS Fund and the Reference CPIs are from the web page, Ref CPI for 2020.)

Code: Select all

                04/30/2020 05/21/2020 05/22/2020   05/26/2020
Est real yield     (0.17%)    (0.30%)    (0.29%)      (0.30%)
   Ref CPI beg   257.93884  258.44233  258.46590    258.56017
   Ref CPI end   258.65443  258.31477  258.29661    258.22397
 Annual change      3.38%     (0.60%)    (0.80%)      (1.58%)
Annual expense     (0.05%)    (0.05%)    (0.05%)      (0.05%)
Computed yield      3.16%     (0.95%)    (1.14%)      (1.93%)
Reported yield      2.92%     (0.96%)    (1.15%)      (1.87%)
Because it includes the annualized value of inflation over the past 30 days, the reported yield is quite volatile. From 4/30 to 5/21 it fell 3.88% points while the real yield fell only 0.13% points. This makes it quite useless in my opinion. I would ignore it and instead use the real yield of the index the fund tracks (less the expense ratio) as my measure of performance (-0.29% - 0.05% = -0.34%). And, to answer the original poster's question: yes, if TIPS' yields were to stay the same, he would lose purchasing power by owning this fund. However, he's also likely to lose purchasing power with regular non-CPI-indexed treasury bonds.

Edited 5/28/2020 to add 5/26 column to table. (-0.30% "Est real yield" for 5/26 is my own calculation.)
S_Track
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by S_Track »

David Jay wrote: Tue May 26, 2020 6:52 pm “SEC Yield” has a specific definition. SEC Yield assumes all bonds will pay out including all coupons and maturity redemption value. But a major source of TIP yield is the inflation index. And since future inflation is unknown, SEC yield can’t make any assumptions about that portion of the yield.

Best estimate of fund yield is: [ -.96% + future inflation]. So if we take a projected inflation rate of, say, 2% then yield is 1.04%. But one can’t know that in advance, only in retrospect, so SEC Yield has no way to include it.
Thanks for your example but I am confused. On a treasury fund in order to calculate the real yield is it Real = SEC yield - future inflation. If true should the real yield of a TIPS fund be Real = SEC yield + inflation adjustment - future inflation. Thanks
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David Jay
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by David Jay »

S_Track wrote: Wed Jul 21, 2021 11:54 pm
David Jay wrote: Tue May 26, 2020 6:52 pm “SEC Yield” has a specific definition. SEC Yield assumes all bonds will pay out including all coupons and maturity redemption value. But a major source of TIP yield is the inflation index. And since future inflation is unknown, SEC yield can’t make any assumptions about that portion of the yield.

Best estimate of fund yield is: [ -.96% + future inflation]. So if we take a projected inflation rate of, say, 2% then yield is 1.04%. But one can’t know that in advance, only in retrospect, so SEC Yield has no way to include it.
Thanks for your example but I am confused. On a treasury fund in order to calculate the real yield is it Real = SEC yield - future inflation. If true should the real yield of a TIPS fund be Real = SEC yield + inflation adjustment - future inflation. Thanks
I guess I don’t understand your confusion. Perhaps it was that other posters are talking about “real” but I did not. Your calculation is correct, future real is nominally SEC yield for a TIPS fund. But I believe that the OP was trying to compare it to other funds, which is where apples-to-oranges problem comes in.

You can make this calculation to Real based on your personal crystal ball, but the mutual fund company cannot make a guess. So “SEC yield” as calculated by the fund company is missing a primary component of TIPS yield. Comparing SEC yield of a TIPS fund to a non-TIPS fund is unhelpful unless you utilize your own inflatIon number.

Looking at the last couple of months, a -.96% Real may be attractive compared to a treasury fund.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
dbr
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by dbr »

justsomeguy2018 wrote: Tue May 26, 2020 1:28 pm Does this mean I am losing money by being invested in the fund?

I am referring to FIPDX. 30-day yield is -0.96%. Am I paying money to own this fund? Lol.
The answer to your specific question is that that the real yield on TIPS is negative and has been for some time. Yes, you are losing money in real dollars but not in nominal dollars. This is true of all fixed income now. If you divide inflation out of most nominal interest rates you get negative real rates for those too. The mechanics for this are that when a TIPS is sold at auction with a positive coupon bidders pay more than the face value and when the security is redeemed at face value there is a loss.

Here is a listing of the real rate curve: https://www.treasury.gov/resource-cente ... =realyield

Note this result is the fortune of history and that there is no dodge to get around the facts of life.
Prudence
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by Prudence »

I believe previous posts have explained that the real yields on a Treasury TIPS fund and a Treasury non TIPS fund of the same duration are not much different, true?
dbr
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by dbr »

Prudence wrote: Thu Jul 22, 2021 9:03 am I believe previous posts have explained that the real yields on a Treasury TIPS fund and a Treasury non TIPS fund of the same duration are not much different, true?
I think the risk premium for inflation protected bonds has been tiny most of the time. Maybe someone has numbers for that.
S_Track
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Re: 30-Day Yield Negative on TIPS Mutual Fund

Post by S_Track »

David Jay wrote: Thu Jul 22, 2021 7:42 am
S_Track wrote: Wed Jul 21, 2021 11:54 pm
David Jay wrote: Tue May 26, 2020 6:52 pm “SEC Yield” has a specific definition. SEC Yield assumes all bonds will pay out including all coupons and maturity redemption value. But a major source of TIP yield is the inflation index. And since future inflation is unknown, SEC yield can’t make any assumptions about that portion of the yield.

Best estimate of fund yield is: [ -.96% + future inflation]. So if we take a projected inflation rate of, say, 2% then yield is 1.04%. But one can’t know that in advance, only in retrospect, so SEC Yield has no way to include it.
Thanks for your example but I am confused. On a treasury fund in order to calculate the real yield is it Real = SEC yield - future inflation. If true should the real yield of a TIPS fund be Real = SEC yield + inflation adjustment - future inflation. Thanks
I guess I don’t understand your confusion. Your calculation is correct, future real is nominally SEC yield for a TIPS fund.
thanks that is exactly what I was trying to ask, basically we are right back where we started when looking at the real yield for a TIPS funds. Although we don't know what Future inflation will be it does not matter since it will be canceled by the inflation adjustment.
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