Trading Treasuries (nominal and TIPS)

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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

mongstradamus wrote: Wed Sep 21, 2022 6:03 pm
Kevin M wrote: Wed Sep 21, 2022 12:34 pm
mongstradamus wrote: Wed Sep 21, 2022 12:19 pm
Kevin M wrote: Wed Sep 21, 2022 11:36 am
mongstradamus wrote: Tue Sep 20, 2022 9:22 pm <snip>
<snip>
<snip>
<snip>

What you could do is buy half now and half at the auction, but the next 13-week auction is not until Oct 3, with settlement Oct 6. If you buy today, settlement is 9/22, so you get 14 days more of interest at the current yield if you buy today. I suspect the 13-week rate will be higher in 14 days, since it tends to keep rising as the fed is increasing the federal funds rate. And, you can earn money market interest in the meantime on any cash waiting for the next auction, and MM yields will continue to increase as well.

Kevin
Thank you for clarification, am I misreading the 13 week auction isn't it on 26 with settlement on 29? I am still a bit confused maybe best way to learn is to experiment a bit and see .
Yes, sorry, you are correct: next auction on 9/26 and settles 9/29. Eyes getting old ;-)
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Wed Sep 21, 2022 6:16 pm So, why do you think the higher-coupon issue tends to have a higher yield? People like the higher cash flows? Just some meaningless noise in the yields?

Kevin
The lower yield would have the higher price, so that's the preferred one. So actually a desire for less cash flow in order to have less reinvestment risk, maybe?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

I thought of another reason one might prefer the lower-coupon, lower-IR, slightly lower yield 1/15/25 TIPS.

Although the IRR (and YTM) are independent of the reinvestment rate on the coupon payments, the investment return is not; i.e., the rates at which the coupon payments are reinvested will affect the investment return.

Since much more of the return for the higher-coupon issue comes from the coupon payments, the reinvestment rate on these has a much greater impact than it does on the lower-coupon issue. So, the uncertainty of return (aka, risk) of the higher-coupon issue is greater, which should result in a higher yield, as it does.

In other words, the 0.250% coupon issue is much closer to a zero-coupon bond than is the 2.375% coupon issue, and a zero-coupon bond has no reinvestment risk.

I personally am happy not to have to bother with reinvesting coupon payments, and I don't need the cash flows, so lower coupon payments actually are a plus for me.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Wed Sep 21, 2022 6:45 pm
Kevin M wrote: Wed Sep 21, 2022 6:16 pm So, why do you think the higher-coupon issue tends to have a higher yield? People like the higher cash flows? Just some meaningless noise in the yields?

Kevin
The lower yield would have the higher price, so that's the preferred one. So actually a desire for less cash flow in order to have less reinvestment risk, maybe?
Correct conclusion, but incorrect premise. The lower-coupon, lower-yield issue has the lower price, 97.33, since little return comes from the coupon payments. The higher yield issue has a higher price, 102.06; all of the positive return comes from the coupon payments--the real price return will be negative. Conversely, most of the return for the lower-coupon, lower-yield issue comes from price return, with very little coming from coupon payments.

It has more to do with coupon rate than yield.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

silvergga wrote: Wed Sep 21, 2022 6:18 pm Hi Kevin, is there a webpage or automated way to obtain the SA real yield?

Maybe someone can host a google doc with view only privilege?

:D
I know of no webpage that provides this. TIPS seasonal adjustments is a bit of an arcane topic; it took quite a bit of discussion, research, and analysis by members of this forum some years ago to figure out why the sawtooth pattern existed in the shorter-term TIPS yields, and what kind of adjustments were appropriate to smooth out the yield curve.

#Cruncher came up with a complicated and difficult to understand but effective way to calculate the SA adjustments, and I used his approach at first. Subsequently, another forum member discovered the Paul Canty paper, which derived a much simpler way to calculate the SA adjustments, and that's what I use now. Not only is it simpler, but calculating it using the Canty approach gave me more insight into the meaning of the SA calculation.

I can't share my working spreadsheet, since there are tons of sheets in it, some of which may contain private info, and there are several other spreadsheets that it's dependent on (I use IMPORTRANGE a lot). However, maybe I could create a spreadsheet to share that simply imports the final SA results sheet, and maybe the BEI sheet too.

Of course this depends on my updating the spreadsheet, but I have been updating it almost daily for the last few months at least.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by LadyGeek »

I had an interesting phone call with my local Fidelity rep and the Fixed Income Specialist (he works in the same office). Although I'm a DIY investor, they are happy to answer any questions I may have. (They only charge AUM if you ask them to manage the account.)

The specialist was not a fan of the "auto roll" technique. Don't use it. Why? Because you should be paying attention to the market instead.

The best deals are on the secondary treasury market - which does not "auto roll". The yield curve is currently inverted, which is a big indicator of what the market might do. There are also the upcoming fed rate hikes (one happened today). Right now, 1-year and 2-year treasuries have the best yields.

You don't know what the market will do in the future (no one knows...). His approach is to look at the yield curve at 3, 6, 9, and 12 months out. Looking more than 5 years out, however, consider CDs.

You can build a bond ladder with 1-year and 2-year treasuries.

For my situation (my Mom's - I'm acting as POA), I'll be investing in FZDXX and 1-year or 2-year Treasuries. Once I get the money market transactions settled (transferring from a bank), I'll contact the Fixed Income specialist to decide on the appropriate Treasuries for me.

The portfolio has other fixed income funds, but I won't discuss them in this thread. I have some work to do regarding asset allocation and tax management.

Update: Clarified what the specialist meant.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Wed Sep 21, 2022 7:00 pm
jeffyscott wrote: Wed Sep 21, 2022 6:45 pm
Kevin M wrote: Wed Sep 21, 2022 6:16 pm So, why do you think the higher-coupon issue tends to have a higher yield? People like the higher cash flows? Just some meaningless noise in the yields?

Kevin
The lower yield would have the higher price, so that's the preferred one. So actually a desire for less cash flow in order to have less reinvestment risk, maybe?
Correct conclusion, but incorrect premise. The lower-coupon, lower-yield issue has the lower price, 97.33, since little return comes from the coupon payments. The higher yield issue has a higher price, 102.06; all of the positive return comes from the coupon payments--the real price return will be negative. Conversely, most of the return for the lower-coupon, lower-yield issue comes from price return, with very little coming from coupon payments.

It has more to do with coupon rate than yield.

Kevin
Okay, but we can say that in order for the yields to be equal the price of the one with lower yield would have to go up. I was thinking of that effect.

But yes, whatever the path to get there, the conclusion is that it seems that there's a preference for lower coupons. Perhaps Treasury could save some money by issuing zero coupon TIPS.
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Re: Trading Treasuries (nominal and TIPS)

Post by mongstradamus »

LadyGeek wrote: Wed Sep 21, 2022 7:13 pm I had an interesting phone call with my local Fidelity rep and the Fixed Income Specialist (he works in the same office). Although I'm a DIY investor, they are happy to answer any questions I may have. (They only charge AUM if you ask them to manage the account.)

The specialist was not a fan of the "auto roll" technique. Why? Because it forces you to pay attention to the market.

The best deals are on the secondary treasury market - which does not "auto roll". The yield curve is currently inverted, which is a big indicator of what the market might do. There are also the upcoming fed rate hikes (one happened today). Right now, 1-year and 2-year treasuries have the best yields.

You don't know what the market will do in the future (no one knows...). His approach is to look at the yield curve at 3, 6, 9, and 12 months out. Looking more than 5 years out, however, consider CDs.

You can build a bond ladder with 1-year and 2-year treasuries.

For my situation (my Mom's - I'm acting as POA), I'll be investing in FZDXX and 1-year or 2-year Treasuries. Once I get the money market transactions settled (transferring from a bank), I'll contact the Fixed Income specialist to decide on the appropriate Treasuries for me.

The portfolio has other fixed income funds, but I won't discuss them in this thread. I have some work to do regarding asset allocation and tax management.
I don’t understand what fidelity rep means you would have to keep check on market if you auto roll. I would think auto reroll you just buy and forget about it ? Wouldn’t timing when to buy depending on yields be market timing and having to check yields all the time ?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

OK, here is a protected spreadsheet that shows the SA and BEI sheets. It shows only the data, not the formulas, and I haven't added any charts yet. Please let me know if this is useful.

Also, credit to #Cruncher for the formulas to calculate BEI from last known reference date (LKR) to maturity.

If anyone wants to dig into the details, let's please move the discussion to TIPS yield curve and seasonal adjustment update.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

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mongstradamus wrote: Wed Sep 21, 2022 7:34 pm I don’t understand what fidelity rep means you would have to keep check on market if you auto roll. I would think auto reroll you just buy and forget about it ? Wouldn’t timing when to buy depending on yields be market timing and having to check yields all the time ?
Sorry about that. I have revised my post. The Fidelity rep said to not use auto roll. Instead, pay attention to what the market is doing.

His ensuing discussion on the inverted yield curve is why you need to look at the market conditions. Also, check every few months.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

LadyGeek wrote: Wed Sep 21, 2022 7:13 pm I had an interesting phone call with my local Fidelity rep and the Fixed Income Specialist (he works in the same office). Although I'm a DIY investor, they are happy to answer any questions I may have. (They only charge AUM if you ask them to manage the account.)

The specialist was not a fan of the "auto roll" technique. Don't use it. Why? Because you should be paying attention to the market instead.
This is very non-Bogleheadish, but that's OK with me, as I do base my fixed income decisions on the available opportunities, the yield curves, etc.
LadyGeek wrote: Wed Sep 21, 2022 7:13 pm The best deals are on the secondary treasury market - which does not "auto roll".

This is poppycock (the part about best deals). I have bought most of my Treasuries on the secondary market, but not because I get the best deals. I do it because the maturities I want to buy are not available at auction, settlement is quicker, and I know what yields I'm getting.

You get the best deal possible for a particular maturity at auction, since you are getting the same yield as the primary dealers (the ones that bid competitively with millions of dollars).
LadyGeek wrote: Wed Sep 21, 2022 7:13 pm The yield curve is currently inverted, which is a big indicator of what the market might do. There are also the upcoming fed rate hikes (one happened today). Right now, 1-year and 2-year treasuries have the best yields.
Here is the nominal Treasury yield curve as of today:

Image

We can see that the yield curve is not at all inverted at the short end, but steeply positively sloped. It also is not inverted between 10 and 20 years. Let's zoom into the shorter maturities, since that seems to be what you're interested in:

Image

We see that the yield curve is steep out to 1-year maturity, then a bit inverted between 1-year and 2-year maturities, and the inversion continues out to 5-year maturity. So, the highest yield is for about 1-year maturities, but not much different than 2-year maturities.

That does not mean that these are the maturities you should invest in. It depends on how you want to balance price risk with reinvestment risk. Shorter-term maturities have less price risk but more reinvestment risk, and vice versa for longer maturities. Personally, I prefer to invest where the yield curve is steep, or near the peak of the steep part, so that would be 1-year or less maturity at this time. That's just me though--I understand that I'm taking more reinvestment risk this way.
LadyGeek wrote: Wed Sep 21, 2022 7:13 pm You don't know what the market will do in the future (no one knows...). His approach is to look at the yield curve at 3, 6, 9, and 12 months out. Looking more than 5 years out, however, consider CDs.
First sentence is true. Second sentence only make sense if you want only shorter term maturities. Last sentence depends on the environment, which changes.

Looking at Fidelity Yield page now, CDs have a slight yield advantage at 2yr maturity, more at 3y, and a lot at 5y (4.50% for CD, 3.80% for Treasury), so would agree with rep if you want to go out five years in current environment.
LadyGeek wrote: Wed Sep 21, 2022 7:13 pm You can build a bond ladder with 1-year and 2-year treasuries.
You can build a ladder with any maturities.
LadyGeek wrote: Wed Sep 21, 2022 7:13 pm For my situation (my Mom's - I'm acting as POA), I'll be investing in FZDXX and 1-year or 2-year Treasuries. Once I get the money market transactions settled (transferring from a bank), I'll contact the Fixed Income specialist to decide on the appropriate Treasuries for me.
I would not invest based on what a Fidelity fixed income specialist told me. I would share his/her recommendation here, and then see what we have to say about it.

I also would highly recommend considering TIPS for 1-year and 2-year time frames, as inflation can really eat away at purchasing power. If the fixed income specialist says something like don't invest in TIPS because the yields are lower (which we have seen posted), I would hang up the phone and come back here for advice, since that shows a deep misunderstanding of real yields vs. nominal yields.

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Re: Trading Treasuries (nominal and TIPS)

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Kevin M wrote: Wed Sep 21, 2022 9:12 pm Looking at Fidelity Yield page now, CDs have a slight yield advantage at 2yr maturity, more at 3y, and a lot at 5y (4.50% for CD, 3.80% for Treasury), so would agree with rep if you want to go out five years in current environment.
They include callable CDs for that rate table. The 4.5% one is callable. They appear to only show callable 5 year CDs available at this time for new issues. At 3 years the highest non-callable CD they show is 3.85%, so less than 3 year treasury yield.
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Re: Trading Treasuries (nominal and TIPS)

Post by whodidntante »

I sorta wandered here off the street, but this turned out to be a decent bond market timing thread.
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Re: Trading Treasuries (nominal and TIPS)

Post by rossington »

whodidntante wrote: Wed Sep 21, 2022 11:06 pm I sorta wandered here off the street, but this turned out to be a decent bond market timing thread.
Would this now be considered chasing yield on the bond side of AA as well? I'm not sure.
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Re: Trading Treasuries (nominal and TIPS)

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Kevin M wrote: Wed Sep 21, 2022 9:12 pm I would not invest based on what a Fidelity fixed income specialist told me. I would share his/her recommendation here, and then see what we have to say about it.

I also would highly recommend considering TIPS for 1-year and 2-year time frames, as inflation can really eat away at purchasing power. If the fixed income specialist says something like don't invest in TIPS because the yields are lower (which we have seen posted), I would hang up the phone and come back here for advice, since that shows a deep misunderstanding of real yields vs. nominal yields.
Thank you for the detailed explanation. Yes, I was looking at short-term maturities and the conversation was focused on that. I'll take the advice I give everyone else - post your portfolio info and ask for recommendations. BTW, we never discussed TIPS.

For balance, bear in mind that I could have misunderstood part of the conversation.
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Re: Trading Treasuries (nominal and TIPS)

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Yes, I guess since the revered Total Bond Market (VBTLX) is down >10%; market timing of your fixed income is the new Boglehead recommendation!
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Re: Trading Treasuries (nominal and TIPS)

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Another nice bump up in nominal and real yields so far today!
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Re: Trading Treasuries (nominal and TIPS)

Post by Tom_T »

Beginner question about specific TIPS... forgive me, but there is SO much information on the Forum that it's hard to search, so I thought I'd just ask a basic question using these two specific examples from the Vanguard site this morning.

1/15/2025, Coupon 2.375, Ask 101.785, YTM 1.584
1/15/2025, Coupon 0.250, Ask 97.042, YTM 1.558

What is the difference between these two? And, at maturity, what will I have, or what might I have?
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

There is very little difference between these two TIPS. You will earn the yield to maturity at the time of purchase plus the change in CPI from purchase to maturity. They both have already gotten a substantial CPI adjustment, so there is risk of nominal loss if the CPI goes down between now and maturity. Even in that case, you have still earned the stated real yield. One has a higher price and higher coupon, the other a lower price and lower coupon, so the timing of your income will be slightly different. In my humble opinion, not enough difference to worry about.
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

I see 5 year TIPS at 1.42% now. I have some TIPS maturing on 4/15/23.

My thought is to hold them until April and then maybe extend out to 5 year TIPS. Would have worked nicely in 2005.

Opinions?
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Re: Trading Treasuries (nominal and TIPS)

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billyt wrote: Thu Sep 22, 2022 10:05 am There is very little difference between these two TIPS. You will earn the yield to maturity at the time of purchase plus the change in CPI from purchase to maturity. They both have already gotten a substantial CPI adjustment, so there is risk of nominal loss if the CPI goes down between now and maturity. Even in that case, you have still earned the stated real yield. One has a higher price and higher coupon, the other a lower price and lower coupon, so the timing of your income will be slightly different. In my humble opinion, not enough difference to worry about.
Would you explain the bolded part? The second bond costs ~$9700 for $10K worth. I'm guaranteed to get $10K at maturity, right? What is the potential nominal loss?
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

I would discourage you from trying to time the market. When do you need the money? That should determine the maturity you chose. If your investment horizon is indefinite at this point, you are better off in a bond fund and you can switch to a ladder when your needs are better defined.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

TIPS yields look great today!! (While, sadly, the stock market is falling like a lead balloon....)
Just a heads up for those of you who, unlike me, have cash to invest.....
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Hi Tom: If the CPI is lower at maturity than it is now, you may get back less than you paid. Most think that this scenario is unlikely, but it is not impossible.
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Re: Trading Treasuries (nominal and TIPS)

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Tom_T wrote: Thu Sep 22, 2022 9:49 am Beginner question about specific TIPS... forgive me, but there is SO much information on the Forum that it's hard to search, so I thought I'd just ask a basic question using these two specific examples from the Vanguard site this morning.

1/15/2025, Coupon 2.375, Ask 101.785, YTM 1.584
1/15/2025, Coupon 0.250, Ask 97.042, YTM 1.558

What is the difference between these two? And, at maturity, what will I have, or what might I have?
YTM is what you will get on your investment (above inflation) if you hold to maturity
Coupon is the original bond's yield from time of investment through maturity (above inflation). That would be important if you bought the bond at original auction, and would equal the YTM for you in that scenario.
The number that should matter to you is YTM ("yield to maturity").
That said, since the YTM is essentially equal on these two bonds which mature the same date (within .03%), I would invest in the one with the lower coupon. It will be cheaper, and you have a little more deflation protection.
Last edited by protagonist on Thu Sep 22, 2022 10:29 am, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

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Tom_T wrote: Thu Sep 22, 2022 10:16 am The second bond costs ~$9700 for $10K worth. I'm guaranteed to get $10K at maturity, right? What is the potential nominal loss?
No, the principle value increases with inflation and decreases with deflation. The second bond has a current principle value of about $1250, due to changes in the reference CPI from issuance to today. So at 97, you would pay about $1212 per bond.

At maturity the principle will be valued based on the reference CPI for that date. That could be higher or lower than today's reference CPI and so higher or lower than $1250. If CPI were low enough the value could fall below the $1212 that you would have paid.
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

jeffyscott is correct, and it is good to understand the details of what you are buying, but don't lose sight of the fact that even in this case your are getting the real yield your were promised. If you want a guaranteed nominal return, buy regular treasuries, if you want guaranteed nominal returns, buy TIPS.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Tom_T wrote: Thu Sep 22, 2022 9:49 am Beginner question about specific TIPS... forgive me, but there is SO much information on the Forum that it's hard to search, so I thought I'd just ask a basic question using these two specific examples from the Vanguard site this morning.

1/15/2025, Coupon 2.375, Ask 101.785, YTM 1.584
1/15/2025, Coupon 0.250, Ask 97.042, YTM 1.558

What is the difference between these two? And, at maturity, what will I have, or what might I have?
There is a series of posts about my decision process to buy one or the other of these yesterday, starting here: viewtopic.php?p=6881112#p6881112.

At first I favored the higher-coupon, higher-yield issue, but ended up buying the lower-yield, lower-coupon issue. Turns out my reasoning was somewhat faulty, but after we discussed it and I thought about it some more, I'm happy with the decision. Look at the discussion (on previous page) and you'll see the various considerations.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Tom_T »

Kevin M wrote: Thu Sep 22, 2022 12:44 pm
Tom_T wrote: Thu Sep 22, 2022 9:49 am Beginner question about specific TIPS... forgive me, but there is SO much information on the Forum that it's hard to search, so I thought I'd just ask a basic question using these two specific examples from the Vanguard site this morning.

1/15/2025, Coupon 2.375, Ask 101.785, YTM 1.584
1/15/2025, Coupon 0.250, Ask 97.042, YTM 1.558

What is the difference between these two? And, at maturity, what will I have, or what might I have?
There is a series of posts about my decision process to buy one or the other of these yesterday, starting here: viewtopic.php?p=6881112#p6881112.

At first I favored the higher-coupon, higher-yield issue, but ended up buying the lower-yield, lower-coupon issue. Turns out my reasoning was somewhat faulty, but after we discussed it and I thought about it some more, I'm happy with the decision. Look at the discussion (on previous page) and you'll see the various considerations.

Kevin
Thank you. At this rate, we will need a "Bogleheads Bonds" forum!
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Here is the TIPS yield curve based on Fidelity quotes today.

Image

(SA = Seasonally Adjusted)

Here it is out to 2027 maturities:

Image

(Vertical axis truncated so we can see more resolution; the Jan 2023 ask yield is 3.07% (SA 1.66%))

The 1/15/25 0.250% TIPS SA yield at 1.44% is 21 basis points higher than the 1.23% SA I got yesterday, but knock off 1-2 basis points for large/small-qty spread.

I will be buying more TIPS today.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Bought 10 of the 1/15/2025 0.250% TIPS for DW at Fidelity at 96.922, yield = 1.61%, SA yield = 1.42%.

Bought 10 of the 1/15/2024 for me at Vanguard at 98.320, yield = 1.93%, SA yield = 1.60%, which is 48 basis points higher SA yield than my last purchase on 09/09/2022. Principal amount was $12,484.81, compared to 12,560.90 for last purchase.

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Re: Trading Treasuries (nominal and TIPS)

Post by ClassOf2021 »

You Know What I Mean wrote: Fri Sep 16, 2022 8:29 am
billyt wrote: Thu Sep 15, 2022 9:52 am Anyone considering the upcoming 10y reopening?
I am. The Indicative Yield is 1.032. Does it make sense to sell at least a portion of TIPS ETFs (TIP and/or SCHP) holdings in IRA's to buy the 10-Year TIP REOPEN (maturing 07/15/32)?

That would be to lock in a "high" real yield for a longer period. Is the major downside the possibility that real yields could go even higher during that term?
I bought this (91282CEZ0) today on Fidelity (IRA) both on auction and on the secondary market. The price on auction was $94.2744 and the price on the secondary market was $94.008 (so slightly better).

The "Ask Yield to Maturity" on Fidelity is given as 1.286%

I did this trade partly to understand better, given that I am considering purchasing much more in the future. I have a few questions:

1. Is the 1.286% the real yield?

2. Is the real yield a combination of the coupon % (contributing over half in this case), the price (which is this case is below 100 as would contribute a bit less than half of the real yield) and the inflation factor at purchase (=1.01975 which is a small contributor)?

3. if I hold to maturity, I would receive the #bonds times $1000 per bond times the inflation factor at maturity plus coupon payments every 6 months over the 10 years to maturity?

Do I understand this correctly?

If so, I expect I will buy a fair amount of roughly 5yr TIPs, so long as I am getting 1+% real yield, and if I understand this correctly then I would not be put off of the secondary market.

Thanks for any feedback.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

^ Here's a detailed description of what the auction results mean:

https://tipswatch.com/2022/09/22/10-yea ... -12-years/

The one you bought at auction won't settle for 8 days, while the secondary settles tomorrow. So there would some small additional difference with that one, besides the price.
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Re: Trading Treasuries (nominal and TIPS)

Post by whodidntante »

TIPS are becoming a meme bond. Y'all have been crowing about bonds for years and years, and finally, I care. Kind of. :happy
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Thu Sep 22, 2022 6:25 am Yes, I guess since the revered Total Bond Market (VBTLX) is down >10%; market timing of your fixed income is the new Boglehead recommendation!
How does this help people understand trading Treasuries, the topic of this thread? My purpose in starting this thread was to help people learn about trading Treasuries, regardless of their motivations, and to learn more about it myself.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

ClassOf2021 wrote: Thu Sep 22, 2022 4:43 pm
You Know What I Mean wrote: Fri Sep 16, 2022 8:29 am
billyt wrote: Thu Sep 15, 2022 9:52 am Anyone considering the upcoming 10y reopening?
I am. <snip>
I bought this (91282CEZ0) today on Fidelity (IRA) both on auction and on the secondary market. The price on auction was $94.2744 and the price on the secondary market was $94.008 (so slightly better).
Good for you, and thanks for sharing your results, which show that you don't always get the best price at auction.
ClassOf2021 wrote: Thu Sep 22, 2022 4:43 pm The "Ask Yield to Maturity" on Fidelity is given as 1.286%

I did this trade partly to understand better, given that I am considering purchasing much more in the future. I have a few questions:

1. Is the 1.286% the real yield?

2. Is the real yield a combination of the coupon % (contributing over half in this case), the price (which is this case is below 100 as would contribute a bit less than half of the real yield) and the inflation factor at purchase (=1.01975 which is a small contributor)?

3. if I hold to maturity, I would receive the #bonds times $1000 per bond times the inflation factor at maturity plus coupon payments every 6 months over the 10 years to maturity?

Do I understand this correctly?

If so, I expect I will buy a fair amount of roughly 5yr TIPs, so long as I am getting 1+% real yield, and if I understand this correctly then I would not be put off of the secondary market.

Thanks for any feedback.
1. Yes, and the auction yield is 1.248%.

2. The real yield, as with any yield to maturity, depends on settlement date, maturity date, coupon rate, and price. Yes, the increase from the price you paid to 100 at maturity adds to the yield, as do the coupon payments. The inflation factor is not part of the yield calculation. It is multiplied by by the price to get the inflation adjusted price, which is what you actually pay. I have never seen a reason to calculate an adjusted yield from the adjusted price.

3. Yes, and each semi-annual coupon payment also is increased by the inflation factor on the date of the payment. So it is coupon rate / 2 * 1,000 * inflation factor.

Good for you not being put off by secondary market; I have bought most of my Treasuries on secondary. If you want a TIPS maturity of less than 5 years, you have no choice.

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Re: Trading Treasuries (nominal and TIPS)

Post by ClassOf2021 »

Kevin M wrote: Thu Sep 22, 2022 6:04 pm
ClassOf2021 wrote: Thu Sep 22, 2022 4:43 pm
You Know What I Mean wrote: Fri Sep 16, 2022 8:29 am
billyt wrote: Thu Sep 15, 2022 9:52 am Anyone considering the upcoming 10y reopening?
I am. <snip>
I bought this (91282CEZ0) today on Fidelity (IRA) both on auction and on the secondary market. The price on auction was $94.2744 and the price on the secondary market was $94.008 (so slightly better).
Good for you, and thanks for sharing your results, which show that you don't always get the best price at auction.
ClassOf2021 wrote: Thu Sep 22, 2022 4:43 pm The "Ask Yield to Maturity" on Fidelity is given as 1.286%

I did this trade partly to understand better, given that I am considering purchasing much more in the future. I have a few questions:

1. Is the 1.286% the real yield?

2. Is the real yield a combination of the coupon % (contributing over half in this case), the price (which is this case is below 100 as would contribute a bit less than half of the real yield) and the inflation factor at purchase (=1.01975 which is a small contributor)?

3. if I hold to maturity, I would receive the #bonds times $1000 per bond times the inflation factor at maturity plus coupon payments every 6 months over the 10 years to maturity?

Do I understand this correctly?

If so, I expect I will buy a fair amount of roughly 5yr TIPs, so long as I am getting 1+% real yield, and if I understand this correctly then I would not be put off of the secondary market.

Thanks for any feedback.
1. Yes, and the auction yield is 1.248%.

2. The real yield, as with any yield to maturity, depends on settlement date, maturity date, coupon rate, and price. Yes, the increase from the price you paid to 100 at maturity adds to the yield, as do the coupon payments. The inflation factor is not part of the yield calculation. It is multiplied by by the price to get the inflation adjusted price, which is what you actually pay. I have never seen a reason to calculate an adjusted yield from the adjusted price.

3. Yes, and each semi-annual coupon payment also is increased by the inflation factor on the date of the payment. So it is coupon rate / 2 * 1,000 * inflation factor.

Good for you not being put off by secondary market; I have bought most of my Treasuries on secondary. If you want a TIPS maturity of less than 5 years, you have no choice.

Kevin
Thanks Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by LadyGeek »

LadyGeek wrote: Thu Sep 22, 2022 6:00 am
Kevin M wrote: Wed Sep 21, 2022 9:12 pm I would not invest based on what a Fidelity fixed income specialist told me. I would share his/her recommendation here, and then see what we have to say about it.

I also would highly recommend considering TIPS for 1-year and 2-year time frames, as inflation can really eat away at purchasing power. If the fixed income specialist says something like don't invest in TIPS because the yields are lower (which we have seen posted), I would hang up the phone and come back here for advice, since that shows a deep misunderstanding of real yields vs. nominal yields.
Thank you for the detailed explanation. Yes, I was looking at short-term maturities and the conversation was focused on that. I'll take the advice I give everyone else - post your portfolio info and ask for recommendations. BTW, we never discussed TIPS.

For balance, bear in mind that I could have misunderstood part of the conversation.
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Re: Trading Treasuries (nominal and TIPS)

Post by Chip Munk »

Looking over the Treasury Auction listings at Fidelity just now, they list the 2-year Note with an expected coupon of 4.125% and an expected yield of 4.105% (earlier in the day it was even lower, 4.098%). Does that mean that they expect the auction price of this Note to be above $100?
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Re: Trading Treasuries (nominal and TIPS)

Post by Chip Munk »

jeffyscott wrote: Wed Sep 21, 2022 9:35 pm
Kevin M wrote: Wed Sep 21, 2022 9:12 pm Looking at Fidelity Yield page now, CDs have a slight yield advantage at 2yr maturity, more at 3y, and a lot at 5y (4.50% for CD, 3.80% for Treasury), so would agree with rep if you want to go out five years in current environment.
They include callable CDs for that rate table. The 4.5% one is callable. They appear to only show callable 5 year CDs available at this time for new issues. At 3 years the highest non-callable CD they show is 3.85%, so less than 3 year treasury yield.
I was browsing through the new issue CDs on Fidelity earlier today and it was interesting to see how quickly the 5-year non-callable CDs were being snapped up, leaving only callable CDs. For example, they had some 5-year non-callable CDs at 4.3% that sold out as I watched. I just took another look and I see they have a new supply of over 3,000 of them listed again now (9pm eastern time). There are some non-callable 3-year CDs at 4.3% as well.
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VTAPX holdings vs. my TIPS holdings

Post by Kevin M »

I used the Vanguard institutional site to download the holdings of Vanguard's short-term TIPS fund, VTAPX. I thought it would be interesting to compare my holdings to the fund's holdings.

Here are VTAPX holdings as of 8/31/22:

Image

The fund holds every maturity from 1/15/22 to 7/15/27. The largest holding is the shortest-term TIPS, the Jan 2023. Holdings generally decrease as maturity increases. Except for 2027, they hold less Apr than Jan or Jul in each maturity year. Since this is an index fund, I assume the holdings are related to the amount outstanding for each maturity. Anyone want to check that?

Here are my holdings, shown in the same way (this does not include DW's holdings):

Image

Obviously I hold much more in the shorter maturities. I find it interesting that the patterns of Jan, Apr and Jul 2023 are similar, which is completely coincidental.

My policy for buying TIPS has been evolving. My view is that the Fed will succeed in bringing inflation down to the 2% level over the next few years (I think the market may be coming around to this view), so I have been, and still am, favoring the shorter maturities. I think what I'll be focusing on now is adding to the 2024 maturities to bring them more in line to the Vanguard % holdings (relative to my 2023 holdings), so I need to start by adding more Jan 2024 (bought some yesterday).

I haven't looked at TIPS yields today, but I see that short-term TIPS ETFs are down today, so short-term TIPS yields should be up.

Kevin
Last edited by Kevin M on Tue Sep 27, 2022 3:08 pm, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Chip Munk wrote: Thu Sep 22, 2022 8:04 pm Looking over the Treasury Auction listings at Fidelity just now, they list the 2-year Note with an expected coupon of 4.125% and an expected yield of 4.105% (earlier in the day it was even lower, 4.098%). Does that mean that they expect the auction price of this Note to be above $100?
Yes. At that coupon and yield, price would be 100.04, calculated using spreadsheet YIELD function.
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Re: VTAPX holdings vs. my TIPS holdings1

Post by vineviz »

Kevin M wrote: Fri Sep 23, 2022 12:00 pm
The fund holds every maturity from 1/15/22 to 7/15/27. The largest holding is the shortest-term TIPS, the Jan 2023. Holdings generally decrease as maturity increases. Except for 2027, they hold less Apr than Jan or Jul in each maturity year. Since this is an index fund, I assume the holdings are related to the amount outstanding for each maturity. Anyone want to check that?
I just did a quick comparison of the three short-term TIPS index funds tracking the 0-5 years index and their composition seems to vary, sometimes notably.

Invesco PureBeta 0-5 Yr US TIPS ETF (PBTP)
Vanguard Short-Term Infl-Prot Secs ETF (VTIP)
iShares 0-5 Year TIPS Bond ETF (STIP)


For instance, both PBTP and VTIP own about the same weight (roughly 4% of the fund) of the 1/15/25 and 4/15/25 TIPS but STIP owns virtually none of the 1/15/25 issue and 11% of the fund is in the 4/15/25.

The 4/15/27 issue is the 7th largest holding in VTIP but the 17th largest in PBTP. And so forth.

Code: Select all

CUSIP	Maturity	PBTP	STIP	VTIP
912828UH1	1/15/23	5.68%	8.18%	6.71%
9128284H0	4/15/23	6.04%	8.19%	5.74%
912828VM9	7/15/23	5.64%	1.63%	6.48%
912828B25	1/15/24	5.56%	6.41%	6.17%
9128286N5	4/15/24	4.03%	3.26%	3.46%
912828WU0	7/15/24	5.46%	6.21%	5.57%
912828YL8	10/15/24	4.33%	5.65%	4.96%
912828H45	1/15/25	5.40%	5.58%	5.09%
912810FR4	1/15/25	4.88%	0.07%	3.64%
912828ZJ2	4/15/25	4.29%	10.81%	4.04%
912828XL9	7/15/25	5.44%	2.92%	5.60%
91282CAQ4	10/15/25	4.12%	5.17%	4.93%
912810FS2	1/15/26	3.29%	0.04%	2.36%
912828N71	1/15/26	5.59%	1.29%	4.74%
91282CCA7	4/15/26	4.68%	7.34%	3.79%
912828S50	7/15/26	4.72%	5.81%	4.66%
91282CDC2	10/15/26	4.31%	6.31%	5.25%
912810PS1	1/15/27	2.73%	0.04%	2.35%
912828V49	1/15/27	4.93%	4.69%	4.36%
91282CEJ6	4/15/27	4.26%	6.91%	5.33%
9128282L3	7/15/27	4.63%	3.50%	4.81%
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Re: VTAPX holdings vs. my TIPS holdings1

Post by Kevin M »

vineviz wrote: Fri Sep 23, 2022 1:11 pm
Kevin M wrote: Fri Sep 23, 2022 12:00 pm The fund holds every maturity from 1/15/22 to 7/15/27. The largest holding is the shortest-term TIPS, the Jan 2023. Holdings generally decrease as maturity increases. Except for 2027, they hold less Apr than Jan or Jul in each maturity year. Since this is an index fund, I assume the holdings are related to the amount outstanding for each maturity. Anyone want to check that?
I just did a quick comparison of the three short-term TIPS index funds tracking the 0-5 years index and their composition seems to vary, sometimes notably.

Invesco PureBeta 0-5 Yr US TIPS ETF (PBTP)
Vanguard Short-Term Infl-Prot Secs ETF (VTIP)
iShares 0-5 Year TIPS Bond ETF (STIP)


For instance, both PBTP and VTIP own about the same weight (roughly 4% of the fund) of the 1/15/25 and 4/15/25 TIPS but STIP owns virtually none of the 1/15/25 issue and 11% of the fund is in the 4/15/25.

The 4/15/27 issue is the 7th largest holding in VTIP but the 17th largest in PBTP. And so forth.

Code: Select all

CUSIP	Maturity	PBTP	STIP	VTIP
912828UH1	1/15/23	5.68%	8.18%	6.71%
9128284H0	4/15/23	6.04%	8.19%	5.74%
912828VM9	7/15/23	5.64%	1.63%	6.48%
912828B25	1/15/24	5.56%	6.41%	6.17%
9128286N5	4/15/24	4.03%	3.26%	3.46%
912828WU0	7/15/24	5.46%	6.21%	5.57%
912828YL8	10/15/24	4.33%	5.65%	4.96%
912828H45	1/15/25	5.40%	5.58%	5.09%
912810FR4	1/15/25	4.88%	0.07%	3.64%
912828ZJ2	4/15/25	4.29%	10.81%	4.04%
912828XL9	7/15/25	5.44%	2.92%	5.60%
91282CAQ4	10/15/25	4.12%	5.17%	4.93%
912810FS2	1/15/26	3.29%	0.04%	2.36%
912828N71	1/15/26	5.59%	1.29%	4.74%
91282CCA7	4/15/26	4.68%	7.34%	3.79%
912828S50	7/15/26	4.72%	5.81%	4.66%
91282CDC2	10/15/26	4.31%	6.31%	5.25%
912810PS1	1/15/27	2.73%	0.04%	2.35%
912828V49	1/15/27	4.93%	4.69%	4.36%
91282CEJ6	4/15/27	4.26%	6.91%	5.33%
9128282L3	7/15/27	4.63%	3.50%	4.81%
Thanks for sharing this.

VTIP is the ETF share class of VTAPX, so its holdings are identical to what I shared. The benchmark for these funds is Bloomberg U.S. 0-5 Year Treasury Inflation Protected Securities Index.

STIP benchmark index is Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L), symbol LTP5TRUU.

Perhaps as long as a fund tracks its index pretty well, the fund managers don't try to replicate the index weights by maturity. I have not yet found the weightings for the index.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

Kevin M wrote: Fri Sep 23, 2022 12:59 pm
Chip Munk wrote: Thu Sep 22, 2022 8:04 pmLooking over the Treasury Auction listings at Fidelity just now, they list the 2-year Note [to be auctioned 9/26/2022] with an expected coupon of 4.125% and an expected yield of 4.105% (earlier in the day it was even lower, 4.098%). Does that mean that they expect the auction price of this Note to be above $100?
Yes. At that coupon and yield, price would be 100.04, calculated using spreadsheet YIELD function.
(I think you mean the spreadsheet PRICE function, not YIELD.) Your math is correct, Kevin, but that's not how initial Treasury auctions work. (2-year notes only have initial auctions; no re-openings.) Unless the yield falls below 0.125%, the price will always be at or slightly below par. The yield is set by the auction and then the coupon is set to be at or below the yield in 1/8% increments. For instance, in last month's 2-year auction the yield was 3.307%. The coupon was therefore set to 3.25%. This made the price
99.890561 = PRICE(DATE(2022,8,31), DATE(2024,8,31), 3.25%, 3.307%, 100, 2, 1)
Kevin M wrote: Fri Sep 23, 2022 1:45 pmI have not yet found the weightings for the index [of TIPS maturing within five years].
For my Consistent Yield & Duration to Help Choose TIPS Fund thread (last update here), I just use the market value of TIPS issued at every auction. I last updated this 7/29/2022 on column K of the Weight sheet of my YTM / Duration Calculator Excel workbook. I plan to update this as of 9/30/2022 the end of next week. I wouldn't be surprised if the official index differs somewhat from what I use. (Perhaps it excludes TIPS held by the Fed. Or perhaps the Treasury buys back some TIPS before maturity.) But in this November 2014 post I compared the Vanguard short term TIPS fund holdings to the index as I calculate it and it matched up pretty closely.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

#Cruncher wrote: Fri Sep 23, 2022 4:35 pm
Kevin M wrote: Fri Sep 23, 2022 12:59 pm
Chip Munk wrote: Thu Sep 22, 2022 8:04 pmLooking over the Treasury Auction listings at Fidelity just now, they list the 2-year Note [to be auctioned 9/26/2022] with an expected coupon of 4.125% and an expected yield of 4.105% (earlier in the day it was even lower, 4.098%). Does that mean that they expect the auction price of this Note to be above $100?
Yes. At that coupon and yield, price would be 100.04, calculated using spreadsheet YIELD function.
(I think you mean the spreadsheet PRICE function, not YIELD.) Your math is correct, Kevin, but that's not how initial Treasury auctions work. (2-year notes only have initial auctions; no re-openings.) Unless the yield falls below 0.125%, the price will always be at or slightly below par. The yield is set by the auction and then the coupon is set to be at or below the yield in 1/8% increments. For instance, in last month's 2-year auction the yield was 3.307%. The coupon was therefore set to 3.25%. This made the price
99.890561 = PRICE(DATE(2022,8,31), DATE(2024,8,31), 3.25%, 3.307%, 100, 2, 1)
Yes, PRICE, of course. Thanks for the explanation.
#Cruncher wrote: Fri Sep 23, 2022 4:35 pm
Kevin M wrote: Fri Sep 23, 2022 1:45 pmI have not yet found the weightings for the index [of TIPS maturing within five years].
For my Consistent Yield & Duration to Help Choose TIPS Fund thread (last update here), I just use the market value of TIPS issued at every auction. I last updated this 7/29/2022 on column K of the Weight sheet of my YTM / Duration Calculator Excel workbook. I plan to update this as of 9/30/2022 the end of next week. I wouldn't be surprised if the official index differs somewhat from what I use. (Perhaps it excludes TIPS held by the Fed. Or perhaps the Treasury buys back some TIPS before maturity.) But in this November 2014 post I compared the Vanguard short term TIPS fund holdings to the index as I calculate it and it matched up pretty closely.
Thanks. I'll check it out.

I did see a note when looking at one of the index descriptions about not including TIPS held by the government, or something like that, but I haven't been able to find the weights in the 0-5 Bloomberg TIPS index.

I also recall seeing a Treasury web page where the % ownership of TIPS was shown, and it was quite large for some issues--like 60%, but based on the column header, I'm not exactly sure what that is a percentage of; I assumed it was % of outstanding amount.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Kevin M wrote: Fri Sep 23, 2022 5:37 pm
#Cruncher wrote: Fri Sep 23, 2022 4:35 pm
Kevin M wrote: Fri Sep 23, 2022 1:45 pmI have not yet found the weightings for the index [of TIPS maturing within five years].
For my Consistent Yield & Duration to Help Choose TIPS Fund thread (last update here), I just use the market value of TIPS issued at every auction. I last updated this 7/29/2022 on column K of the Weight sheet of my YTM / Duration Calculator Excel workbook. I plan to update this as of 9/30/2022 the end of next week. I wouldn't be surprised if the official index differs somewhat from what I use. (Perhaps it excludes TIPS held by the Fed. Or perhaps the Treasury buys back some TIPS before maturity.) But in this November 2014 post I compared the Vanguard short term TIPS fund holdings to the index as I calculate it and it matched up pretty closely.
Thanks. I'll check it out.
Here is a chart comparing the #Cruncher weights (Weight %) for 1/15/27 to 7/15/27 (fund holdings) to VTAPX weights:

Image

Not perfect, but not bad. Here it is in tabular form:

Image

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Re: Trading Treasuries (nominal and TIPS)

Post by Chip Munk »

#Cruncher wrote: Fri Sep 23, 2022 4:35 pm
Kevin M wrote: Fri Sep 23, 2022 12:59 pm
Chip Munk wrote: Thu Sep 22, 2022 8:04 pmLooking over the Treasury Auction listings at Fidelity just now, they list the 2-year Note [to be auctioned 9/26/2022] with an expected coupon of 4.125% and an expected yield of 4.105% (earlier in the day it was even lower, 4.098%). Does that mean that they expect the auction price of this Note to be above $100?
Yes. At that coupon and yield, price would be 100.04, calculated using spreadsheet YIELD function.
(I think you mean the spreadsheet PRICE function, not YIELD.) Your math is correct, Kevin, but that's not how initial Treasury auctions work. (2-year notes only have initial auctions; no re-openings.) Unless the yield falls below 0.125%, the price will always be at or slightly below par. The yield is set by the auction and then the coupon is set to be at or below the yield in 1/8% increments. For instance, in last month's 2-year auction the yield was 3.307%. The coupon was therefore set to 3.25%. This made the price
99.890561 = PRICE(DATE(2022,8,31), DATE(2024,8,31), 3.25%, 3.307%, 100, 2, 1)
Very interesting. Thank you both for responding. And thank you #Cruncher for the links to the Treasury Offering Announcement for that 2-year Note, the spreadsheet functions, and the example showing how to use the PRICE function.
protagonist
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Re: VTAPX holdings vs. my TIPS holdings1

Post by protagonist »

Kevin M wrote: Fri Sep 23, 2022 12:00 pm My view is that the Fed will succeed in bringing inflation down to the 2% level over the next few years (I think the market may be coming around to this view), so I have been, and still am, favoring the shorter maturities.
Kevin

In a previous thread I mentioned that I don't consider reinvestment risk as a negative in my decision making since it can go either way, win or lose.
That is postulated on my belief that I can't second-guess what things will look like in the future.

However, if you believe that inflation will be back down to about 2% in a few years and will stay low (and I assume interest rates as well if you are correct), given that TIPS yields were much lower (mostly negative) when inflation was under control in recent years than now, wouldn't that make you think about spreading your TIPS out over longer maturities as well? This could be a relatively unique buying opportunity with YTMs around 1.5%. When your bonds mature in 2024 or 2025 you may not have the ability to reinvest at real YTMs as high as they are now.

Or am I missing something? I have a feeling I might be. Maybe I am generalizing about the effect of inflation rate on TIPS yields due to recency bias.

Is it because you think that investing in nominal Treasuries at longer maturities hovering now around 4% YTM will outperform TIPS in the long run (2% inflation plus current TIPS YTMs around 1.5% only equals 3.5% total)? So are you buying much longer term nominal Treasuries?
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vineviz
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Re: VTAPX holdings vs. my TIPS holdings1

Post by vineviz »

protagonist wrote: Sat Sep 24, 2022 6:01 pm In a previous thread I mentioned that I don't consider reinvestment risk as a negative in my decision making since it can go either way, win or lose.
That's true for EVERY risk.

Ignoring a risk doesn't usually make it go away.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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