Now that long TIPS have backed off 2.50% I will…

[Exchme]

The bond portion of our portfolio has been strictly BND, I have been selling some of that, adding dividend money and rebalancing money and buying BLV. Sure, it's not inflation protected, but I've long been tempted to follow former poster vineviz's advice to have the bond duration = retirement length/2. Fortunately, I didn't do that prior to the 2022 bond-a-geddon, but it seems much more reasonable now (I still don't have that much, but have distinctly lengthened duration)

I enjoy reading Scott Grannis' blog (retired economist), he only posts every other week or so, mostly on future inflation. He is critical of the reporting methodology the FED uses for housing and claims that it induces a large lag and since housing is about 1/3 of the index, this causes the FED to be driving by looking in the rearview mirror. He saw the inflation coming in 2020/2021 and has telling us since summer that the inflation peak was in and interest rates would follow. http://scottgrannis.blogspot.com/

[GAAP]

I posted this earlier this year:

The TIPS era has been clearly different, and yet still had peaks well above the 10-year breakeven rate.

It seems to me that if your goal is protection against short-term inflation, then shorter term TIPS make sense. If your goal is for long-term real return consistency, then longer term TIPS make more sense. An LMP approach or a ladder does exactly that, moving to shorter terms as the immediate effect of inflation becomes more important.

The percentile distribution is as follows:

Code: Select all

Percentile	1871 Full Period	1934 End of Gold Standard	1974 Start of ERISA	1997 Start of TIPS
0.1		-4.54%			0.70%				1.45%			1.26%
0.2		-1.08%			1.40%				1.61%			1.55%
0.3		0.97%			1.63%				2.24%			1.59%
0.4		1.52%			2.26%				2.61%			1.67%
0.5		2.25%			2.73%				2.93%			2.08%
0.6		2.80%			3.22%				3.67%			2.50%
0.7		3.53%			3.83%				4.13%			2.69%
0.8		4.76%			5.21%				5.39%			2.97%
0.9		9.28%			8.15%				8.57%			3.86%
1		20.65%			18.13%				13.91%			7.48%

[McQ]

Terrific chart, FactualFran, thanks for adding it. Through no fault of yours, it is achingly incomplete. I would be fascinated to see the right side of the chart extended by showing the auction yield of the 2014 versus inflation over 9 years, the auction yield of the 2015 versus inflation over the next eight years ... out to maybe the five year bond issued in 2018.

Nominal yields went down more after 2013, and the big news on inflation came in 2021 and 2022 ...

Here is a version that includes 10-year TIPS that are within five years of maturing.

Much obliged!

I note that the right side of the chart looks much different now, suggesting increasingly worse predictive performance over time, rather than the narrowing seen earlier.

Slots well with the point protagonist made just up thread, about normal versus unusual times.

[McQ]

I posted this earlier this year:

The TIPS era has been clearly different, and yet still had peaks well above the 10-year breakeven rate.

It seems to me that if your goal is protection against short-term inflation, then shorter term TIPS make sense. If your goal is for long-term real return consistency, then longer term TIPS make more sense. An LMP approach or a ladder does exactly that, moving to shorter terms as the immediate effect of inflation becomes more important.

The percentile distribution is as follows:

Code: Select all

Percentile	1871 Full Period	1934 End of Gold Standard	1974 Start of ERISA	1997 Start of TIPS
0.1		-4.54%			0.70%				1.45%			1.26%
0.2		-1.08%			1.40%				1.61%			1.55%
0.3		0.97%			1.63%				2.24%			1.59%
0.4		1.52%			2.26%				2.61%			1.67%
0.5		2.25%			2.73%				2.93%			2.08%
0.6		2.80%			3.22%				3.67%			2.50%
0.7		3.53%			3.83%				4.13%			2.69%
0.8		4.76%			5.21%				5.39%			2.97%
0.9		9.28%			8.15%				8.57%			3.86%
1		20.65%			18.13%				13.91%			7.48%

Another nice chart to have on the thread, thank you GAAP.

For charts of post- gold standard inflation over 10, 20, and 30 year rolls, see my other thread viewtopic.php?t=413759.

Suffice to say that the expected inflation rate embedded into long TIPS over the last year or two (Allan Roth has such a chart somewhere), is down there in the lower percentiles of what has actually occurred.

[Svensk Anga]

Terrific chart, FactualFran, thanks for adding it. Through no fault of yours, it is achingly incomplete. I would be fascinated to see the right side of the chart extended by showing the auction yield of the 2014 versus inflation over 9 years, the auction yield of the 2015 versus inflation over the next eight years ... out to maybe the five year bond issued in 2018.

Nominal yields went down more after 2013, and the big news on inflation came in 2021 and 2022 ...

Here is a version that includes 10-year TIPS that are within five years of maturing.

Much obliged!

I note that the right side of the chart looks much different now, suggesting increasingly worse predictive performance over time, rather than the narrowing seen earlier.

Slots well with the point protagonist made just up thread, about normal versus unusual times.

There is still a chance that the coming yield curve predicted recession will pull down those red bars close to the blue. Even inflation trending down from the recent peak, without any recession induced deflation, will average the red bars down.

[evancox10]

Terrific chart, FactualFran, thanks for adding it. Through no fault of yours, it is achingly incomplete. I would be fascinated to see the right side of the chart extended by showing the auction yield of the 2014 versus inflation over 9 years, the auction yield of the 2015 versus inflation over the next eight years ... out to maybe the five year bond issued in 2018.

Nominal yields went down more after 2013, and the big news on inflation came in 2021 and 2022 ...

Here is a version that includes 10-year TIPS that are within five years of maturing.

Much obliged!

I note that the right side of the chart looks much different now, suggesting increasingly worse predictive performance over time, rather than the narrowing seen earlier.

Slots well with the point protagonist made just up thread, about normal versus unusual times.

I don’t think plotting it this way helps all that much. Annualized inflation over shorter time scales will show more volatility, down to negative rates for certain months. For this specific time series, you are averaging the outlier recent years with fewer and fewer normal years. So it is more of a statement on the last few years inflation than overall predictive power of bond markets, I think.

What would be more informative is 5-year TIPS yield vs 5-year break even rate over the complete time period, likewise 1-year, etc. That way it is not mixing and matching different durations.

Definitely a good topic for study!

[FactualFran]

Thank you FactualFran for sharing this graph! Would you be able to share the underlying data set too? (I know it is all publicly available somewhere but I'd like to build off of this as a starting point, if possible.)

I encourage others to independently gather the data, do the calculations, and post their results.

[Kbg]

What?! You aren’t our task on demand research assistant?

[Oliver]

I took a slightly different approach in building my TIPS ladder. I aimed at building the whole ladder in stages. I started by purchasing enough bonds to generate 10k of cash flow. I then started purchasing enough bonds to generate 15k of cash flow and so on.

PS I prioritized those years with the highest yield at each stage.

[FactualFran]

What would be more informative is 5-year TIPS yield vs 5-year break even rate over the complete time period, likewise 1-year, etc. That way it is not mixing and matching different durations.

Here is a graph for 5-Year TIPS of the break even rate and yield at auction. The previous graphs showed the inflation after the auction up to maturity, rather than the auction yield, of 10-Year TIPS.



The graph excludes the first 5-year TIPS that was auctioned 1997-07. The next one was auctioned eight years later.

[evancox10]

What would be more informative is 5-year TIPS yield vs 5-year break even rate over the complete time period, likewise 1-year, etc. That way it is not mixing and matching different durations.

Here is a graph for 5-Year TIPS of the break even rate and yield at auction. The previous graphs showed the inflation after the auction up to maturity, rather than the auction yield, of 10-Year TIPS.



The graph excludes the first 5-year TIPS that was auctioned 1997-07. The next one was auctioned eight years later.

Thanks Fran for sharing. I think I misspoke as I was interested in the same graph as before but with all 5-year. However that’s not what I wrote! That’s what I get for going too fast on my phone trying to get the post out.

Also, I didn’t meant to say that you or your efforts were not helpful, rather I was trying to figure out what is the most elucidating presentation of the underlying data. Again, thanks for compiling and sharing these results!

[FactualFran]

Thanks Fran for sharing. I think I misspoke as I was interested in the same graph as before but with all 5-year. However that’s not what I wrote! That’s what I get for going too fast on my phone trying to get the post out.

Here is a graph for 5-year TIPS of the breakeven inflation at auction and the actual inflation to maturity.



The graph excludes the first 5-year TIPS that was auctioned 1997-07. The next one was auctioned eight years later.

There was about 2 years of high year-to-year inflation from about early 2021 through early 2023. With the 5-year TIPS auctioned 2017-04, the last about 1/5th of its term was during that high inflation. With the 5-year TIPS auctioned 2018-04, the last about 2/5th of its term was during that high inflation.

[protagonist]

Now that long TIPS have almost backed off 2% I will.....

A strategic question for all you seasoned investors.

The Jan 2024 maturity TIPS are now selling at 6.47% YTM (Fidelity).

Would you:
a.) Buy long TIPS now?
b.) Take advantage of the short term 1/15/24 maturity yield (roughly $75 per 10K invested between now and maturity- no big deal vs. money market).
Buy 1/15/24 TIPS now and take your chances with reinvestment risk vs. reinvestment opportunity in January when they mature?

I realize nobody has a crystal ball. I'm just on the fence about this. I suppose CPI adjustment and inflation figures that come out in mid-December will impact the direction of TIPS yields...I just have no idea in what direction. Last I checked I was getting 5.2% in FZDXX money market. I pay no state income tax .

Now that TIPS yields are falling, buying I-bonds at 1.3% fixed rate in December is becoming more appealing. I will wait until the end of December to decide whether to do so based on TIPS yields at that point.

[Horton]

Now that long TIPS have almost backed off 2% I will.....

I’m still seeing the 2045 around 2.30%

[protagonist]

Now that long TIPS have almost backed off 2% I will.....

I’m still seeing the 2045 around 2.30%

Right.....
In the world of a septuagenarian like me, I consider 2033 "long TIPS".
Anyway, 0.3% difference between 2% and 2.3% is only $30/yr./$10K invested. That's not nearly one tank of gas per year. So really, the difference is splitting hairs.

[Kevin M]

Now that long TIPS have almost backed off 2% I will.....

A strategic question for all you seasoned investors.

The Jan 2024 maturity TIPS are now selling at 6.47% YTM (Fidelity).

Would you:
a.) Buy long TIPS now?
b.) Take advantage of the short term 1/15/24 maturity yield (roughly $75 per 10K invested between now and maturity- no big deal vs. money market).
Buy 1/15/24 TIPS now and take your chances with reinvestment risk vs. reinvestment opportunity in January when they mature?

I realize nobody has a crystal ball. I'm just on the fence about this. I suppose CPI adjustment and inflation figures that come out in mid-December will impact the direction of TIPS yields...I just have no idea in what direction. Last I checked I was getting 5.2% in FZDXX money market. I pay no state income tax .

Now that TIPS yields are falling, buying I-bonds at 1.3% fixed rate in December is becoming more appealing. I will wait until the end of December to decide whether to do so based on TIPS yields at that point.

I wouldn't place much importance on the real yield of the Jan 2024 TIPS. The inflation adjustment is known through Jan 1, so the only unknown for inflation adjustment is for Jan 1 through Jan 15, which depends on Nov 2023 CPI (which sets the Feb 1 ref CPI). This TIPS is trading mostly to be competitive with the nominal Treasury maturing on Jan 15, 2024, and the ask yield for that is 5.23% (when I pulled the yields a few minutes ago at least). I would assume that the nominal return for the Jan 2024 TIPS will be pretty close to 5.2%, so about the same as FZDXX, with a little less certainty.

The BEI for Jan 15, unadjusted for seasonality or outlier factors, is -1.21%. However, that doesn't factor in the known inflation adjustment between now and Jan 1. The BEI from Jan 1 to Jan 15 is -2.13%, and adjusting for seasonality it's -1.08%. Any of these numbers indicate that Treasury traders expect a negative monthly CPI change for November. Buying the Jan 2024 TIPS as a short-term trade basically is a bet that the Treasury traders are wrong, and that November inflation will be higher than expected.

[protagonist]

Now that long TIPS have almost backed off 2% I will.....

A strategic question for all you seasoned investors.

The Jan 2024 maturity TIPS are now selling at 6.47% YTM (Fidelity).

Would you:
a.) Buy long TIPS now?
b.) Take advantage of the short term 1/15/24 maturity yield (roughly $75 per 10K invested between now and maturity- no big deal vs. money market).
Buy 1/15/24 TIPS now and take your chances with reinvestment risk vs. reinvestment opportunity in January when they mature?

I realize nobody has a crystal ball. I'm just on the fence about this. I suppose CPI adjustment and inflation figures that come out in mid-December will impact the direction of TIPS yields...I just have no idea in what direction. Last I checked I was getting 5.2% in FZDXX money market. I pay no state income tax .

Now that TIPS yields are falling, buying I-bonds at 1.3% fixed rate in December is becoming more appealing. I will wait until the end of December to decide whether to do so based on TIPS yields at that point.

I wouldn't place much importance on the real yield of the Jan 2024 TIPS. The inflation adjustment is known through Jan 1, so the only unknown for inflation adjustment is for Jan 1 through Jan 15, which depends on Nov 2023 CPI (which sets the Feb 1 ref CPI). This TIPS is trading mostly to be competitive with the nominal Treasury maturing on Jan 15, 2024, and the ask yield for that is 5.23% (when I pulled the yields a few minutes ago at least). I would assume that the nominal return for the Jan 2024 TIPS will be pretty close to 5.2%, so about the same as FZDXX, with a little less certainty.



The BEI for Jan 15, unadjusted for seasonality or outlier factors, is -1.21%. However, that doesn't factor in the known inflation adjustment between now and Jan 1. The BEI from Jan 1 to Jan 15 is -2.13%, and adjusting for seasonality it's -1.08%. Any of these numbers indicate that Treasury traders expect a negative monthly CPI change for November. Buying the Jan 2024 TIPS as a short-term trade basically is a bet that the Treasury traders are wrong, and that November inflation will be higher than expected.

Good analysis.

And yes, I agree, the real yield on the 1/24 TIPS is not important.

The main question, I suppose, is whether to pounce on TIPS now or wait and hope for a rebound. My usual inclination is to pounce, because I have no crystal ball anyway, and it keeps me from having to think about what to do based on wild guesses about the future. But I also want to have enough in reserve to invest in 2034 TIPS when they become available in January.

I also want to reserve $20K of investible assets in MM until late December to decide whether to use it for TIPS or I-bonds in 2023.

[Kevin M]

Good analysis.

And yes, I agree, the real yield on the 1/24 TIPS is not important.

The main question, I suppose, is whether to pounce on TIPS now or wait and hope for a rebound. My usual inclination is to pounce, because I have no crystal ball anyway, and it keeps me from having to think about what to do based on wild guesses about the future. But I also want to have enough in reserve to invest in 2034 TIPS when they become available in January.

I also want to reserve $20K of investible assets in MM until late December to decide whether to use it for TIPS or I-bonds in 2023.

I probably would put money intended for TIPS purchase in Jan into nominal Treasuries maturing in Jan, unless I was concerned about or wanted to bet on unexpectedly high inflation in November.

If I knew I would not need the cash before late December, I would put it into individual Treasuries, but I have a high marginal state income tax rate. There are bills maturing 12/26 and 12/28 at about 5.35%. Fidelity Treasury only MM fund, FDLXX, yield is 5.01%. If no state income taxes, FZDXX is 5.21%, or if using Vanguard, VMRXX is 5.29%, so not much worse than Treasuries.

[AQ]

LTPZ only buyer here. Now it's well off its low what do fellow LT{Z investors do now? Wait to see if it comes down again, or keep buying? (my reserve is in MMF to take advantage of inverted curve for now)

[McQ]

LTPZ only buyer here. Now it's well off its low what do fellow LT{Z investors do now? Wait to see if it comes down again, or keep buying? (my reserve is in MMF to take advantage of inverted curve for now)

Thanks for asking.

Short answer: I expect to see a better buying opportunity over the next 6 - 10 months. In the mean time, LTPZ is still trading below my average cost of purchase near $55, so I am comfortable having its dividends reinvested.

If LTPZ continues rallying past 55, I'll shift the dividends to cash for later redeployment.

My market timing plans are informed by what seems to me a disjunct between my expectations of inflation and the market's expectations. As of yesterday, the market expected about 2.2% from now through 2033, and about 2.4% through 2043 (nominal minus TIPS yields).

That's crazy. IMHO.

My prediction is that the first digit on the trailing 12-month CPI will mostly be '3' over the next year or two, with the occasional '2' but more frequently '4'.

*I mean the CPI used to adjust TIPS, not the decaffeinated, non-fat, sugar-free version to which the Fed's target of 2.0% applies.

The Fed might not hike again, but they certainly won't cut in 2024 if my expectation is realized. Once the market comes around to my point of view about expected inflation , bond prices will tank (again), and LTPZ will dive toward 50 + /-, and I'll buy some more.

Will LTPZ touch new lows? I dunno. Will LTPZ revisit its lows? Not unlikely.

[Jaylat]

LTPZ only buyer here. Now it's well off its low what do fellow LT{Z investors do now? Wait to see if it comes down again, or keep buying? (my reserve is in MMF to take advantage of inverted curve for now)

My market timing plans are informed by what seems to me a disjunct between my expectations of inflation and the market's expectations. As of yesterday, the market expected about 2.2% from now through 2033, and about 2.4% through 2043 (nominal minus TIPS yields).

That's crazy. IMHO.

My prediction is that the first digit on the trailing 12-month CPI will mostly be '3' over the next year or two, with the occasional '2' but more frequently '4'.

I agree with your predictions, but disagree as to their effect on TIPS. I would expect TIPS real yields to go down if the breakeven inflation rises. Buyers compare nominal yields, and all things being held equal, a higher breakeven inflation should result in a lower real TIPS yield.

Also, if inflation is seen as being an intractable problem, that should increase demand for TIPS, again driving down real TIPS yields.

Of course, I've beed dead wrong about these things before, so proceed with caution...

[slicendice]

As of yesterday, the market expected about 2.2% from now through 2033, and about 2.4% through 2043 (nominal minus TIPS yields).

That's crazy. IMHO.

My prediction is that the first digit on the trailing 12-month CPI will mostly be '3' over the next year or two, with the occasional '2' but more frequently '4'.

*I mean the CPI used to adjust TIPS, not the decaffeinated, non-fat, sugar-free version to which the Fed's target of 2.0% applies.

I'm inclined to agree, but the beauty of long term TIPS is we can afford not to care. The main risk we run is that of opportunity cost in the case that nominal bonds marginally outperform because inflation does not reach market expectations over the long term. That is a potential cost I am willing to bear.

[protagonist]

Good analysis.

And yes, I agree, the real yield on the 1/24 TIPS is not important.

The main question, I suppose, is whether to pounce on TIPS now or wait and hope for a rebound. My usual inclination is to pounce, because I have no crystal ball anyway, and it keeps me from having to think about what to do based on wild guesses about the future. But I also want to have enough in reserve to invest in 2034 TIPS when they become available in January.

I also want to reserve $20K of investible assets in MM until late December to decide whether to use it for TIPS or I-bonds in 2023.

I probably would put money intended for TIPS purchase in Jan into nominal Treasuries maturing in Jan, unless I was concerned about or wanted to bet on unexpectedly high inflation in November.

If I knew I would not need the cash before late December, I would put it into individual Treasuries, but I have a high marginal state income tax rate. There are bills maturing 12/26 and 12/28 at about 5.35%. Fidelity Treasury only MM fund, FDLXX, yield is 5.01%. If no state income taxes, FZDXX is 5.21%, or if using Vanguard, VMRXX is 5.29%, so not much worse than Treasuries.

Easiest for me to just leave it in FZDXX at 5.21%. Even if state tax was an issue (which it is not) At a 0.14% difference, that is $14/year difference in income vs. FZDXX, or only a bit over a dollar difference of taxable income between now and the maturity date per $10K. If your state taxes are 10% it would cost you about a dime difference in tax per 10K invested. I would much prefer the flexibility of the money market.

[HomerJ]

The only thing I felt confident "predicting" is that bond values would plummet over the next year, because the Fed essentially told me so when they announced that they would be aggressively raising interest rates. That wasn't really a prediction- it was almost a known fact.

FYI... This isn't actually how bond values actually work.

The Fed can raise the federal fund rate (super-short term rate for banks to borrow or loan each other money), and it doesn't always strongly affect intermediate and long-term bond interest rates.

For instance, from May 2004 to June 2006, the Fed rate rose from 1% to 5.25%, which is nearly as much and just as fast as the Fed raised rates these past 2 years (from 0% to 5.25%)



Yet, intermediate bond values didn't plummet during that time. Holding Total Bond Market Index fund still made you money over that time period.

So, it's NOT automatic that all interest rates rise across the board and bond funds all crash just because the Fed raises their rate.

[protagonist]

The only thing I felt confident "predicting" is that bond values would plummet over the next year, because the Fed essentially told me so when they announced that they would be aggressively raising interest rates. That wasn't really a prediction- it was almost a known fact.

FYI... This isn't actually how bond values actually work.

The Fed can raise the federal fund rate (super-short term rate for banks to borrow or loan each other money), and it doesn't always strongly affect intermediate and long-term bond interest rates.

For instance, from May 2004 to June 2006, the Fed rate rose from 1% to 5.25%, which is nearly as much and just as fast as the Fed raised rates these past 2 years (from 0% to 5.25%)



Yet, intermediate bond values didn't plummet during that time. Holding Total Bond Market Index fund still made you money over that time period.

So, it's NOT automatic that all interest rates rise across the board and bond funds all crash just because the Fed raises their rate.

I didn't think it is an automatic slam-dunk, but even if the chances of losing money are only 51% vs. a 49% chance of making the same amount of money, wouldn't you seek a different investment?

I have some questions about the 5/04-6/06 period you focused on:

1. Did the Fed announce in spring 2004, in strong terms, that it intended to raise rates dramatically over the following year or two?

If not, perhaps investors could not predict with any confidence what would happen to interest rates, and thus did not alter their bond strategy.

In 2022, in the face of 8-9% annual inflation, the Fed. was very clear about what it intended to do, which sent a clear signal to investors. In my humble opinion (I admit I am no expert), that made it easy to predict with confidence that there was greater than a 50% chance that holding bonds would lose money over the following year. Now that inflation may be under control and the Fed is not sending clear signals, we don't know ahead of time what the Fed. will do, and where interest rates go from here is anybody's guess.

2. You focused on one two year period on a graph covering a 68 year span. Was it typical or anomalous?

[alluringreality]

from May 2004 to June 2006, the Fed rate rose from 1% to 5.25%, which is nearly as much and just as fast as the Fed raised rates these past 2 years (from 0% to 5.25%)

Generally the two example periods appear to have limited similarities for my personal finance interpretations. The more recent period started from lower rates, both for near-term and longer-term rates. The difference in the slope of the rise for short-term rates is generally less drastic than the comparative rise for longer-term rates, yet that's sort of to be expected. With such low comparative starting points for longer-term rates, I still have little idea what the bond market was thinking. Basically I considered the late 2021 projections questionable in relation to target policy and recent inflation. My best guess amounts to some sort of complacency due to past-performance and the extent of prior public policy. Stock markets clearly overextend prices at times, so I suppose it makes sense to occasionally expect similar behavior from bond markets.
https://fred.stlouisfed.org/graph/?g=1c1Fv
https://disciplinefunds.com/2023/08/15/ ... -velocity/

[exodusing]

Acting on your predictions of future rates seems unwise, however much you can point to history or economic conditions. If nothing else, the market has likely already considered and reacted to whatever you're looking at. Also, everything is obvious in hindsight and, as some gamblers say, the worst you can do is be right on a bet/prediction and then assume you'll win again.

One might draw a distinction between predictions and making decisions based on current rates, for example, at current rates a TIPS ladder will satisfy my needs, so I'll buy one, but the ladder would have been inadequate at lower rates.