Now that long TIPS yields are 60 bp off their highs I will…

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#Cruncher
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by #Cruncher »

marcopolo wrote: Tue Oct 04, 2022 2:36 pmCurious why the ref CPI lags by several months.
I wouldn't say "several" months. The lag is as short as it can be given the mechanism for indexing TIPS. For example the September CPI, scheduled to be released next week, will be used to index TIPS principal as of December 1st -- a lag of three months. However, there really is a big lag for I Bonds. For example, the same September CPI will determine the value on October 1st 2023 of an I Bond purchased this month -- a lag of thirteen months.
marcopolo, in same post, wrote:... I would think ... the calculations could have used the previous month's CPI as the reference
(Remember, the monthly CPIs aren't known until they are released the following month.) The lag could be reduced one month if the same factor was used to index TIPS principal for an entire month. The September CPI could then be used to calculate one index ratio for every day November 1st through 30th -- a lag of just two months. But then there would often be a big change in the index ratio between the last day of one month and the first day of the next month. The bond market would have to compensate for this with an offsetting change in the price and yield to maturity.

To avoid this, TIPS index ratios are gradually adjusted every day during the month. The cost of this however, is that the September CPI can't be used for all of November. It can only be used for December 1st. The index ratios November 2nd - 30th are then interpolated between the November 1st and December 1st values. (See first two paragraphs of the left sidebar on this help page for an explanation of how the monthly CPI, Reference CPI, and Index Ratios are used to adjust TIPS for inflation.)
jeffyscott wrote: Tue Oct 04, 2022 5:19 pmSince they mature on the 15th, I don't know if the lag could be any less. The next maturity date is January 15. We'll get the Jan. 1 reference CPI in mid November and Feb 1 in mid December and only then will the Jan. 15 value be known.
It's not enough to be indexed on interest payment or redemption dates. TIPS principal also needs to be indexed every business day to facilitate trading on the secondary market.
jeffyscott, in same post, wrote:I don't know how the CPI release dates are set, but some are as late as the 13th.
Because of a government shutdown, the September 2013 CPI wasn't released until October 30th, just under the wire to calculate index ratios beginning 11/2/2013.
Kevin M wrote: Wed Oct 05, 2022 12:37 pm
Prudence wrote: Wed Oct 05, 2022 12:20 pmI want to shift about $36,000 in my money market to TIPS due in 2023. So, should I buy 30 of these bonds now to do the job ... [?]
Just now I can submit an order at Fidelity for 30 of the 4/15/23 for 35,546.27. This is a price of 99.046 and adjusted price of 118.13 (price times index ratio). There is 106.32 accrued interest.
In case anyone is interested, here is how Kevin's total cost can be calculated.

Code: Select all

Row                   Col A        Col B
  2    Face value purchased       30,000
  3                 Matures    4/15/2023
  4                  Coupon       0.625%
  5              Settlement   10/06/2022  [1]
  6      Price (unadjusted)    99.046000
  7  Index ratio 10/06/2022      1.19271  [2]

Code: Select all

  8   Interest period start    4/15/2022  =COUPPCD(B5,B3,2,1) [3]
  9     Interest period end   10/15/2022  =COUPNCD(B5,B3,2,1) [3]
 10          Days in period          183  =B9-B8 [4]
 11  Days before settlement          174  =B5-B8 [4]
 12     Principal purchased    35,781.30  =B2*B7
 13          Principal cost    35,439.95  =B12*(B6/100)
 14        Accrued interest       106.32  =B12*(B4/2)*(B11/B10)
 15              Total cost    35,546.26  =B13+B14
  1. Treasury securities bought on the secondary market settle the next business day.
  2. TIPS index ratios for October 1-15 are on this webpage.
  3. The start and end of the interest period surrounding the settlement date can be determined with the Excel COUPPCD and COUPNCD functions. (In Google Sheets these functions may not work for maturities on the last day of a month. But TIPS always mature on the 15th.)
  4. Excel stores dates as the number of days since a base date (12/31/1899 in Windows). So the difference between two dates can be determined just by subtracting.
McQ wrote: Thu Oct 06, 2022 12:16 amLet me answer the OP question for myself as I see it today.
Nice post!
McQ, in same post, wrote:... Too bad I’m condemned to buy LTPZ for the moment, average maturity about 2042.
The average maturity of the thirteen TIPS in the 15+ year index followed by LTPZ is about that of the issue maturing 2/15/2045. This is because no TIPS currently mature 2033 - 2039 and the earliest issue in the index is the Feb 2040. According to the table in this post the weighted average life as of 9/30/2022 of the 15+ index was 22.41 years.
2/26/2045 = DATE(2022, 9, 30) + 22.41 * 365.25
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Prudence »

McQ wrote: Thu Oct 06, 2022 12:16 am Dry powder / remaining firepower

Let me answer the OP question for myself as I see it today.

I’m a buyer of long TIPS now that they have come close to yielding 2.0%. Those due in the mid-2040s correspond to our joint life expectancy. Any real yield I lock today on those TIPS is locked for life.

*Too bad I’m condemned to buy LTPZ for the moment, average maturity about 2042. Rounding error when all is said and done, I’ll eventually own the individual bonds once our account structure gets rationalized.

Where do the funds come from? Conservative investments from before Jeremy Grantham even said "Beware!" I've got lots if you count fixed income embedded in balanced funds; as do most folks my age.

I started buying LTPZ last week; I’m under water as of today. No problem!

I expect to be further underwater next week and next month and next year. That’s okay; I’ll be buying more and averaging down.

The joy of buying TIPS at 2.125% will overcome any pangs about buying TIPS at 1.9%.

The excitement of buying TIPS at 2.25% will overcome the sorrow of further losses. And so on.

Easier to catch a falling knife once your hands are taped up from trying to catch the knife before.

Total purchases will average out at some deficit, possibly in the $10,000s, relative to the person who picked the absolute bottom and shoved in hundreds of thousands of chips right then at that day, hour, minute.

Not my standard of success. When all is said and done I’ll have converted most of my fixed income exposure to the safest bonds in the world with a locked in real yield greater than what anyone can expect on an equally safe long nominal bond. Based on history. And that much more over an intermediate duration total bond fund.

My prospective regret is the same as I had in 2008-09. I was still converting less risky assets into risky stock assets through February 2009 (S&P decline of 50%, say). I had enough firepower to continue converting through declines of 60% and 70%; no more. So on the trajectory, I would have run out of dry powder to buy stocks about June 2009 if they had gone down 70%. Then it would be hold and pray.

Quick quiz: your stocks are down 70%. That’s the bottom, you are sure. The actual bottom was down 85% (late Spring 1932). How much did you lose between the false dawn (down 70%) and the true dawn?

As it happened, stocks bottomed March 9th 2009 at minus 57%. Didn’t/never hit my next threshold; so not all the dry powder got used. Consequence: dry powder moldered while stocks soared on the bounce.

I expect the same thing to happen with TIPS. True bottom might be a yield of, say, real 2.69%. My last purchase might be at 2.47%; weighted average yield of 2.25% on all the purchases, at best. Tens of thousands of dollars in moldering dry powder remaining, in case TIPS had bottomed closer to 3.0%.

And tens of thousands of dollars in losses if my purchases were marked to market at the very bottom.

I couldn’t care less. I’ll have legged most of my fixed income exposure into a guaranteed real yield of +2%. OMG.

And if the bottom was yesterday? I probably won’t have a loss on my position by next week, and at least I’ll have $100K locked into a real yield of not too much less than 2.0%.

Be still my heart.
Do you expect the proceeds from the TIPS due in the 40s to wind up in your estate for the benefit of heirs? What percentage of your eventual TIPS portfolio will be this long?
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Kevin M
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

As of now, the 2045 ask yield is just kissing 2% at 1.986 for min qty 50, 1.981 for min qty 10.

Image

Bid yield for min 50 is 2.006.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Fly Guy
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Fly Guy »

#Cruncher thanks so much for the math. To follow this out to the maturity date, and assuming that the Index ratio on 10/06/2022 stays fixed at 1.19271 (I'm guessing that would be zero inflation from 10/06/2022 - 4/15/2023?), one would receive:

- On 10/15/22 $111.82 of interest (B12 * (B4/2))
- On 04/15/23 $111.82 of interest (B12 * (B4/2))
- On 04/15/23 the principal amount of $35,781.30 (B2*B7)

Is that correct? Thanks!
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by marcopolo »

#Cruncher wrote: Thu Oct 06, 2022 6:43 am
marcopolo wrote: Tue Oct 04, 2022 2:36 pmCurious why the ref CPI lags by several months.
I wouldn't say "several" months. The lag is as short as it can be given the mechanism for indexing TIPS. For example the September CPI, scheduled to be released next week, will be used to index TIPS principal as of December 1st -- a lag of three months. However, there really is a big lag for I Bonds. For example, the same September CPI will determine the value on October 1st 2023 of an I Bond purchased this month -- a lag of thirteen months.
marcopolo, in same post, wrote:... I would think ... the calculations could have used the previous month's CPI as the reference
(Remember, the monthly CPIs aren't known until they are released the following month.) The lag could be reduced one month if the same factor was used to index TIPS principal for an entire month. The September CPI could then be used to calculate one index ratio for every day November 1st through 30th -- a lag of just two months. But then there would often be a big change in the index ratio between the last day of one month and the first day of the next month. The bond market would have to compensate for this with an offsetting change in the price and yield to maturity.

To avoid this, TIPS index ratios are gradually adjusted every day during the month. The cost of this however, is that the September CPI can't be used for all of November. It can only be used for December 1st. The index ratios November 2nd - 30th are then interpolated between the November 1st and December 1st values. (See first two paragraphs of the left sidebar on this help page for an explanation of how the monthly CPI, Reference CPI, and Index Ratios are used to adjust TIPS for inflation.)
jeffyscott wrote: Tue Oct 04, 2022 5:19 pmSince they mature on the 15th, I don't know if the lag could be any less. The next maturity date is January 15. We'll get the Jan. 1 reference CPI in mid November and Feb 1 in mid December and only then will the Jan. 15 value be known.
It's not enough to be indexed on interest payment or redemption dates. TIPS principal also needs to be indexed every business day to facilitate trading on the secondary market.
jeffyscott, in same post, wrote:I don't know how the CPI release dates are set, but some are as late as the 13th.
Because of a government shutdown, the September 2013 CPI wasn't released until October 30th, just under the wire to calculate index ratios beginning 11/2/2013.
Kevin M wrote: Wed Oct 05, 2022 12:37 pm
Prudence wrote: Wed Oct 05, 2022 12:20 pmI want to shift about $36,000 in my money market to TIPS due in 2023. So, should I buy 30 of these bonds now to do the job ... [?]
Just now I can submit an order at Fidelity for 30 of the 4/15/23 for 35,546.27. This is a price of 99.046 and adjusted price of 118.13 (price times index ratio). There is 106.32 accrued interest.
In case anyone is interested, here is how Kevin's total cost can be calculated.

Code: Select all

Row                   Col A        Col B
  2    Face value purchased       30,000
  3                 Matures    4/15/2023
  4                  Coupon       0.625%
  5              Settlement   10/06/2022  [1]
  6      Price (unadjusted)    99.046000
  7  Index ratio 10/06/2022      1.19271  [2]

Code: Select all

  8   Interest period start    4/15/2022  =COUPPCD(B5,B3,2,1) [3]
  9     Interest period end   10/15/2022  =COUPNCD(B5,B3,2,1) [3]
 10          Days in period          183  =B9-B8 [4]
 11  Days before settlement          174  =B5-B8 [4]
 12     Principal purchased    35,781.30  =B2*B7
 13          Principal cost    35,439.95  =B12*(B6/100)
 14        Accrued interest       106.32  =B12*(B4/2)*(B11/B10)
 15              Total cost    35,546.26  =B13+B14
  1. Treasury securities bought on the secondary market settle the next business day.
  2. TIPS index ratios for October 1-15 are on this webpage.
  3. The start and end of the interest period surrounding the settlement date can be determined with the Excel COUPPCD and COUPNCD functions. (In Google Sheets these functions may not work for maturities on the last day of a month. But TIPS always mature on the 15th.)
  4. Excel stores dates as the number of days since a base date (12/31/1899 in Windows). So the difference between two dates can be determined just by subtracting.
McQ wrote: Thu Oct 06, 2022 12:16 amLet me answer the OP question for myself as I see it today.
Nice post!
McQ, in same post, wrote:... Too bad I’m condemned to buy LTPZ for the moment, average maturity about 2042.
The average maturity of the thirteen TIPS in the 15+ year index followed by LTPZ is about that of the issue maturing 2/15/2045. This is because no TIPS currently mature 2033 - 2039 and the earliest issue in the index is the Feb 2040. According to the table in this post the weighted average life as of 9/30/2022 of the 15+ index was 22.41 years.
2/26/2045 = DATE(2022, 9, 30) + 22.41 * 365.25
Thanks for the detailed explanation!
Very informative, as always.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

Here is a graph that should be useful for this thread. It's the yield history for the 2045 TIPS, available at FRED.

Image

Aside from one purchase in June 2021, I have bought all of my current TIPS holdings since April 2022, so I chose April 1, 2022 as the start date for the graph. You can click it and modify the start date and other parameters if you want.

Of course the generally increasing yield has resulted in price declines, but the inflation adjustments have offset that to some degree, perhaps a lot, depending on when you bought.

If you did buy this TIPS, your yield should be pretty close to the yield for your settlement date on the chart. For example, here are my purchases of the 4/15/2024 TIPS since April, plotted as red dots on the blue FRED curve, with the last red dot being the yield for a hypothetical purchase today:

Image

(Sorry it's not a longer-term TIPS, but that's not what I've been buying so far).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by sls239 »

Can someone tell me how I would buy a TIP in a Vanguard account?

I was going to dip my toe in since they’ve forced me into the brokerage account anyway, but I can’t find it.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

sls239 wrote: Thu Oct 06, 2022 1:20 pm Can someone tell me how I would buy a TIP in a Vanguard account?

I was going to dip my toe in since they’ve forced me into the brokerage account anyway, but I can’t find it.
I provided a detailed walkthrough of buying Treasuries at Vanguard in the Trading Treasuries thread (just search for it in the forum). There is a link to the walkthrough in the original post. If you have any more detailed questions, I can answer in that thread (that's what it's for).

When you get to the bond search screen, select TIPS as the type of bond (only). Change the max number of rows to 50 or greater, and change the sort order to "by maturity". Your search results will then include all 49 outstanding TIPS. The process from there is the same as buying any Treasury, so the walkthough should do it for you.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Tom_T »

Kevin M wrote: Thu Oct 06, 2022 1:25 pm
sls239 wrote: Thu Oct 06, 2022 1:20 pm Can someone tell me how I would buy a TIP in a Vanguard account?

I was going to dip my toe in since they’ve forced me into the brokerage account anyway, but I can’t find it.
I provided a detailed walkthrough of buying Treasuries at Vanguard in the Trading Treasuries thread (just search for it in the forum). There is a link to the walkthrough in the original post. If you have any more detailed questions, I can answer in that thread (that's what it's for).

When you get to the bond search screen, select TIPS as the type of bond (only). Change the max number of rows to 50 or greater, and change the sort order to "by maturity". Your search results will then include all 49 outstanding TIPS. The process from there is the same as buying any Treasury, so the walkthough should do it for you.

Kevin
One thing I just discovered on the Search screen is that I can enter a range of maturities as mm/dd/yyyy, or just years (e.g. 2024 to 2027). That might already be in your walkthrough.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

Tom_T wrote: Thu Oct 06, 2022 1:31 pm
Kevin M wrote: Thu Oct 06, 2022 1:25 pm
sls239 wrote: Thu Oct 06, 2022 1:20 pm Can someone tell me how I would buy a TIP in a Vanguard account?

I was going to dip my toe in since they’ve forced me into the brokerage account anyway, but I can’t find it.
I provided a detailed walkthrough of buying Treasuries at Vanguard in the Trading Treasuries thread (just search for it in the forum). There is a link to the walkthrough in the original post. If you have any more detailed questions, I can answer in that thread (that's what it's for).

When you get to the bond search screen, select TIPS as the type of bond (only). Change the max number of rows to 50 or greater, and change the sort order to "by maturity". Your search results will then include all 49 outstanding TIPS. The process from there is the same as buying any Treasury, so the walkthough should do it for you.

Kevin
One thing I just discovered on the Search screen is that I can enter a range of maturities as mm/dd/yyyy, or just years (e.g. 2024 to 2027). That might already be in your walkthrough.
Yes, it is. Here is the link: viewtopic.php?p=6719923#p6719923.

The only thing it doesn't show is selecting TIPS as the Treasury type. There are only 49 TIPS, so I usually don't bother filtering by date for TIPS. There are over 580 nominal Treasuries, so it's much more useful for those.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Tom_T »

Thanks. Bookmarked!
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by aj76er »

McQ wrote: Thu Oct 06, 2022 12:16 am
I probably won’t have a loss on my position by next week, and at least I’ll have $100K locked into a real yield of not too much less than 2.0%.

Be still my heart.
Isn't it better to say you've locked in a real yield-to-maturity (from the date of purchase, assuming holding for the full duration, and re-investing all dividends over the full duration)?

The yield of LPTZ will change daily, such that in 5yrs, it could potentially drop. However, if so, then the price of LPTZ will increase. Under that scenario, LPTZ may not still have a 2.0% real yield, correct? The YTM from that point (to ~15yrs) should be the same as your original date of purchase (again, assuming holding for the remaining duration from original date of purchase, and re-investing all dividends over that time).

If you treat LPTZ as a percentage of your asset allocation and start buying/selling periodically, the YTM would then change too. Only if you treat this purchase as a standalone bond that is held to the full duration and all dividends re-invested can you claim you've "locked-in" anything.

Anyway, it is important to clarify the type of commitment you've signed up for in order to accurately realize the yield-to-maturity you are so excited about.

Another way to look at it is that over a 20yr time period, a 2% real yield is a rather low bar for equities to clear, and that is for taking similar volatility (i.e. LPTZ has market-like volatility). If inflation returns to a 2% level, the current dividends on VXUS alone will be about 2% real, for example.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by McQ »

#Cruncher wrote: Thu Oct 06, 2022 6:43 am ...
McQ, in same post, wrote:... Too bad I’m condemned to buy LTPZ for the moment, average maturity about 2042.
The average maturity of the thirteen TIPS in the 15+ year index followed by LTPZ is about that of the issue maturing 2/15/2045. This is because no TIPS currently mature 2033 - 2039 and the earliest issue in the index is the Feb 2040. According to the table in this post the weighted average life as of 9/30/2022 of the 15+ index was 22.41 years.
2/26/2045 = DATE(2022, 9, 30) + 22.41 * 365.25
hmmm, #Cruncher: I may have to change my signature line to be the same as Kevin M's :sharebeer

My bad, I had mentally substituted the LTPZ duration for its average maturity. Now I feel that much better about buying it--especially with the ongoing opportunity to buy it for less and less..
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by McQ »

Prudence wrote: Thu Oct 06, 2022 7:42 am
McQ wrote: Thu Oct 06, 2022 12:16 am Dry powder / remaining firepower

Let me answer the OP question for myself as I see it today.

I’m a buyer of long TIPS now that they have come close to yielding 2.0%. Those due in the mid-2040s correspond to our joint life expectancy. Any real yield I lock today on those TIPS is locked for life.

...
1. Do you expect the proceeds from the TIPS due in the 40s to wind up in your estate for the benefit of heirs?

2. What percentage of your eventual TIPS portfolio will be this long?
1. Maybe, maybe not. At these ages there's a 50% to 55% chance that one spouse will outlive life expectancy by a year or more, so the real sum will be available to her for assisted living on the downside, or showering gifts on the grandchildren on the upside, etc.
2. All of it. The argument again is that 2% real is as best as history tells you to expect on fixed income. If so, I'll lock it in for as long as I can
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by McQ »

phantom0308 wrote: Thu Oct 06, 2022 5:04 am It doesn’t appear as if TIPs are really making up for their long term underperformance during the greatest unexpected inflation shock in 40 years. The link below has a backtest of a 60/40 portfolio comparing intermediate TIPs, long term TIPs, and long term treasuries where EDV and VGLT are mixed to make the duration of LTTs and LTTips match. LTTs have a more negative correlation with stocks so are a clear winner on a total and risk adjusted basis.

https://www.portfoliovisualizer.com/ba ... ation6_3=8

The link here shows TIPs underperformed identical duration treasuries during the GFC when the protection would’ve been the most helpful. It’s possible TIPs could be useful in the future but they don’t have a history of doing. It’d take another period of unexpected inflation for them to pay off. Correlations amongst components of your portfolio are more important than inflation protection in this case.
https://www.portfoliovisualizer.com/ba ... tion6_3=40
Thanks, that's a helpful addition to the thread. I would point out that a test of nominal bonds against TIPS during one of the great episodes of disinflation in the modern era, and coming at the crest of a 40 year bull market in nominal bonds, might not be fair to TIPS.

But as always, the history we've got is so much shorter than what we'd like to have.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by McQ »

Kevin M wrote: Thu Oct 06, 2022 1:10 pm Here is a graph that should be useful for this thread. It's the yield history for the 2045 TIPS, available at FRED.

Image

Aside from one purchase in June 2021, I have bought all of my current TIPS holdings since April 2022, so I chose April 1, 2022 as the start date for the graph. You can click it and modify the start date and other parameters if you want.

Of course the generally increasing yield has resulted in price declines, but the inflation adjustments have offset that to some degree, perhaps a lot, depending on when you bought.

If you did buy this TIPS, your yield should be pretty close to the yield for your settlement date on the chart. For example, here are my purchases of the 4/15/2024 TIPS since April, plotted as red dots on the blue FRED curve, with the last red dot being the yield for a hypothetical purchase today:

Image

(Sorry it's not a longer-term TIPS, but that's not what I've been buying so far).

Kevin
Kevin, I really appreciate the updates that you have been posting. I was looking for a source for historical yields on individual bonds in another connection, and now I know I can find them at FRED.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by McQ »

aj76er wrote: Thu Oct 06, 2022 3:14 pm
McQ wrote: Thu Oct 06, 2022 12:16 am
I probably won’t have a loss on my position by next week, and at least I’ll have $100K locked into a real yield of not too much less than 2.0%.

Be still my heart.
Isn't it better to say you've locked in a real yield-to-maturity (from the date of purchase, assuming holding for the full duration, and re-investing all dividends over the full duration)?

The yield of LPTZ will change daily, such that in 5yrs, it could potentially drop. However, if so, then the price of LPTZ will increase. Under that scenario, LPTZ may not still have a 2.0% real yield, correct? The YTM from that point (to ~15yrs) should be the same as your original date of purchase (again, assuming holding for the remaining duration from original date of purchase, and re-investing all dividends over that time).

If you treat LPTZ as a percentage of your asset allocation and start buying/selling periodically, the YTM would then change too. Only if you treat this purchase as a standalone bond that is held to the full duration and all dividends re-invested can you claim you've "locked-in" anything.

Anyway, it is important to clarify the type of commitment you've signed up for in order to accurately realize the yield-to-maturity you are so excited about.

Another way to look at it is that over a 20yr time period, a 2% real yield is a rather low bar for equities to clear, and that is for taking similar volatility (i.e. LPTZ has market-like volatility). If inflation returns to a 2% level, the current dividends on VXUS alone will be about 2% real, for example.
I take your first point, and plead guilty to loose talk. Forgot what I should have known from Leibowitz and Homer, Inside the Yield Book.

To your second, bolded point: no plans as yet to switch equities to TIPS (see exchange with CletusCaddy upthread). It's my fixed income holdings, including those embedded in the W duo, that are up at bat. And as noted in the OP, history shows that 2.0% real is a hurdle that long nominal bonds may not surmount.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by marcopolo »

McQ wrote: Thu Oct 06, 2022 4:42 pm
aj76er wrote: Thu Oct 06, 2022 3:14 pm
McQ wrote: Thu Oct 06, 2022 12:16 am
I probably won’t have a loss on my position by next week, and at least I’ll have $100K locked into a real yield of not too much less than 2.0%.

Be still my heart.
Isn't it better to say you've locked in a real yield-to-maturity (from the date of purchase, assuming holding for the full duration, and re-investing all dividends over the full duration)?

The yield of LPTZ will change daily, such that in 5yrs, it could potentially drop. However, if so, then the price of LPTZ will increase. Under that scenario, LPTZ may not still have a 2.0% real yield, correct? The YTM from that point (to ~15yrs) should be the same as your original date of purchase (again, assuming holding for the remaining duration from original date of purchase, and re-investing all dividends over that time).

If you treat LPTZ as a percentage of your asset allocation and start buying/selling periodically, the YTM would then change too. Only if you treat this purchase as a standalone bond that is held to the full duration and all dividends re-invested can you claim you've "locked-in" anything.

Anyway, it is important to clarify the type of commitment you've signed up for in order to accurately realize the yield-to-maturity you are so excited about.

Another way to look at it is that over a 20yr time period, a 2% real yield is a rather low bar for equities to clear, and that is for taking similar volatility (i.e. LPTZ has market-like volatility). If inflation returns to a 2% level, the current dividends on VXUS alone will be about 2% real, for example.
I take your first point, and plead guilty to loose talk. Forgot what I should have known from Leibowitz and Homer, Inside the Yield Book.

To your second, bolded point: no plans as yet to switch equities to TIPS (see exchange with CletusCaddy upthread). It's my fixed income holdings, including those embedded in the W duo, that are up at bat. And as noted in the OP, history shows that 2.0% real is a hurdle that long nominal bonds may not surmount.
Aren't you just placing a bet on unexpected inflation?

If i understand correctly, and it is quite possible i don't, the performance of TIPs vs. Nominals depends on whether inflation is higher or lower than break even inflation (BEI). If you assume a somewhat efficient market, the yield difference (which is the BEI) should reflect the market's best guess of future inflation. If you go fully TIPs, you are kind of betting you know better and expect inflation to be unexpectedly higher than BEI. Conversely, someone choosing to stay fully nominal is kind of betting that they know better and expect inflation to be unexpectedly lower than BEI.

I personally feel like i have no way of judging whether the market is over or under estimating the BEI. So, i have been hedging my bets for some time and splitting my fixed income assets about 50/50 between TIPs and Nominals. My intermediate TIPs are in a ladder spanning 12 years. The rest of my TIPs are in LPTZ.

I guess time will tell which approach works out better.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

WRT the 2% yield goal, what will you do if the 2045 TIPS yield falls back to 0% or less, which is where it was in March of this year? As indicated in an earlier post, your yield from then to maturity will be 0%. Will you then sell your TIPS and do something else?

If the 2045 yield was to fall quickly back to 0%, you would essentially front-load your return, with about a 50% nominal return. Price today was 77.77. At 0%, say by 12/30/2022:

Code: Select all

=PRICE("12/30/2022", "2/15/2045", 0.75%, 0%, 100,2,1) = 116.60

116.60 / 77.77 - 1 = 49.92%
Actually something like this happened to me some years ago, although not nearly as dramatic. I had bought some TIPS and the price increased enough that I sold them to take advantage of what I considered better alternatives at the time.

I understand that if you are liability matching, you must accept whatever the TIPS yield is when you buy TIPS. But then you wouldn't be pulling the trigger or backing up the truck just because yields hit a certain level.

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Re: If long TIPS hit a real yield above 2.0% I will…

Post by #Cruncher »

Fly Guy wrote: Thu Oct 06, 2022 11:57 amTo follow this [the example purchase of the 4/15/2023 TIPS in my post above] out to the maturity date, and assuming that the Index ratio on 10/06/2022 stays fixed at 1.19271 (I'm guessing that would be zero inflation from 10/06/2022 - 4/15/2023?), one would receive:
- On 10/15/22 $111.82 of interest (B12 * (B4/2))
- On 04/15/23 $111.82 of interest (B12 * (B4/2))
- On 04/15/23 the principal amount of $35,781.30 (B2*B7)
Is that correct?
Your math is correct, Fly Guy, but your assumption on the index ratio is a little off. We already know what the index ratio will be on the October 15th interest payment date and it's not the same as the index ratio on the 10/6/2022 settlement date. We even know what the index ratios for all TIPS will be through November 1st, which are based on the August CPI reported last month. [*]

If we want to assume zero inflation from here on out, we can assume that the January and February 2023 CPIs [*] will be the same as August's. This would make the index ratio on the 4/15/2023 maturity the same as it is 11/1/2022. (Index ratios for this TIPS are on this web page.) The "Nominal $" amounts in cells D14:D16 below differ little from yours since the index ratio on 11/1 is only slightly changed from the one on 10/6.

Code: Select all

Row                  Col A       Col B      Col C       Col D   Formulas in Column B
  2             Face value      30,000
  3             Settlement  10/06/2022
  4                 Mature   4/15/2023
  5                 Coupon      0.625%
  6                  Price     99.0460
  7   Previous coupon date   4/15/2022                         =COUPPCD(B3,B4,2,1)
  8       Next coupon date  10/15/2022                         =COUPNCD(B3,B4,2,1)
  9         Days in period         183                         =B8-B7
 10     Days before settle         174                         =B3-B7
 11                   Date      Real $  Idx Ratio   Nominal $

Code: Select all

 12             10/06/2022  -29,713.80    1.19271  -35,439.95  =-B2*(B6/100)  [cost ex accrued interest]
 13             10/06/2022      -89.14    1.19271     -106.32  =-B2*(B5/2)*(B10/B9)   [accrued interest]
 14             10/15/2022       93.75    1.19259      111.81  =B$2*(B$5/2)+IF(A14=B$4,B$2,0) [interest]
 15              4/15/2023       93.75    1.19236      111.78  =IF(A14=B$4,B$2,B$2*(B$5/2))   [interest]
 16              4/15/2023   30,000.00    1.19236   35,770.80  =IF(A15=B$4,B$2,B$2*(B$5/2))  [principal]
* See the first two paragraphs of the left sidebar on this help page for an explanation of how TIPS index ratios are determined based on the monthly CPIs.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by HenrySouthernCal »

Based on ltpz price, I believe more 20+ year tips bonds hit 2% real yield today. I looked at those bonds, many have low coupons, so they are now priced 70-80 on 100 face value. Whoever buy them in secondary market will also hit the de minimis tax rule, the portion of capital increase from 76 to 100 in future will be taxed as ordinary income instead of capital gain tax rate. Doesn't that make them a little less attractive?
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Fly Guy »

#Cruncher wrote: Fri Oct 07, 2022 8:36 am
Your math is correct, Fly Guy, but your assumption on the index ratio is a little off. . . .
Thank you #Cruncher. That makes sense. A lot written in this thread and many others on the purchase side of TIPS - I just want to make sure I'm clear on the maturity side as well. This was a big help - thanks!
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

HenrySouthernCal wrote: Fri Oct 07, 2022 9:01 am Based on ltpz price, I believe more 20+ year tips bonds hit 2% real yield today. I looked at those bonds, many have low coupons, so they are now priced 70-80 on 100 face value. Whoever buy them in secondary market will also hit the de minimis tax rule, the portion of capital increase from 76 to 100 in future will be taxed as ordinary income instead of capital gain tax rate. Doesn't that make them a little less attractive?
You are correct about the yields hitting 2%:

Image

Ask yields for 2043 through 2047 are all at or slightly about 2%.

I believe the entire increase from the settlement price to 100 at maturity (market discount accrual) will be taxed as ordinary income if held to maturity. But if I'm wrong, please explain, and perhaps cite the relevant IRS pub section.

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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

Well, now that I look only the 20245 and 2046 are at or above 2% for large quantity. For the 2045 high yield is 2.001 for min qty 50. For min qty 10 it's 1.997. Of course this is changing by the second.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by discman017 »

Kevin M wrote: Thu Oct 06, 2022 5:30 pm WRT the 2% yield goal, what will you do if the 2045 TIPS yield falls back to 0% or less, which is where it was in March of this year? As indicated in an earlier post, your yield from then to maturity will be 0%. Will you then sell your TIPS and do something else?
I've been buying the 2045 and 2046 issues over the past several weeks, at YTM ranging from 1.6% to 2.0%.

Absolutely, if yields fell to 0%, I would lock in my gains. Why wait 23 years and get 2% above inflation per year when you can lock in a massive gain right away?

I buy TIPS with the plan to hold to maturity. 1.6% to 2.0% above inflation every year would meet my needs. With that said, I've never held a TIPS issue to maturity. Yields rise and fall, and when I can lock in gains, I do. If yields went to 3% or 4%, I'd keep buying, and hold what I've recently bought. But if yields dropped to 0% again, I'd absolutely sell.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

discman017 wrote: Fri Oct 07, 2022 12:53 pm
Kevin M wrote: Thu Oct 06, 2022 5:30 pm WRT the 2% yield goal, what will you do if the 2045 TIPS yield falls back to 0% or less, which is where it was in March of this year? As indicated in an earlier post, your yield from then to maturity will be 0%. Will you then sell your TIPS and do something else?
I've been buying the 2045 and 2046 issues over the past several weeks, at YTM ranging from 1.6% to 2.0%.

Absolutely, if yields fell to 0%, I would lock in my gains. Why wait 23 years and get 2% above inflation per year when you can lock in a massive gain right away?

I buy TIPS with the plan to hold to maturity. 1.6% to 2.0% above inflation every year would meet my needs. With that said, I've never held a TIPS issue to maturity. Yields rise and fall, and when I can lock in gains, I do. If yields went to 3% or 4%, I'd keep buying, and hold what I've recently bought. But if yields dropped to 0% again, I'd absolutely sell.
Thanks for sharing that. I'm tempted to buy some of the 2045 or whatever has a yield of 2% or more, more as a speculation than to hold to maturity. But like you, if yields continued to rise, I probably would buy more. Running low on cash now though, so probably have to wait for my next CD to mature later this month.

Interested in what prof McQ has to say.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by McQ »

discman017 wrote: Fri Oct 07, 2022 12:53 pm
Kevin M wrote: Thu Oct 06, 2022 5:30 pm WRT the 2% yield goal, what will you do if the 2045 TIPS yield falls back to 0% or less, which is where it was in March of this year? As indicated in an earlier post, your yield from then to maturity will be 0%. Will you then sell your TIPS and do something else?
I've been buying the 2045 and 2046 issues over the past several weeks, at YTM ranging from 1.6% to 2.0%.

Absolutely, if yields fell to 0%, I would lock in my gains. Why wait 23 years and get 2% above inflation per year when you can lock in a massive gain right away?

I buy TIPS with the plan to hold to maturity. 1.6% to 2.0% above inflation every year would meet my needs. With that said, I've never held a TIPS issue to maturity. Yields rise and fall, and when I can lock in gains, I do. If yields went to 3% or 4%, I'd keep buying, and hold what I've recently bought. But if yields dropped to 0% again, I'd absolutely sell.
Hello Kevin and discman017 (if I may answer you both).

Not sure what I would do in that happy event. It's not obvious to me that I would sell.

1. I imagine nominal bonds would have rallied too, so no point in switching back there;
2. Would stocks also have rallied back? Or did the bond/TIPS market lead?;
3. If stocks were still scraping along at their lows, then I might lighten up on TIPS to buy stocks.

Or not. Maybe TIPS will go back to minus 1% yields (a further rally). Maybe I'll use these super-appreciated TIPS to fund my RMDs year by year, holding onto stocks (and thus backing into a sort of bond tent strategy).

I dunno.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Northern Flicker »

marcopolo wrote: Fri Sep 30, 2022 4:30 pm My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.

I look at the asymmetric nature of the risk associated with the two.

1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.

2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
Equities historically have done poorly in times of deflation, a scenario that also may be challenging for TIPS.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

Northern Flicker wrote: Fri Oct 07, 2022 2:27 pm
marcopolo wrote: Fri Sep 30, 2022 4:30 pm My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.

I look at the asymmetric nature of the risk associated with the two.

1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.

2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
Equities historically have done poorly in times of deflation, a scenario that also may be challenging for TIPS.
If you believe that TIPS protect you from unexpected inflation, then you believe that the CPI is a reasonable proxy for your purchasing power. It follows that TIPS protect you from unexpected deflation as well, since what you pay for stuff decreases along with the nominal value of your TIPS. Of course nominal Treasuries are likely to do even better than TIPS with unexpected inflation, just as they are likely to do worse if there is unexpected inflation. I say likely because it also depends on the change in the breakeven inflation rate.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by discman017 »

McQ wrote: Fri Oct 07, 2022 1:53 pm Not sure what I would do in that happy event. It's not obvious to me that I would sell.

1. I imagine nominal bonds would have rallied too, so no point in switching back there;
2. Would stocks also have rallied back? Or did the bond/TIPS market lead?;
3. If stocks were still scraping along at their lows, then I might lighten up on TIPS to buy stocks.
You're absolutely right; the decision on whether to sell definitely depends on prospective returns of other asset classes.

Having bought and sold individual TIPS for 15 years now, I'm pretty sure I would lock in the gains, but it could be different this time.

I always buy long TIPS with the intent to hold to maturity, and it seems I always wind up with a fantastic selling opportunity a few years down the line. Maybe TIPS yields are just more volatile than nominal treasuries because the TIPS market is so much smaller? I don't know, but a great selling opportunity always seems to come along.

To be clear, I'm buying with the intent to hold to maturity. I'd be happy with my 1.6% to 2.0% real yield each year for the next 23 years. If it so happens that in a year I can lock in a 30% gain (quite a few years of those 2% returns), I'll almost certainly do it, and put the money somewhere else.

By buying today, I'm locking in a worst-case long-term 2% real yield, and I'd be totally happy with that. If it happens that I get a chance to sell for a big short-term gain, even better.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Lee_WSP »

I find the deflation argument slightly amusing. I find it slightly amusing because that’s what TIPS are supposed to do. Deliver a real return of X%. If deflation occurs, then the TIP will readjust to still return X%.

The fact that this is the only bond which does such an adjustment is a different conversation, but I do find it fascinating that it does do that adjustment. I still don’t quite understand the calculation or mechanism, but I don’t have to understand how the sausage is made to understand that I’m getting a sausage.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

For some context ...

The last time a TIPS was auctioned at 2% or more was the 30-year auction on 2/17/2011 at 2.190%.

Here are the 20-year and 30-year real CMT yields during that period:

Image

The 30-year real-CMT on 2/17/2011 was 2.19%, which makes sense, since the real CMT yields are based on most recently issued TIPS.

The 2/15/2045 TIPS was initially auctioned as a 30-year on 2/19/2015, and issued on 2/27/2015 at 0.842%. This chart shows the 20y and 30y real CMT yields along with the 2/15/2045 TIPS yields for a bit over a year after issuance:

Image

The 2/15/2045 tracks the 30-year real CMT quite well, as expected.

Looking at the last year:

Image

The 2/15/2045 continued to track the 30-year real CMT for about the first half of the last year, but has pulled ahead the second half.

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Re: If long TIPS hit a real yield above 2.0% I will…

Post by SteadyOne »

I recall that TIPS are the most appropriate for tax sheltered accounts. What will be a rational to keep them in taxable unless there are no other options available
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

SteadyOne wrote: Fri Oct 07, 2022 3:54 pm I recall that TIPS are the most appropriate for tax sheltered accounts. What will be a rational to keep them in taxable unless there are no other options available
I don't think they are terrible to hold in taxable if you don't have the IRA space. You are taxed on the interest and inflation adjustments to principal, but those are both components of the return. Your inflation adjustments are "reinvested"--you have no choice, but is it that different than being taxed on dividends that you reinvest?

You can use a fund if you want the inflation adjustments distributed.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Svensk Anga »

phantom0308 wrote: Thu Oct 06, 2022 5:04 am It doesn’t appear as if TIPs are really making up for their long term underperformance during the greatest unexpected inflation shock in 40 years. The link below has a backtest of a 60/40 portfolio comparing intermediate TIPs, long term TIPs, and long term treasuries where EDV and VGLT are mixed to make the duration of LTTs and LTTips match. LTTs have a more negative correlation with stocks so are a clear winner on a total and risk adjusted basis.

https://www.portfoliovisualizer.com/ba ... ation6_3=8

The link here shows TIPs underperformed identical duration treasuries during the GFC when the protection would’ve been the most helpful. It’s possible TIPs could be useful in the future but they don’t have a history of doing. It’d take another period of unexpected inflation for them to pay off. Correlations amongst components of your portfolio are more important than inflation protection in this case.
https://www.portfoliovisualizer.com/ba ... tion6_3=40
The backtests linked above include annual rebalancing. Many who are building TIPS ladders (or approximating them with TIPS funds of appropriate weighted average duration) are liability matching. There will be no rebalancing. Bonds will be held to maturity. Those who embrace liability matching may feel that the risk of the future turning out worse than the past can take no comfort from a backtest predicting a comfortable retirement. Just because 4% worked for the 1966 retiree does not mean that it was a fun ride through the 1970's until the bull markets in both stocks and bonds bailed them out starting in 1982. Check how much portfolio the 1966 retiree had left in 1981 after "the death of equities" and with inflation raging. If you can afford it and your risk tolerance is low, lock in your future income by liability matching.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Zosima »

SteadyOne wrote: Fri Oct 07, 2022 3:54 pm I recall that TIPS are the most appropriate for tax sheltered accounts. What will be a rational to keep them in taxable unless there are no other options available
TIPS (and other Treasury securities) are tax free at a state level, which makes them valuable in taxable account if one lives in a high tax bracket. The only drawback on TIPS is the "phantom" income on the inflation adjustments which results in taxable income without corresponding cash to pay taxes. However, that is no different than nominal treasuries in which a portino of the interest payments are reinvested.

I have all of my TIPS in a taxable account as I currently live in a moderately high tax state/bracket (7.65%).
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Northern Flicker »

Kevin M wrote: Fri Oct 07, 2022 2:39 pm
Northern Flicker wrote: Fri Oct 07, 2022 2:27 pm
marcopolo wrote: Fri Sep 30, 2022 4:30 pm My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.

I look at the asymmetric nature of the risk associated with the two.

1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.

2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
Equities historically have done poorly in times of deflation, a scenario that also may be challenging for TIPS.
If you believe that TIPS protect you from unexpected inflation, then you believe that the CPI is a reasonable proxy for your purchasing power. It follows that TIPS protect you from unexpected deflation as well, since what you pay for stuff decreases along with the nominal value of your TIPS. Of course nominal Treasuries are likely to do even better than TIPS with unexpected inflation, just as they are likely to do worse if there is unexpected inflation. I say likely because it also depends on the change in the breakeven inflation rate.
Sure. I was responding to a claim regarding how TIPS behave as an equity diversifier vs nominal treasuries as an equity diversifier.

The original claim was that while it states the obvious that if inflation is high, then TIPS are a better diversifier than nominal treasuries of the same duration, but if inflation is low that is good for stocks so TIPS underperform when stocks do well. This is essentially claiming that for a fixed duration, TIPS are less correlated with stocks than nominal treasuries. That has not generally been true of historical sample correlations, and it had not even been true so far in the current period of accelerated inflation:

https://www.portfoliovisualizer.com/ass ... &months=36

But the more fundamental problem with the argument is that during deflation, typically a bad time for stocks, TIPS would be expected to underperform duration-matched treasuries by a significant margin just when you most need the diversification benefit.

Liability matching is great, but it is a strategy that involves funding some amount of consumption without using or depending on equities-- using the inflation adjustment of TIPS to ensure keeping up with inflation instead of hoping that equities outpace inflation.
Last edited by Northern Flicker on Fri Oct 07, 2022 10:24 pm, edited 1 time in total.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Kevin M »

Northern Flicker wrote: Fri Oct 07, 2022 8:26 pm
Kevin M wrote: Fri Oct 07, 2022 2:39 pm
Northern Flicker wrote: Fri Oct 07, 2022 2:27 pm
marcopolo wrote: Fri Sep 30, 2022 4:30 pm My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.

I look at the asymmetric nature of the risk associated with the two.

1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.

2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
Equities historically have done poorly in times of deflation, a scenario that also may be challenging for TIPS.
If you believe that TIPS protect you from unexpected inflation, then you believe that the CPI is a reasonable proxy for your purchasing power. It follows that TIPS protect you from unexpected deflation as well, since what you pay for stuff decreases along with the nominal value of your TIPS. Of course nominal Treasuries are likely to do even better than TIPS with unexpected inflation, just as they are likely to do worse if there is unexpected inflation. I say likely because it also depends on the change in the breakeven inflation rate.
Sure. I was responding to a claim regarding how TIPS behave as an equity diversifier vs nominal treasuries as an equity diversifier.

The original claim was that while it states the obvious that if inflation is low high, then TIPS are a better diversifier than nominal treasuries of the same duration, but if inflation is low that is good for stocks so TIPS underperform when stocks do well. This is essentially claiming that for a fixed duration, TIPS are less correlated with stocks than nominal treasuries. That has not generally been true of historical sample correlations, and it had not even bern true so far in the current period of accelerated inflation:

https://www.portfoliovisualizer.com/ass ... &months=36

But the more fundamental problem with the argument is that during deflation, typically a bad time for stocks, TIPS would be expected to underperform duration-matched treasuries by a significant margin just when you most need the diversification benefit.

Liability matching is great, but it is a strategy that involves funding some amount of consumption without using or depending on equities-- using the inflation adjustment of TIPS to ensure keeping up with inflation instead of hoping that equities outpace inflation.
Ah, gotcha. The simplest, easiest for me to remember example is late 2008, when long-term nominal Treasuries soared, shorter-term nominals went up some, and pretty much everything else, including TIPS, did poorly. I believe the standard explanation for TIPS was liquidity, which tanked at that time (and the TIPS liquidity premium skyrocketed, according to some models).

Unfortunately for this stock downturn, neither nominals nor TIPS (other than perhaps shorter term ones to some extent) have done the hoped for job.
If I make a calculation error, #Cruncher probably will let me know.
seiyafan
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by seiyafan »

Is there any difference in purchasing TIPS vs. TIPS ETF?
ebeb
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by ebeb »

Not having much idea help me understand how this TIPS with YTM 2.134% will be affected due to inflation. Do I get more if inflation increases and how much more :confused

Description Coupon Maturity Quote Quantity Price Min Max YTM YTW 1 AccruedInterest
US Treasury 912828UH1 TIP 0.125% 0.125 01/15/2023 Ask 25 99.48400 1 2000 2.134 -- 9.700
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tc101
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by tc101 »

The people who are not buying individual TIPS all seem to be buying the etf LPTZ. No one ever mentions the vanguard TIPS funds or etfs. Why is this?
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Northern Flicker »

Zosima wrote: Fri Oct 07, 2022 8:10 pm
SteadyOne wrote: Fri Oct 07, 2022 3:54 pm I recall that TIPS are the most appropriate for tax sheltered accounts. What will be a rational to keep them in taxable unless there are no other options available
TIPS (and other Treasury securities) are tax free at a state level, which makes them valuable in taxable account if one lives in a high tax bracket. The only drawback on TIPS is the "phantom" income on the inflation adjustments which results in taxable income without corresponding cash to pay taxes. However, that is no different than nominal treasuries in which a portino of the interest payments are reinvested.

I have all of my TIPS in a taxable account as I currently live in a moderately high tax state/bracket (7.65%).
A TIPS fund will distribute the inflation adjustment as a non-qualified dividend, providing a choice of whether or not to reinvest it.

Nominal treasuries held in a taxable account will provide a more stable income stream, while TIPS income will vary with inflation. Projecting or managing taxes thus is easier with nominal treasuries in a taxable account than with TIPS.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Northern Flicker »

tc101 wrote: The people who are not buying individual TIPS all seem to be buying the etf LPTZ. No one ever mentions the vanguard TIPS funds or etfs. Why is this?
I doubt that LTPZ is the most common TIPS holding among BH's. I think intermediate funds (VAIPX, FIPDX, SCHP) and short-term funds (VTIP, STIP) are more commonly held.

STIP ER is .03%.
SCHP and VTIP ERs are .04%.
FIPDX ER is .05%.
VAIPX is actively managed and ER is .10%.
LTPZ ER is .20%, likely off-putting for many.

Vanguard bond funds do not engage in securities lending.
Last edited by Northern Flicker on Sat Oct 08, 2022 11:12 am, edited 1 time in total.
mikeyzito22
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by mikeyzito22 »

Why do I-Shares 0-5 STIP Short Treasury have a SEC yield of %6.86 and VTIP Vanguard Short tips 0-5 have a SEC yield of %3.5? Do yields on Short term treasury funds vary that much?
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Northern Flicker »

mikeyzito22 wrote: Sat Oct 08, 2022 11:11 am Why do I-Shares 0-5 STIP Short Treasury have a SEC yield of %6.86 and VTIP Vanguard Short tips 0-5 have a SEC yield of %3.5? Do yields on Short term treasury funds vary that much?
There seems to be some latitude with how SEC yield is computed for TIPS funds. STIP and VTIP track the same index. STIP does securities lending and iShares retains some of the securities lending revenue. That is not accounted for in ER.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by SteadyOne »

Zosima wrote: Fri Oct 07, 2022 8:10 pm
SteadyOne wrote: Fri Oct 07, 2022 3:54 pm I recall that TIPS are the most appropriate for tax sheltered accounts. What will be a rational to keep them in taxable unless there are no other options available
TIPS (and other Treasury securities) are tax free at a state level, which makes them valuable in taxable account if one lives in a high tax bracket. The only drawback on TIPS is the "phantom" income on the inflation adjustments which results in taxable income without corresponding cash to pay taxes. However, that is no different than nominal treasuries in which a portino of the interest payments are reinvested.

I have all of my TIPS in a taxable account as I currently live in a moderately high tax state/bracket (7.65%).
Thanks, that’s a good point. Will it make a difference to keep individual TIPS in taxable while TIPS Funds in 401k? Or it’s a wash? I do have an option in 401k for a tips fund but also was thinking that individual TIPs are better than funds and will have to buy them in taxable.

This optimization exercise is exhausting :)
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by jeffyscott »

mikeyzito22 wrote: Sat Oct 08, 2022 11:11 am Why do I-Shares 0-5 STIP Short Treasury have a SEC yield of %6.86 and VTIP Vanguard Short tips 0-5 have a SEC yield of %3.5? Do yields on Short term treasury funds vary that much?
The 6.86% is the 12 month trailing nominal yield. The Vanguard figure is a real SEC yield and is not 3.5%, it's 1.79%.

STIP has real YTM of 1.9%, very similar to Vanguard SEC yield as would be expected.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Indyhou »

This past week I decided I’d pull the trigger on putting together a TIPS ladder.

I sold all my holdings in VTAPX and built a TIPS bond ladder to provide the necessary real cashflow for the next eleven years of our spending (ie projected needs less Social Security Benefits when they start).

The ladder consists of 28 different TIPS bonds/notes with maturities from 1/15/23 to 7/15/2032. I determined the quantities on a spreadsheet I wrote which uses linear programming to solve bond quantities needed to spin off the required cashflows (through interest and bonds maturing). I suspect there are other several tools out there that will do this.

This increased the duration of the holdings from 2.6 to 4.35 years, but I really don’t care that much since I plan to hold everything to maturity. The IRR of the bond cashflow was 1.81% which is close to 2% …

The process of doing this was surprisingly easy on the Vanguard website. They have a bond ladder tool that is easy to use. Once I knew the quantities and bond maturities the tool allowed me to search available bonds, put them in a ladder, modify quantities, and save it for future use. You can then initiate the bond purchases from the bond ladder tool when you want.

The Vanguard tool also creates a bond ladder of your portfolio as you buy bonds.

I ended up doing the purchases over a four day period to somewhat “time” the purchases (avoiding a couple of days when prices went up). I also wanted to take it slow to make sure I understood the process.

The only real issue I had was with Quicken. For some reason they don’t include the accrued principle in the price they download (not sure if the fault is with Vanguard or Quicken…).

In researching this I found several Boglehead posts about this over the years so it has been an issue for a while.

I found a work around by adjusting the bond quantity in Quicken to reflect the accrued principle. This isn’t great but it works for the time being. And I’m not really that concerned about price fluctuations in the TIPS portfolio.

The bottom line is that buying a large number of bonds this way was pretty painless.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Zosima »

SteadyOne wrote: Sat Oct 08, 2022 11:20 am
Zosima wrote: Fri Oct 07, 2022 8:10 pm
SteadyOne wrote: Fri Oct 07, 2022 3:54 pm I recall that TIPS are the most appropriate for tax sheltered accounts. What will be a rational to keep them in taxable unless there are no other options available
TIPS (and other Treasury securities) are tax free at a state level, which makes them valuable in taxable account if one lives in a high tax bracket. The only drawback on TIPS is the "phantom" income on the inflation adjustments which results in taxable income without corresponding cash to pay taxes. However, that is no different than nominal treasuries in which a portino of the interest payments are reinvested.

I have all of my TIPS in a taxable account as I currently live in a moderately high tax state/bracket (7.65%).
Thanks, that’s a good point. Will it make a difference to keep individual TIPS in taxable while TIPS Funds in 401k? Or it’s a wash? I do have an option in 401k for a tips fund but also was thinking that individual TIPs are better than funds and will have to buy them in taxable.

This optimization exercise is exhausting :)
I am hoping others who are more knowledgable weigh in also but its generally should be a wash as bond funds are generally tax exempt at the state level to the extent that they have securities issued by the federal government. Most TIPS funds have all or substantially all of their income and assets from TIPS that are exempt from state taxes (approximately 99%).

https://investor.vanguard.com/investor- ... -are-taxed
https://personal.vanguard.com/pdf/USGO_012020.pdf

As others have pointed out, TIPS funds make distributions of the "phantom" income on the inflation adjustments so the cash flows/distributions from TIPS funds are greater than holding individual TIPS.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by SteadyOne »

Zosima wrote: Sat Oct 08, 2022 1:24 pm
SteadyOne wrote: Sat Oct 08, 2022 11:20 am
Zosima wrote: Fri Oct 07, 2022 8:10 pm
SteadyOne wrote: Fri Oct 07, 2022 3:54 pm I recall that TIPS are the most appropriate for tax sheltered accounts. What will be a rational to keep them in taxable unless there are no other options available
TIPS (and other Treasury securities) are tax free at a state level, which makes them valuable in taxable account if one lives in a high tax bracket. The only drawback on TIPS is the "phantom" income on the inflation adjustments which results in taxable income without corresponding cash to pay taxes. However, that is no different than nominal treasuries in which a portino of the interest payments are reinvested.

I have all of my TIPS in a taxable account as I currently live in a moderately high tax state/bracket (7.65%).
Thanks, that’s a good point. Will it make a difference to keep individual TIPS in taxable while TIPS Funds in 401k? Or it’s a wash? I do have an option in 401k for a tips fund but also was thinking that individual TIPs are better than funds and will have to buy them in taxable.

This optimization exercise is exhausting :)
I am hoping others who are more knowledgable weigh in also but its generally should be a wash as bond funds are generally tax exempt at the state level to the extent that they have securities issued by the federal government. Most TIPS funds have all or substantially all of their income and assets from TIPS that are exempt from state taxes (approximately 99%).

https://investor.vanguard.com/investor- ... -are-taxed
https://personal.vanguard.com/pdf/USGO_012020.pdf

As others have pointed out, TIPS funds make distributions of the "phantom" income on the inflation adjustments so the cash flows/distributions from TIPS funds are greater than holding individual TIPS.
Good points

Just to make it a little bit more complex. Would it not be a almost perfect solution for TIPs from a tax point to use in plan 401k rollover to buy individual TIPs. Those moneys should not be taxed ever.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
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