Sharing some of the work I've done on calculating how many excess bracket year TIPS to hold for duration matching of 2036-2040. I'll share an overview in this post, and go into more detail in subsequent posts. This is not something I'd expect anyone else to do, but I felt compelled to do it due to dissatisfaction from what I can do with the tips ladder building tools alone; this is primarily because tipsladder.com assumes the bracket year excess bonds are held as long as possible--i.e., the 2034s or 2035s until maturity, and the 2040s until the 2034s or 2035s mature, which is not what we typically intend to do with duration matching.
I calculated the duration matching weightings for the
excess of either Jan 2034 and Feb 2040 or Jan 2035 and 2040. For the former it's 0.41 and 0.59, and for the latter it's 0.48 and 0.52 respectively. These weightings are based on current Schwab ask quotes. I haven't yet calculated the weightings for Jul 2034 and Feb 2040. For me, the relevant weightings currently are for Jan 2034, since that's where I hold my lower-bracket excess, and I haven't yet decided if I'm going to switch to Jan 2035 for my lower bracket year holdings.
I ran tipsladder.com with these parameters:
I could pick any choice for the first parameter, since I'll be replacing the values for 2036-2039 in a later step, and tweaking the number of bonds for earlier years as necessary.
I then selected the Funded Years view, and downloaded it to a CSV file, which I then uploaded to a spreadsheet. The downloaded file contains many more fields than those shown on the webpage, which is a big aid to subsequent steps. Here is the way it looked at this point, with a couple of uninteresting columns hidden:
I then modified the spreadsheet to calculate the values in all the fields except Year Funded, CUSIP, and Bond Count. At this point I no longer rely on tipsladder.com for any further calculations.
I modified the rows for 2034 and 2035 to use the actual values for the Jan 2034 and Jan 2035. When I did this, the Jan 2035 was not yet available in TipsLadder.com, but it is now.
The next steps are to make changes to the 2036-2039 rows such that they contain values as if these TIPS were issued today and settle on T+1. Here are those steps for each row, working from 2039 down to 2036, since this minimizes bond count tweaking due to interest from later bonds.
- Delete CUSIP.
- Set maturity date to Jan 1 of the Year Funded.
- Set yield using linear interpolation between the Jan 2035 and Feb 2040 ask yields.
- Set the coupon to what it would be at auction based on the yield.
- Set inflation adjusted principal to 1,000.00, since the index ratio at auction would be very close to 1.
- Tweak the Bond count so that it is the minimum to get the real total income to at least $100K (consistent with the tipsladder.com settings I chose).
- Calculate the adjusted ask cost per bond based on the yield.
- Calculate Purchase cost as adjusted cost per bond times bond count. Accrued interest is set to 0, so Total cost equals Purchase cost.
After this I tweaked the bond count for earlier years to get the appropriate real total income; this is not required for subsequent calculations, but it provides a more accurate total ladder cost.
Here's the result:
Then I added some rows with calculations to determine the excess bracket year number of bonds:
I know this is slim on explanations, but I wanted to get it out today since the calculations are based on today's yields, although I pulled the TipsLadder.com data a couple of days ago. More explanations to follow, and of course questions are welcome in the meantime.
If I make a calculation error, #Cruncher probably will let me know.