2043-47 TIPS paying 1.6%

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discman017
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2043-47 TIPS paying 1.6%

Post by discman017 »

Anyone else buying long-term TIPS these days? We've built a long-term financial plan assuming a 1% rate of return above inflation. Haven't owned TIPS in a while because rates have been so poor, but at 1.6% they definitely have a place in our portfolio.

This is what I see right now at Vanguard when shopping for individual TIPS:

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billyt
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Re: 2043-47 TIPS paying 1.6%

Post by billyt »

It seems like a sensible move if that fits with your plan. Only concern is regret if real rates continue to rise.
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Re: 2043-47 TIPS paying 1.6%

Post by Weathering »

Is that minimum purchase $50k face value or am I reading it wrong?
Is that the usual minimum purchase amount, or can TIPS be bought/sold in smaller increments?
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

discman017 wrote: Thu Sep 22, 2022 1:23 pm Haven't owned TIPS in a while because rates have been so poor, but at 1.6% they definitely have a place in our portfolio.
What have you been using instead of TIPS?
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Re: 2043-47 TIPS paying 1.6%

Post by whodidntante »

I'm simultaneously bored and interested.
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Re: 2043-47 TIPS paying 1.6%

Post by marcopolo »

Weathering wrote: Thu Sep 22, 2022 4:31 pm Is that minimum purchase $50k face value or am I reading it wrong?
Is that the usual minimum purchase amount, or can TIPS be bought/sold in smaller increments?
They can be bought in smaller amounts, as little as $1000.
There is usually a slightly lower yields for amounts less than $100k.
You have to look at all the offerings on the secondary market to find lots that are offered for smaller quantities.
it is referred to as the "depth of book" for a specific bond offering.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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discman017
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Re: 2043-47 TIPS paying 1.6%

Post by discman017 »

Weathering wrote: Thu Sep 22, 2022 4:31 pm Is that minimum purchase $50k face value or am I reading it wrong?
Is that the usual minimum purchase amount, or can TIPS be bought/sold in smaller increments?
In the screenshot in my original post, there's a "see more" link under each issue. Clicking that shows you the best bid/ask yield for different quantities. $50K face gets the best terms, but you can usually buy as little as $1K for just slightly worse terms. What I was seeing when I bought the other day was if I bought $50K I would save $60 total on the entire purchase (0.12% difference in price) vs. buying $1K.
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discman017
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Re: 2043-47 TIPS paying 1.6%

Post by discman017 »

FreddieFIRE wrote: Thu Sep 22, 2022 5:15 pm What have you been using instead of TIPS?
Lots and lots of cash, waiting to be deployed at decent rates. I just couldn't stomach a 20-year maturity at a negative real yield.

The St. Louis Fed has a graph showing Market Yield on U.S. Treasury Securities at 20-Year Constant Maturity, Quoted on an Investment Basis, Inflation-Indexed.

I'm not exactly sure what they're measuring, as they show a current rate of 1.17% vs. the 1.62% that I bought today (for a bit longer than 20-year maturity). But click on "max" to see the chart going back to 2004. The last time the rate was above 1.5% was 2011.

Obviously rates could keep going higher, but for someone with a large nest egg looking to protect against inflation, current rates look pretty good. And I'll definitely take a 1.6% real yield vs. 3.6% nominal for the 30-year Treasury.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

discman017 wrote: Thu Sep 22, 2022 7:01 pm
FreddieFIRE wrote: Thu Sep 22, 2022 5:15 pm What have you been using instead of TIPS?
Lots and lots of cash, waiting to be deployed at decent rates. I just couldn't stomach a 20-year maturity at a negative real yield.
Therein lies the rub. 12 month cash has been yielding negative 8% real recently. Does my ten year rolling TIPS ladder have an ugly rung or two? Yep. But, invest we must. 8-)
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Re: 2043-47 TIPS paying 1.6%

Post by discman017 »

FreddieFIRE wrote: Thu Sep 22, 2022 7:24 pm Therein lies the rub. 12 month cash has been yielding negative 8% real recently. Does my ten year rolling TIPS ladder have an ugly rung or two? Yep. But, invest we must. 8-)
Yes, cash has been bad.

But the Vanguard Inflation-Protected Securities fund has returned -9% nominal / -17% real over the past 12 months.

Vanguard Total World Stock Index has returned -19% nominal / -27% real.

Vanguard Long-Term Treasury has returned -28% nominal / -36% real.

We all wish we could have kept up with inflation over the past 12 months. But aside from niche investments like commodities (18% nominal / 10% real for Pimco's commodities fund, where I have a small allocation), I don't know what we would have invested in to accomplish that. But right now, today, I'm pleased to put my dry powder to work and lock in 1.6% real for 23 years.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

discman017 wrote: Thu Sep 22, 2022 8:11 pm We all wish we could have kept up with inflation over the past 12 months. But aside from niche investments like commodities (18% nominal / 10% real for Pimco's commodities fund, where I have a small allocation), I don't know what we would have invested in to accomplish that.
I hold the TIPS in my ten year rolling ladder to maturity. They all kept up with inflation over the past 12 months. In addition, they all paid out coupons of at least .125%. Sure, I bought one or two of the rungs at a premium which built in a known loss of principal on the front end, but that's the way Mr. Market was treating us at that time.
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Re: 2043-47 TIPS paying 1.6%

Post by discman017 »

FreddieFIRE wrote: Fri Sep 23, 2022 10:49 am I hold the TIPS in my ten year rolling ladder to maturity. They all kept up with inflation over the past 12 months. In addition, they all paid out coupons of at least .125%. Sure, I bought one or two of the rungs at a premium which built in a known loss of principal on the front end, but that's the way Mr. Market was treating us at that time.
I guess I'd just point out that if you bought 10-year TIPS a year ago, you guaranteed yourself a yield to maturity of minus 1% or so for the next 10 years. So your "kept up with inflation" characterization is more than outweighed by the "known loss of principal".

Additionally, your net worth is down significantly in the past year as real rates have risen and the value of your holdings has decreased. But I understand that may not matter to you because you plan to hold to maturity and continue to receive your locked-in negative real yield. And over time, the yield of your TIPS portfolio rises as you're able to invest at today's new higher rates.

I totally understand the attraction of investing automatically and taking what Mr. Market gives you on any given day. And it sounds like you're happy with your approach, and that's probably the most important thing: to find an approach that works for you and stick with it.
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Re: 2043-47 TIPS paying 1.6%

Post by Robot Monster »

discman017 wrote: Thu Sep 22, 2022 8:11 pm
FreddieFIRE wrote: Thu Sep 22, 2022 7:24 pm Therein lies the rub. 12 month cash has been yielding negative 8% real recently. Does my ten year rolling TIPS ladder have an ugly rung or two? Yep. But, invest we must. 8-)
Yes, cash has been bad.

But the Vanguard Inflation-Protected Securities fund has returned -9% nominal / -17% real over the past 12 months.

Vanguard Total World Stock Index has returned -19% nominal / -27% real.

Vanguard Long-Term Treasury has returned -28% nominal / -36% real.

We all wish we could have kept up with inflation over the past 12 months. But aside from niche investments like commodities (18% nominal / 10% real for Pimco's commodities fund, where I have a small allocation), I don't know what we would have invested in to accomplish that. But right now, today, I'm pleased to put my dry powder to work and lock in 1.6% real for 23 years.
Things worked out well for you, but it is a bit of a gamble waiting for rates to go higher, and not simply buy what the market is offering. In your case, the gamble paid off. But I imagine there are others out there sitting in cash, waiting for rates to go higher still, and whether it will work out for them is an unknown--which is, I guess, the risk of market timing.
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Re: 2043-47 TIPS paying 1.6%

Post by 209south »

Until recently I considered myself a relatively sophisticated investor...diversified portfolio, all low fee funds and ETFs, a bit of a 'Larry' bent, with heavy fixed income allocation and much of my equity exposure in small value (I'm HNW but near retirement age and looking to protect downside more than drive upside). I've done fine, but the negative surprise has been the underperformance of long-term TIPs vs. long-term treasuries. I decided I wasn't smart enough to predict rates or inflation, so have divided my fixed income portfolio relatively 50-50 between nominal and TIPs. With inflation rearing its ugly head all bond prices are down...that is the market and that is fine...but WHY for example is LTPZ (long TIPs) down more than SPTL (long treasuries). I haven't taken the time to study the math behind TIPs pricing...I have a substantial TIPs ladder within my 401k to fund future RMDs...I built the ladder as rates were falling so I'm now about break-even and have no regrets. I don't own LTPZ directly but use it as a proxy to see how my ladder is doing value wise (I understand that's not the purpose of a ladder). Anyway, just looking for guidance on why long-term TIPs...which offer inflation protection...are down MORE than long-term treasuries, which do not??
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

discman017 wrote: Fri Sep 23, 2022 11:19 am
FreddieFIRE wrote: Fri Sep 23, 2022 10:49 am I hold the TIPS in my ten year rolling ladder to maturity. They all kept up with inflation over the past 12 months. In addition, they all paid out coupons of at least .125%. Sure, I bought one or two of the rungs at a premium which built in a known loss of principal on the front end, but that's the way Mr. Market was treating us at that time.
I guess I'd just point out that if you bought 10-year TIPS a year ago, you guaranteed yourself a yield to maturity of minus 1% or so for the next 10 years. So your "kept up with inflation" characterization is more than outweighed by the "known loss of principal".

Additionally, your net worth is down significantly in the past year as real rates have risen and the value of your holdings has decreased. But I understand that may not matter to you because you plan to hold to maturity and continue to receive your locked-in negative real yield. And over time, the yield of your TIPS portfolio rises as you're able to invest at today's new higher rates.

I totally understand the attraction of investing automatically and taking what Mr. Market gives you on any given day. And it sounds like you're happy with your approach, and that's probably the most important thing: to find an approach that works for you and stick with it.
Exactly. While I might describe it in different ways, everything you said is accurate.

I did buy rungs each of the past several January's. That 10% premium I paid was rewarded with 8%+ in inflation adjustments, so let's say for that one year in that one rung I about broke even vs. just holding cash, but only for one or two rungs (I lose track). The other rungs (80% - 90% of my holdings) were purchased at positive real yields. Those also kept up with inflation while so many other investments did not. It is a long term strategy and it does work well for my needs.

Re: net worth. I look at net worth as a lifetime projection, not a one day snapshot. I think others might benefit from this type of perspective. Since I hold to maturity, I use my TIPS's principal value in my financial planning, not today's prices.
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Re: 2043-47 TIPS paying 1.6%

Post by Toadvine »

discman017:
I am curious why you bought when the yield hit 1.6%. Sounds like your desired rate was at least 1%, but you delayed until the rate was higher than that. Did you wait because you expected yields to continue rising?
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Re: 2043-47 TIPS paying 1.6%

Post by DougieJones »

discman017 wrote: Fri Sep 23, 2022 11:19 am
FreddieFIRE wrote: Fri Sep 23, 2022 10:49 am I hold the TIPS in my ten year rolling ladder to maturity. They all kept up with inflation over the past 12 months. In addition, they all paid out coupons of at least .125%. Sure, I bought one or two of the rungs at a premium which built in a known loss of principal on the front end, but that's the way Mr. Market was treating us at that time.
I guess I'd just point out that if you bought 10-year TIPS a year ago, you guaranteed yourself a yield to maturity of minus 1% or so for the next 10 years. So your "kept up with inflation" characterization is more than outweighed by the "known loss of principal".
A TIPS bought at auction and held to maturity can never lose principle (or purchasing power). Isn't that the definition of "keeping up with inflation?"
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Re: 2043-47 TIPS paying 1.6%

Post by zie »

DougieJones wrote: Sun Sep 25, 2022 1:35 pm
A TIPS bought at auction and held to maturity can never lose principle (or purchasing power). Isn't that the definition of "keeping up with inflation?"
That's not actually true as I understand it. TIPS are subject to deflation, which TIPS do not protect you from. I-bonds do protect you from that, but they are still at 0%/real, so unless you think more than 1% deflation will happen over the term(which I think most would consider quite unlikely), TIPS will return more.

As to the specific negative real yield here, FreddieFIRE bought a negative TIPS, i.e. they paid more than it was worth, by about 1%, guaranteeing a real loss over the term. i.e. if it was a $1000 TIPS they paid $1,010 for it(1%). That's not necessarily a terrible strategy. At the time, people were so happy to buy TIPS that they were willing to pay a 1% premium for the privilege. Since TIPS are auctioned, the price can be whatever the market will bear. Right now it's a 1.6% discount from 0% real, so for that $1000 TIPS, its total cost is $984 instead, guaranteeing that $16 in principal at maturity.

A year later and FreddieFIRE seems reasonably happy with their 2 batches of negative real yield TIPS.

The inflation protection happens after purchase and will be whatever it will be. I.e. it's easier to think of inflation protected securities from their real yield only.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

zie wrote: Sun Sep 25, 2022 1:52 pm
DougieJones wrote: Sun Sep 25, 2022 1:35 pm
A TIPS bought at auction and held to maturity can never lose principle (or purchasing power). Isn't that the definition of "keeping up with inflation?"
That's not actually true as I understand it. TIPS are subject to deflation, which TIPS do not protect you from.
That's not true. A TIPS bought at auction and held to maturity is guaranteed to pay no less than the original face value.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

zie wrote: Sun Sep 25, 2022 1:52 pm As to the specific negative real yield here, FreddieFIRE bought a negative TIPS, i.e. they paid more than it was worth, by about 1%, guaranteeing a real loss over the term. i.e. if it was a $1000 TIPS they paid $1,010 for it(1%). That's not necessarily a terrible strategy. At the time, people were so happy to buy TIPS that they were willing to pay a 1% premium for the privilege. Since TIPS are auctioned, the price can be whatever the market will bear. Right now it's a 1.6% discount from 0% real, so for that $1000 TIPS, its total cost is $984 instead, guaranteeing that $16 in principal at maturity.
Actually, I bought ten year TIPS and paid a premium in the ballpark of 10%. Yes, you can call that a 10% "loss," which it absolutely is relative to the principle of the maturing TIPS that was reinvested. Unfortunately, all other fixed income investments were faced with the same negative real rates. The difference being that nobody knew what the true real rate was for the alternatives. With the unbelievable inflation of the past year plus, the truth has become painfully obvious. I locked in a 10% real loss on the front end of an investment that was guaranteed to lose no further purchasing power over the next ten years. Others experienced an 8% loss in year one, and may continue to suffer real loses (unless they buy one of my ten year TIPS in the secondary market and lock in a 1.4% real gain for the next nine years - approximate numbers). Nothing has changed. When I bought all ten rungs of my ladder I had no idea what inflation and future real TIPS rates would be. Eight of them were "winners." Nobody knows nothin. Same as it ever was. That said, I have a plan, I stay the course and I know that inflation is a non-factor for my LMP.
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Re: 2043-47 TIPS paying 1.6%

Post by Wrench »

FreddieFIRE wrote: Fri Sep 23, 2022 12:23 pm <SNIP>

Re: net worth. I look at net worth as a lifetime projection, not a one day snapshot. I think others might benefit from this type of perspective. Since I hold to maturity, I use my TIPS's principal value in my financial planning, not today's prices.
That's a question/concern I've had for some time. I started my TIPS ladder a little over three years ago. For a few years, my mark to market value of my ladder showed a gain in value. Now, it's a loss. From a net worth perspective, I was a bit unprepared for the variation with time. Since I too will hold to maturity, I finally realized that today's value should not really matter, it is the principal value that will matter, i.e., ignore the price and look at the accrued principal. This is a bit counter-intuitive since no brokerage ever does that (and are probably not even allowed to do that by FINRA?). That means that the current value according to my brokerage is different than the current value in my own accounting. A bit tough to reconcile, but just a different perspective I guess.

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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

Wrench wrote: Sun Sep 25, 2022 4:45 pm
FreddieFIRE wrote: Fri Sep 23, 2022 12:23 pm <SNIP>

Re: net worth. I look at net worth as a lifetime projection, not a one day snapshot. I think others might benefit from this type of perspective. Since I hold to maturity, I use my TIPS's principal value in my financial planning, not today's prices.
That's a question/concern I've had for some time. I started my TIPS ladder a little over three years ago. For a few years, my mark to market value of my ladder showed a gain in value. Now, it's a loss. From a net worth perspective, I was a bit unprepared for the variation with time. Since I too will hold to maturity, I finally realized that today's value should not really matter, it is the principal value that will matter, i.e., ignore the price and look at the accrued principal. This is a bit counter-intuitive since no brokerage ever does that (and are probably not even allowed to do that by FINRA?). That means that the current value according to my brokerage is different than the current value in my own accounting. A bit tough to reconcile, but just a different perspective I guess.

Wrench
Yep. It is totally counter-intuitive. It's easier for my fixed income, since it's close to 100% TIPS in a rolling ten year ladder. That said, I've tended to look at stocks the same way. Some will struggle/disagree. I'm in the long game (most/all are). Am I more valuable if I have $1M in stocks in a market that is at record highs or $800,000 in a bear market? If I need the money next week, then it would be the former. But, why would I have money I need next week in the stock market? If I don't, then why do I think I'm in worse shape just because the fed hiccupped this week and everybody ran for the exits? Younger investors will likely struggle more with this. Those of us who have been through crash/burn/soar/sour/exuberance? Just enjoy the ride (or at least relax...). You still own the same number of shares in the finest companies in the world. Yes, I'm 100% US TMI, but that's a topic for another thread (or a hundred more threads). :P 8-)
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Re: 2043-47 TIPS paying 1.6%

Post by zie »

FreddieFIRE wrote: Sun Sep 25, 2022 4:27 pm
zie wrote: Sun Sep 25, 2022 1:52 pm
DougieJones wrote: Sun Sep 25, 2022 1:35 pm
A TIPS bought at auction and held to maturity can never lose principle (or purchasing power). Isn't that the definition of "keeping up with inflation?"
That's not actually true as I understand it. TIPS are subject to deflation, which TIPS do not protect you from.
That's not true. A TIPS bought at auction and held to maturity is guaranteed to pay no less than the original face value.
True, but deflation can reduce the TIPS coupon, which reduces the interest payment cash flow to an investor.
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Re: 2043-47 TIPS paying 1.6%

Post by zie »

FreddieFIRE wrote: Sun Sep 25, 2022 4:36 pm
zie wrote: Sun Sep 25, 2022 1:52 pm As to the specific negative real yield here, FreddieFIRE bought a negative TIPS, i.e. they paid more than it was worth, by about 1%, guaranteeing a real loss over the term. i.e. if it was a $1000 TIPS they paid $1,010 for it(1%). That's not necessarily a terrible strategy. At the time, people were so happy to buy TIPS that they were willing to pay a 1% premium for the privilege. Since TIPS are auctioned, the price can be whatever the market will bear. Right now it's a 1.6% discount from 0% real, so for that $1000 TIPS, its total cost is $984 instead, guaranteeing that $16 in principal at maturity.
Actually, I bought ten year TIPS and paid a premium in the ballpark of 10%. Yes, you can call that a 10% "loss," which it absolutely is relative to the principle of the maturing TIPS that was reinvested. Unfortunately, all other fixed income investments were faced with the same negative real rates. The difference being that nobody knew what the true real rate was for the alternatives. With the unbelievable inflation of the past year plus, the truth has become painfully obvious. I locked in a 10% real loss on the front end of an investment that was guaranteed to lose no further purchasing power over the next ten years. Others experienced an 8% loss in year one, and may continue to suffer real loses (unless they buy one of my ten year TIPS in the secondary market and lock in a 1.4% real gain for the next nine years - approximate numbers). Nothing has changed. When I bought all ten rungs of my ladder I had no idea what inflation and future real TIPS rates would be. Eight of them were "winners." Nobody knows nothin. Same as it ever was. That said, I have a plan, I stay the course and I know that inflation is a non-factor for my LMP.
I apologize. I definitely didn't look up the rates, thanks for the clarification. I agree you made reasonable decision at the time as did everyone else that bought TIPS then. Thankfully nobody has to take a real loss on TIPS currently!
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
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Re: 2043-47 TIPS paying 1.6%

Post by discman017 »

zie wrote: Sun Sep 25, 2022 8:20 pm True, but deflation can reduce the TIPS coupon, which reduces the interest payment cash flow to an investor.
Sure, but that coupon is being paid in dollars that are worth more, due to the deflation.

At the end of the day, TIPS protect your purchasing power and (currently, at least) increase it with a rate of about 1.6% over inflation (for the 21-25 year maturities). Whether the inflation rate is positive or negative, TIPS provide the same purchasing power protection.

Deflation can be good for TIPS, in that the built-in "deflation floor" guarantees that you get back at least the par value at maturity. If that deflation protection kicked in, you'd wind up earning more (in real yield) than the original stated yield.

Now, granted, holding cash in a deflationary environment could be even better. But TIPS do just fine with deflation, as long as your objective is protecting and increasing your purchasing power.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

When was the last time we had a prolonged period of meaningful deflation? Just asking.
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Re: 2043-47 TIPS paying 1.6%

Post by Mel Lindauer »

One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
How is this any different from a TIPS purchased at auction and held to maturity?
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Re: 2043-47 TIPS paying 1.6%

Post by Wiggums »

Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
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Re: 2043-47 TIPS paying 1.6%

Post by strongboy2005 »

FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
How is this any different from a TIPS purchased at auction and held to maturity?
With significant deflation the best your TIPS can do is 0% real return. I bonds, on the other hand, will have a POSITIVE real return under all scenarios (overall, unless all 30 years of holding is marked by consistent deflation).
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Re: 2043-47 TIPS paying 1.6%

Post by whodidntante »

strongboy2005 wrote: Mon Sep 26, 2022 3:56 pm
FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
How is this any different from a TIPS purchased at auction and held to maturity?
With significant deflation the best your TIPS can do is 0% real return. I bonds, on the other hand, will have a POSITIVE real return under all scenarios (overall, unless all 30 years of holding is marked by consistent deflation).
I guess zero technically is positive, but a zero return probably will not feel great.
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Re: 2043-47 TIPS paying 1.6%

Post by Mel Lindauer »

FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
]How is this any different from a TIPS purchased at auction and held to maturity?
The big difference is that you don't have to hold I Bonds until maturity to be guaranteed that you'll never lose money. Unlike TIPS, deflation never reduces the value of I Bonds.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

Mel Lindauer wrote: Mon Sep 26, 2022 3:59 pm
FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
]How is this any different from a TIPS purchased at auction and held to maturity?
The big difference is that you don't have to hold I Bonds until maturity to be guaranteed that you'll never lose money. Unlike TIPS, deflation never reduces the value of I Bonds.
Did you miss the "held to maturity" part?
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Re: 2043-47 TIPS paying 1.6%

Post by Mel Lindauer »

FreddieFIRE wrote: Mon Sep 26, 2022 4:05 pm
Mel Lindauer wrote: Mon Sep 26, 2022 3:59 pm
FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
]How is this any different from a TIPS purchased at auction and held to maturity?
The big difference is that you don't have to hold I Bonds until maturity to be guaranteed that you'll never lose money. Unlike TIPS, deflation never reduces the value of I Bonds.
Did you miss the "held to maturity" part?
No, I didn't miss that. I tried to answer your question asking why it was different.

I was pointing out that the difference is that you have to hold TIPS to maturity to be assured you'll that you'll get your money back, whereas with I Bonds, they never go down in value, so you can redeem them anytime after one year and be guaranteed that you'll get your money back.
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

Mel Lindauer wrote: Mon Sep 26, 2022 4:11 pm
FreddieFIRE wrote: Mon Sep 26, 2022 4:05 pm
Mel Lindauer wrote: Mon Sep 26, 2022 3:59 pm
FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
Mel Lindauer wrote: Mon Sep 26, 2022 11:53 am One of the nice advantages of I Bonds over TIPS is their DEflation protection.

Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
]How is this any different from a TIPS purchased at auction and held to maturity?
The big difference is that you don't have to hold I Bonds until maturity to be guaranteed that you'll never lose money. Unlike TIPS, deflation never reduces the value of I Bonds.
Did you miss the "held to maturity" part?
No, I didn't miss that. I tried to answer your question asking why it was different.

I was pointing out that the difference is that you have to hold TIPS to maturity to be assured you'll that you'll get your money back, whereas with I Bonds, they never go down in value, so you can redeem them anytime after one year and be guaranteed that you'll get your money back.
That was my point. I don't need to sell prior to maturity. I have a plan, it works and I stick with it. I can't buy iBonds in my tIRA. You know this.
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Re: 2043-47 TIPS paying 1.6%

Post by Mel Lindauer »

FreddieFIRE wrote: Mon Sep 26, 2022 4:13 pm
Mel Lindauer wrote: Mon Sep 26, 2022 4:11 pm
FreddieFIRE wrote: Mon Sep 26, 2022 4:05 pm
Mel Lindauer wrote: Mon Sep 26, 2022 3:59 pm
FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
]How is this any different from a TIPS purchased at auction and held to maturity?
The big difference is that you don't have to hold I Bonds until maturity to be guaranteed that you'll never lose money. Unlike TIPS, deflation never reduces the value of I Bonds.
Did you miss the "held to maturity" part?
No, I didn't miss that. I tried to answer your question asking why it was different.

I was pointing out that the difference is that you have to hold TIPS to maturity to be assured you'll that you'll get your money back, whereas with I Bonds, they never go down in value, so you can redeem them anytime after one year and be guaranteed that you'll get your money back.
That was my point. I don't need to sell prior to maturity. I have a plan, it works and I stick with it. I can't buy iBonds in my tIRA. You know this.
Good for you. You have a plan and expect to stick with it. However, lots of other folks start out with a plan and then life happens and they have to sell prior to maturity in which case they can lose money with TIPS but not with I Bonds. Just want to make folks aware of the possibilities before they choose.
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Re: 2043-47 TIPS paying 1.6%

Post by #Cruncher »

FreddieFIRE wrote: Mon Sep 26, 2022 1:58 pm
Mel Lindauer wrote: Mon Sep 26, 2022 11:53 amOne of the nice advantages of I Bonds over TIPS is their DEflation protection. Since the composite rate can never go below 0%, the greater the rate of deflation, the greater the I Bond's real rate of return will be.
How is this any different from a TIPS purchased at auction and held to maturity?
The difference is that I Bonds can [*] benefit if there is deflation over any six month period March - September or September to March. TIPS benefit only if there is deflation over their entire term. Consider the hypothetical case where over five years, the CPI rises 2% every March to September and falls 1% every September to March.

After five years a 0% fixed rate I Bond will increase in value 10.4% (1.02 ^ 5 - 1). While, assuming for simplicity the CPI is applied the same way, a hypothetical five-year TIPS with a 0% real yield bought at par will increase only 5.0% (1.02 ^ 5 * 0.99 ^ 5 - 1) at maturity. This is because the I Bond ignores the five periods of falling CPI while the TIPS does not.

* I say "can" benefit because the extent of the benefit, if any, depends on the I Bond's fixed rate. A 0% fixed rate I Bond benefits the most. But ones with a positive fixed rate benefit less or not at all.
Last edited by #Cruncher on Mon Sep 26, 2022 5:20 pm, edited 1 time in total.
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Re: 2043-47 TIPS paying 1.6%

Post by Hector »

DougieJones wrote: Sun Sep 25, 2022 1:35 pm
discman017 wrote: Fri Sep 23, 2022 11:19 am
FreddieFIRE wrote: Fri Sep 23, 2022 10:49 am I hold the TIPS in my ten year rolling ladder to maturity. They all kept up with inflation over the past 12 months. In addition, they all paid out coupons of at least .125%. Sure, I bought one or two of the rungs at a premium which built in a known loss of principal on the front end, but that's the way Mr. Market was treating us at that time.
I guess I'd just point out that if you bought 10-year TIPS a year ago, you guaranteed yourself a yield to maturity of minus 1% or so for the next 10 years. So your "kept up with inflation" characterization is more than outweighed by the "known loss of principal".
A TIPS bought at auction and held to maturity can never lose principle (or purchasing power). Isn't that the definition of "keeping up with inflation?"
We have seen TIPS sold at a premium at auction.
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Re: 2043-47 TIPS paying 1.6%

Post by Mel Lindauer »

Hector wrote: Mon Sep 26, 2022 5:05 pm
DougieJones wrote: Sun Sep 25, 2022 1:35 pm
discman017 wrote: Fri Sep 23, 2022 11:19 am
FreddieFIRE wrote: Fri Sep 23, 2022 10:49 am I hold the TIPS in my ten year rolling ladder to maturity. They all kept up with inflation over the past 12 months. In addition, they all paid out coupons of at least .125%. Sure, I bought one or two of the rungs at a premium which built in a known loss of principal on the front end, but that's the way Mr. Market was treating us at that time.
I guess I'd just point out that if you bought 10-year TIPS a year ago, you guaranteed yourself a yield to maturity of minus 1% or so for the next 10 years. So your "kept up with inflation" characterization is more than outweighed by the "known loss of principal".
A TIPS bought at auction and held to maturity can never lose principle (or purchasing power). Isn't that the definition of "keeping up with inflation?"
We have seen TIPS sold at a premium at auction.
True. Nice if you're a seller, perhaps not so nice if you're a buyer.
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Re: 2043-47 TIPS paying 1.6%

Post by LeftCoastIV »

This thread has me wondering if I should be buying TIPS rather than (nominal) t-bills for yield. At the end of the day, real yield is what matters and TIPS provide more certainty on this point.

That said, expected inflation should already be priced in to the spread between TIPS and nominals, so if the market is “right” about future inflation it shouldn’t matter.

Maybe the 50/50 approach between nominals and TIPS in case the market is wrong about expected inflation in either direction.

Currently, I’m buying 6 month nominals knowing I’m losing $ in real terms over that duration unless inflation gets tamed much faster than expected. I prefer flexibility with my cash/fixed income and don’t want to be locked into long hold-to-duration periods (10 years etc).
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Re: 2043-47 TIPS paying 1.6%

Post by discman017 »

LeftCoastIV wrote: Mon Sep 26, 2022 6:44 pm This thread has me wondering if I should be buying TIPS rather than (nominal) t-bills for yield. At the end of the day, real yield is what matters and TIPS provide more certainty on this point.

That said, expected inflation should already be priced in to the spread between TIPS and nominals, so if the market is “right” about future inflation it shouldn’t matter.
I think TIPS are as close to a free lunch as you can get in investing. 30-year Treasury pays 3.70% nominal. 30-year TIPS pays 1.52% real. So if inflation is more than 2.18%, you win with TIPS.

And really, even if inflation was projected at only, say, 2%, TIPS would still be the thing to buy because of the protection they provide against unexpected inflation. As a less risky investment, you'd expect TIPS to provide a lower yield.

My only explanation for this "free lunch" is I believe many pension funds and other institutions are required to buy regular nominal treasuries, so they artificially bid up their prices (correspondingly, bid down their yields) relative to other options like TIPS. But that's kind of just my own explanation to try to make sense of this crazy world.

You mentioned duration as a concern. You can buy TIPS in any duration up to 30 years. If you want the simplicity of a fund and want short duration, Vanguard's Short-Term Inflation-Protected Securities Index Fund currently has a duration of 2.6 years.
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Re: 2043-47 TIPS paying 1.6%

Post by whodidntante »

The STIP iShares 0-5 Year TIPS Bond ETF has a real yield of 1.97%. The site is gonna melt soon from all the bond posts. One can only withstand so many kilobytes at a time!
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Re: 2043-47 TIPS paying 1.6%

Post by Bill Bernstein »

I would be careful saying that TIPS provide protection against unexpected inflation.

As a lot of TIPS and TIPS fund holders have discovered to their chagrin this year, unexpected inflation often leads to central bank tightening, which can be painful in the short term for both nominal and inflation-linked bonds.

Only when held to maturity are TIPS as close to a riskless asset, as defined by consumption needs, as one can get. Along the way, expect some bumps; sometimes, big ones.

While it's true that if inflation somehow comes in under 2.1%, you'll come out ahead with nominal bonds, this is a classic Pascal's Wager. If you bet on TIPS and come out behind because of lower than expected realized inflation, you'll be slightly chagrined. But inflation can surprise a lot more on the upside than on the downside, and if you bet on nominal bonds and are wrong, the pain will be a lot worse, as long-bond holders found out between 1940 and 1980.

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Re: 2043-47 TIPS paying 1.6%

Post by Doc7 »

whodidntante wrote: Mon Sep 26, 2022 10:00 pm The STIP iShares 0-5 Year TIPS Bond ETF has a real yield of 1.97%. The site is gonna melt soon from all the bond posts. One can only withstand so many kilobytes at a time!

Are you able to provide any feedback of the tax implications of holding STIP in a taxable account? Eg: how are "Capital Gains" from NAV changes which would be subject to state tax differentiated from NAV changes due to fund reinvestment of federal treasury yields, which I think would not be state taxable?
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Re: 2043-47 TIPS paying 1.6%

Post by Robot Monster »

Bill Bernstein wrote: Tue Sep 27, 2022 8:54 am If you bet on TIPS and come out behind because of lower than expected realized inflation, you'll be slightly chagrined. But inflation can surprise a lot more on the upside than on the downside, and if you bet on nominal bonds and are wrong, the pain will be a lot worse, as long-bond holders found out between 1940 and 1980.
That seems very much aligned in thought with willthrill81's thread, "Asymmetric risk with nominal vs. inflation-linked bonds" link
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Re: 2043-47 TIPS paying 1.6%

Post by FreddieFIRE »

Bill Bernstein wrote: Tue Sep 27, 2022 8:54 am I would be careful saying that TIPS provide protection against unexpected inflation.
Why? This makes no sense.
As a lot of TIPS and TIPS fund holders have discovered to their chagrin this year, unexpected inflation often leads to central bank tightening, which can be painful in the short term for both nominal and inflation-linked bonds.

Only when held to maturity are TIPS as close to a riskless asset, as defined by consumption needs, as one can get. Along the way, expect some bumps; sometimes, big ones.
That's why many buy TIPS at auction and hold to maturity. There are no bumps. What Mr. Market does has absolutely no effect on my future purchasing power.
While it's true that if inflation somehow comes in under 2.1%, you'll come out ahead with nominal bonds, this is a classic Pascal's Wager. If you bet on TIPS and come out behind because of lower than expected realized inflation, you'll be slightly chagrined.
For many of us, our fixed income investments have nothing to do with "coming out ahead/behind." It's all about preservation of purchasing power, and there ain't nothin that beats TIPS. 8-)
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Re: 2043-47 TIPS paying 1.6%

Post by HomerJ »

Mel Lindauer wrote: Mon Sep 26, 2022 4:34 pm
FreddieFIRE wrote: Mon Sep 26, 2022 4:13 pm
Mel Lindauer wrote: Mon Sep 26, 2022 4:11 pm
FreddieFIRE wrote: Mon Sep 26, 2022 4:05 pm
Mel Lindauer wrote: Mon Sep 26, 2022 3:59 pm

The big difference is that you don't have to hold I Bonds until maturity to be guaranteed that you'll never lose money. Unlike TIPS, deflation never reduces the value of I Bonds.
Did you miss the "held to maturity" part?
No, I didn't miss that. I tried to answer your question asking why it was different.

I was pointing out that the difference is that you have to hold TIPS to maturity to be assured you'll that you'll get your money back, whereas with I Bonds, they never go down in value, so you can redeem them anytime after one year and be guaranteed that you'll get your money back.
That was my point. I don't need to sell prior to maturity. I have a plan, it works and I stick with it. I can't buy iBonds in my tIRA. You know this.
Good for you. You have a plan and expect to stick with it. However, lots of other folks start out with a plan and then life happens and they have to sell prior to maturity in which case they can lose money with TIPS but not with I Bonds. Just want to make folks aware of the possibilities before they choose.
Yes, thank you Mel... I appreciate the clarification.
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Re: 2043-47 TIPS paying 1.6%

Post by Robot Monster »

FreddieFIRE wrote: Tue Sep 27, 2022 12:18 pm
Bill Bernstein wrote: Tue Sep 27, 2022 8:54 am I would be careful saying that TIPS provide protection against unexpected inflation.
Why? This makes no sense.
I suppose he's saying people need to understand more than just "TIPS provide protection against unexpected inflation". They need to understand the interest rate risk TIPS have (that I Bonds don't).
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Re: 2043-47 TIPS paying 1.6%

Post by discman017 »

FreddieFIRE wrote: Tue Sep 27, 2022 12:18 pm For many of us, our fixed income investments have nothing to do with "coming out ahead/behind." It's all about preservation of purchasing power, and there ain't nothin that beats TIPS. 8-)
Well, I bonds. It's sure hard to beat a guaranteed 9.62% rate for the next six months, plus inflation adjustments whenever inflation is positive and nominal value preservation when inflation is negative.

But because of these enormous benefits to the buyer, the government imposes limits on I bond purchases. I suspect, like me, you've maxed out your annual I bonds allotment, in which case TIPS are excellent for preserving and (now, with recent rate increases) enhancing purchasing power over time.
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Re: 2043-47 TIPS paying 1.6%

Post by whodidntante »

Doc7 wrote: Tue Sep 27, 2022 9:04 am
whodidntante wrote: Mon Sep 26, 2022 10:00 pm The STIP iShares 0-5 Year TIPS Bond ETF has a real yield of 1.97%. The site is gonna melt soon from all the bond posts. One can only withstand so many kilobytes at a time!

Are you able to provide any feedback of the tax implications of holding STIP in a taxable account? Eg: how are "Capital Gains" from NAV changes which would be subject to state tax differentiated from NAV changes due to fund reinvestment of federal treasury yields, which I think would not be state taxable?
I'm probably the worst person on this site to direct a bond fund question to. But I'll take a shot. :happy

The fund has been successful at avoiding the distribution of capital gains and doesn't use derivatives, so tax treatment on the distributions would be similar to holding TIPS directly. You would manage to avoid state taxes by holding the fund. Or at least, you would have in the past, and I see no reason to suspect the future will be worse.

If you were to sell STIP, that would be a capital gain or capital loss and would have the usual impact. Most if not all states with an income tax also tax capital gains.
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