TIPS: auction vs. secondary market to build ladder

[Atticus713]

Hi Forum,
We're planning to do a TIPS ladder with the non-equity portion of our portfolio. We have 5 years until retirement at age 62. $370k is in our core position (FDRXX) ready to go. We will be able to contribute an additional $70k/year into that Fidelity retirement account until we retire in 5 years. We want to build a 9 year TIPS Ladder with each "rung" being $70k starting with a 5 year TIPS maturing in 2030 and then build the ladder with rungs maturing yearly through 2038. I am aware of tipsladder.com but with the absence of TIPS maturing 2035-2039, I'm wondering which of the following plans would be the most prudent way to go:

Plan A: Use tipsladder.com to build the initial 5 years of the ladder from 2030-2034 (which would use up our current funds; then, since we are able to contribute $70k/yr, we could buy a new 10 year TIPS each year at initial auction over the upcoming 4 years to cover 2035-2038.)

Plan B: Buy all the rungs at initial auction through Fidelity over the next few years as follows:
2025: Buy a 5-year TIPS (maturing in 2030) and a 10-year TIPS (maturing in 2035)
2026: Buy a 5-year TIPS (maturing in 2031) and a 10-year TIPS (maturing in 2036)
2027: Buy a 5-year TIPS (maturing in 2032) and a 10-year TIPS (maturing in 2037)
2028: Buy a 5-year TIPS (maturing in 2033) and a 10-year TIPS (maturing in 2038)
2029: Buy a 5-year TIPS (maturing in 2034)

Plan C: Something else?

Basically, my question: With the current rates for existing TIPS on the secondary market and the current uncertainty in with interest rates in the near and longer term, would you recommend a "Plan A" approach utilizing the secondary market or utilize "Plan B" and gradually purchase new-issue TIPS at auction over the next several years?

Your thoughts and suggestions are appreciated!
Cheers,
Atticus713

[id0ntkn0wjack]

Sure seems like Plan A might be a better choice given that TIPS yields are historically high if I'm reading David Enna right...
https://tipswatch.com/2024/12/31/2024- ... in-review/

[sycamore]

Another option is to build your ladder now but use a technique to "cover the TIPS black hole". Some prior threads: https://www.google.com/search?q=cover+t ... org&udm=14

There are a few ways to do it. One way is to use an average duration mix from two different issues. E.g., for the $70000 2037 rung you'd buy $35000 in 2034 and $35000 in 2040 issues. When 2027 comes around and the Treasury auctions off new 2037 TIPS, you'd sell those 2034 & 2040 issues and buy the 2037. The idea is that you roughly matched the intended duration. It's not perfect but probably good enough. You'll lose a little bit by having to sell and then buy (lose on the spread), maybe a few basis points?

Or you buy 2034 issues to cover your 203x black hole years. You'd sell the 2034 whenever a new 203x becomes available. You're taking a chance that when 2027 comes around, the existing 2034 yield is close enough to the new 2037 yield. Three years difference in maturity, there can be some difference in yield but maybe it's not that bad.

[MtnBiker]

Since yields are high now, I would suggest using the funds you have now to lock in current yields for the longer maturities that you need, using purchases on the secondary market. In other words, cover the gap years first and then fill in the earlier years as funds become available later at whatever the yield might be then. (The prices of shorter maturities are less sensitive to yield.)

If you might have regret about filling the later years first (if yields should continue to climb higher), then fill all the rungs (including the gap rungs) partially now and add to each rung later as funds become available.

Tipsladder.com is useful for covering any years including the gap rungs. To lock in current yields without significant interest rate risk, you could consider using a duration-matching approach to cover the gap years such as is shown in this post:
viewtopic.php?p=8178611#p8178611

[Padlin]

Mtnbiker

I read your post at the link and understand what your doing, can you explain the process for actually funding 35 thru 39 when the time comes? Do you live off the bonds that mature in 34 till it runs out then sell some of the 40 bonds on the secondary as needed?

[MtnBiker]

Mtnbiker

I read your post at the link and understand what your doing, can you explain the process for actually funding 35 thru 39 when the time comes? Do you live off the bonds that mature in 34 till it runs out then sell some of the 40 bonds on the secondary as needed?

The temporary bracket year holdings (2034 and 2040) are held for a period of time until it is convenient to swap them for the actual 10-year gap-year bond (sometime after that gap-year bond is issued). Using the example in the post at the link, sometime in 2026 I would sell 4 of the 2040s and 12 of the 2034s and use the proceeds to buy the 2036. This buy and sell swap would be done on the same day and without delay, so that prevailing yields don't change between the buy and the sell. (If you wanted to market time the swap, do it on a day when yields are increasing, not decreasing.)

I actually have some limited experience doing this, having swapped 2032/2040 holdings to fill the 2034 which was a gap year for me. My observation was that I saw better relative pricing/yield for buying the January 2034 bond on the secondary market later in 2024 after the July 2034 issue was auctioned. Thus, my preference is to wait at least six months after the auction to minimize any effects of the small "on-the-run premium" (See: https://www.frbsf.org/wp-content/uploads/wp2017-10.pdf). But one could also make the swap at (or soon after) the auction without any large variation in relative price/yield compared to waiting.

[Padlin]

Very good, thanks.

[steadyosmosis]

I used secondary market.

[exodusing]

I don't see any advantage to buying at auction over buying on the secondary market. If current yields are adequate for your purpose I'd buy now. Yields may go higher, but they also may go lower, so why take the risk?

[17outs]

Thanks for posting because I have the same timeline and same thoughts. I plan to buy the first five years (2030-2035) when its available later this month all on secondary at some point this year. Then wait until 2030 to buy 2035-2040 because they will all be available by then.

[SkatingtoFire]

I’m also on a similar timeline and doing a hybrid of your plan A and B. This is mainly because I don’t have all the funds to build the ladder and need continuing contributions to build the rungs.

I started last year:
In 2024: bought 2029 5yr and 2034 10yr at auction

In 2025: Just bought 2033 and partial 2032 on secondary, because I couldn’t resist market timing. Will buy 2030 5yr and 2035 10yr at auction, and fill remaining 2032 on secondary as I get funds.

In 2026: Buy 2031 5yr and 2036 10yr at auction.

In 2027 and beyond: Buy 10yr at auction.

Buying at auction helps me resist market timing. With continuing contributions, I buy SCHP and sell it to cash a little before auction to then have the funds to put in buy order at auction.

[NatureBoy]

I don't see any advantage to buying at auction over buying on the secondary market. If current yields are adequate for your purpose I'd buy now. Yields may go higher, but they also may go lower, so why take the risk?

I think the only advantage is at the initial auction, there is no inflation-adjusted principal, so in the unlikely scenario of extended deflation, if held to maturity, they are redeemed at face value. For the most part, this doesn't worry me, but I do prefer secondary market TIPS with lower adjusted principal, even if the yield is a bit lower than TIPS of similar maturity. Buying on the secondary market also has the advantage of knowing exactly what real yield you'll get.