New tool for building a TIPS ladder

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kaesler
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Re: New tool for building a TIPS ladder

Post by kaesler »

MtnBiker wrote: Sat Feb 01, 2025 10:45 am In the manual tool, is there any way to see the effect of changing a holding entered as preowned, other than reverting back to the Analyze page and changing it there? (Seems kind of awkward to have to bounce back and forth between pages just to change a quantity.)
I’m working today on adding the ability to reduce the size of a pre-owned holding in the manual “Build” page. This should allow modeling the use-case of selling one’s 2034s and 2040s to buy the newly minted 2035s.

It will show you the effect on your ladder and also estimate proceeds from sale of the pre-owned bonds.

Hope to get this finished in a few days time.
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Raspberry-503
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Re: New tool for building a TIPS ladder

Post by Raspberry-503 »

Too late for me (in that I purchased my entire ladder bridge to SS at this point, except for filling in the gap year from the bookend TIPS I purchased), but is there a setting that would allow to get TIPS quarterly, spreading the maturity through the year? Some may like to have their whole year allowance mature at once, but I'm planning on withdrawing monthly, and by having TIPS mature every quarter you hedge against intra-year spikes in inflation.
Possibly an over-optimization but it seems that it would be easy to do.
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kaesler
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Re: New tool for building a TIPS ladder

Post by kaesler »

Raspberry-503 wrote: Tue Feb 04, 2025 12:53 am ...is there a setting that would allow to get TIPS quarterly, spreading the maturity through the year?
Not sure this is worth trying. For quite a few years of interest, there is only one TIPS maturity date during the year. For quite a few others only two.

https://www.tipsladder.com/catalog
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kaesler
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Re: New tool for building a TIPS ladder

Post by kaesler »

kaesler wrote: Sat Feb 01, 2025 10:52 am
MtnBiker wrote: Sat Feb 01, 2025 10:45 am In the manual tool, is there any way to see the effect of changing a holding entered as preowned, other than reverting back to the Analyze page and changing it there? (Seems kind of awkward to have to bounce back and forth between pages just to change a quantity.)
I’m working today on adding the ability to reduce the size of a pre-owned holding in the manual “Build” page. This should allow modeling the use-case of selling one’s 2034s and 2040s to buy the newly minted 2035s.

It will show you the effect on your ladder and also estimate proceeds from sale of the pre-owned bonds.

Hope to get this finished in a few days time.
This is now implemented and deployed. You may have to refresh your browser to get the new app version.

It works like this:
  • Load up your existing TIPS portfolio on the "Analyse" page, most conveniently from a previously saved CSV file
  • "Extend to ladder", which takes you to the "Build" page seeded with your existing ladder
  • Add new bonds, e.g. 2035s
  • Remove old bonds, e.g. some 2034s and 2040s, by reducing the bond count beside the CUSIP
  • When you have the ladder with the desired properties (they are updated as you go at the bottom of the page), download the buy and sell lists and execute the trades.
telstar
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Re: New tool for building a TIPS ladder

Post by telstar »

Wow kaesler; thank you for all your hard work.
And I thought it was great before!
I don't know if I would have been able to build my ladder as soon as I have without your wonderful creation.
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Re: New tool for building a TIPS ladder

Post by Stubbie »

kaesler wrote: Tue Feb 04, 2025 5:05 pm
kaesler wrote: Sat Feb 01, 2025 10:52 am

I’m working today on adding the ability to reduce the size of a pre-owned holding in the manual “Build” page. This should allow modeling the use-case of selling one’s 2034s and 2040s to buy the newly minted 2035s.

It will show you the effect on your ladder and also estimate proceeds from sale of the pre-owned bonds.

Hope to get this finished in a few days time.
This is now implemented and deployed. You may have to refresh your browser to get the new app version.

It works like this:
  • Load up your existing TIPS portfolio on the "Analyse" page, most conveniently from a previously saved CSV file
  • "Extend to ladder", which takes you to the "Build" page seeded with your existing ladder
  • Add new bonds, e.g. 2035s
  • Remove old bonds, e.g. some 2034s and 2040s, by reducing the bond count beside the CUSIP
  • When you have the ladder with the desired properties (they are updated as you go at the bottom of the page), download the buy and sell lists and execute the trades.
Fantastic! Thanks.
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Re: New tool for building a TIPS ladder

Post by MtnBiker »

kaesler wrote: Tue Feb 04, 2025 5:05 pm
kaesler wrote: Sat Feb 01, 2025 10:52 am
I’m working today on adding the ability to reduce the size of a pre-owned holding in the manual “Build” page. This should allow modeling the use-case of selling one’s 2034s and 2040s to buy the newly minted 2035s.

It will show you the effect on your ladder and also estimate proceeds from sale of the pre-owned bonds.
This is now implemented and deployed.
This is very nicely done. Thank you!
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Kevin M
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Re: New tool for building a TIPS ladder

Post by Kevin M »

kaesler wrote: Tue Feb 04, 2025 4:58 pm
Raspberry-503 wrote: Tue Feb 04, 2025 12:53 am ...is there a setting that would allow to get TIPS quarterly, spreading the maturity through the year?
Not sure this is worth trying. For quite a few years of interest, there is only one TIPS maturity date during the year. For quite a few others only two.

https://www.tipsladder.com/catalog
Not recommending or requesting an update to do this, but a few comments ...

The maturity dates of TIPS are a function of the auction frequencies, which you can read about on this TreasuryDirect web page. To summarize, for initial offerings, the auctions are tentatively planned for the following months:
  • 30-year: Feb
  • 10-year: Jan and Jul
  • 5-year Apr and Oct
This is why we currently see TIPS maturities available quarterly through Oct 2029, in Jan and Jul for 2030-2034, in Jan only for 2035, and in Feb only for 2040-2054 (the 2055 should be auctioned this month, on Feb 20).

The implication is that one can only achieve quarterly maturities for funded years about four years into the future. So if you want to build your ladder now, you have to live with what's available, but of course could do additional transactions to achieve more frequent maturities as the shorter-maturity TIPS become available.

Finally, you currently can choose more than one maturity per funded year with the #Cruncher TIPS ladder spreadsheet. For example, where TIPS maturities are available quarterly, you can use 0.25 as the multipliers for each of Jan, Apr, Jul and Oct for a given funded year.
If I make a calculation error, #Cruncher probably will let me know.
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Re: New tool for building a TIPS ladder

Post by protagonist »

MtnBiker wrote: Tue Feb 04, 2025 10:37 pm
kaesler wrote: Tue Feb 04, 2025 5:05 pm
This is now implemented and deployed.
This is very nicely done. Thank you!
Thanks from me too!
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kaesler
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Re: New tool for building a TIPS ladder

Post by kaesler »

Kevin M wrote: Wed Feb 05, 2025 1:42 pm
kaesler wrote: Tue Feb 04, 2025 4:58 pm
Not sure this is worth trying. For quite a few years of interest, there is only one TIPS maturity date during the year. For quite a few others only two.

https://www.tipsladder.com/catalog
Not recommending or requesting an update to do this, but a few comments ...

The maturity dates of TIPS are a function of the auction frequencies, which you can read about on this TreasuryDirect web page. To summarize, for initial offerings, the auctions are tentatively planned for the following months:
  • 30-year: Feb
  • 10-year: Jan and Jul
  • 5-year Apr and Oct
This is why we currently see TIPS maturities available quarterly through Oct 2029, in Jan and Jul for 2030-2034, in Jan only for 2035, and in Feb only for 2040-2054 (the 2055 should be auctioned this month, on Feb 20).

The implication is that one can only achieve quarterly maturities for funded years about four years into the future. So if you want to build your ladder now, you have to live with what's available, but of course could do additional transactions to achieve more frequent maturities as the shorter-maturity TIPS become available.

Finally, you currently can choose more than one maturity per funded year with the #Cruncher TIPS ladder spreadsheet. For example, where TIPS maturities are available quarterly, you can use 0.25 as the multipliers for each of Jan, Apr, Jul and Oct for a given funded year.
Thanks for that Kevin. I guess one could already use the manual "Build" aspect of tipsladder.com to choose multiple maturities per year where available. For that matter it would be pretty easy to implement an option in the ladder auto-generator to "Choose multiple maturities per year where available, best effort". I'll put it on the possible list for now.
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Re: New tool for building a TIPS ladder

Post by MtnBiker »

kaesler wrote: Fri Oct 11, 2024 7:21 am
MtnBiker wrote: Fri Oct 11, 2024 12:06 am How about "Duration matched pair of bonds" as a new entry for the drop-down box labeled "Which TIPS to use to fund a year without a maturing TIPS:"?

<snip>
Interesting idea this. Will think about it.
What are your thoughts on this idea?
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kaesler
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Re: New tool for building a TIPS ladder

Post by kaesler »

MtnBiker wrote: Wed Feb 05, 2025 4:02 pm
kaesler wrote: Fri Oct 11, 2024 7:21 am

Interesting idea this. Will think about it.
What are your thoughts on this idea?
First problem to be solved would be: estimating the duration of a bond that does not yet exist.
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Re: New tool for building a TIPS ladder

Post by MtnBiker »

kaesler wrote: Wed Feb 05, 2025 4:07 pm
MtnBiker wrote: Wed Feb 05, 2025 4:02 pm

What are your thoughts on this idea?
First problem to be solved would be: estimating the duration of a bond that does not yet exist.
The logical assumptions would be:

1) Each gap year is covered by a duration-matched mixture of bracket years, such as Jan 2035 and Feb 2040.
2) The yield of each gap year is assumed to be as linearly interpolated between the present day 2035 and 2040 yields.
3) Noting that the ladder computes the interest in years prior to 2035 based on the coupons from the bracket year mix, we then make the assumption that the coupon rate of each gap year is a linear interpolation between the 2035 and 2040 coupon rates.
4) Via a disclosure, we specify that if the coupon rate of the actual gap year, when issued, differs substantially from the assumed coupon rate, then bonds may need to be swapped between the pre-gap years and gap year to correct for any major changes in interest in the pre-gap years vs principal in the gap year (a process known as ARA (annual real amount) smoothing). ARA smoothing means that the income stream will be as calculated, assures that the average duration of the income stream will be as assumed, and the duration matching used to hedge against interest rate changes will not be degraded due to the difference between the assumed gap coupon rate and the actual, as realized, coupon rate.

I think these 4 assumptions are enough information to calculate the duration of the bonds that do not exist. I'm too lazy to do the calculations at the moment, but I would suggest that the resulting durations would likely be very close to what one would calculate by linear interpolation between the bracket year durations. Here is what we have today using linear interpolation:

Code: Select all

Year    Duration
2040     12.81
2039     12.05
2038     11.29
2037     10.53
2036     9.77
2035     9.01
Using the ladder manual tool, if I try to build a 2035 to 2040 ladder with 20K of annual income, I find that I need 14 of the 2040 bonds to cover 2040 and 18 of the 2035 bonds to cover 2035. The number of bonds to cover the intervening gap years is basically a linear interpolation of the number of bonds to cover the bracket years:

Code: Select all

            No. of Bonds
Year      2035      2040     Duration     Income
2040        0        14      12.81       $20,654
2039        4        11      12.05       $20,661
2038        8         8      11.26       $20,576
2037       12         5      10.44       $20,397
2036       14         3       9.91       $19,601
2035       18         0       9.01       $19,862
Just as it isn't possible to hit the Income targets exactly, the duration targets can't be matched exactly either. Juggling the mixture of bracket years covering each gap year changes the duration and income slightly one way or the other. I hope this gives a general idea of how it could be done.

Note that I intentionally used income amount targets on the low side for 2035 and 2036, since the ladder tool underestimates (neglects) the interest payments received from reinvesting the 2035s to cover the gap years.
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kaesler
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Re: New tool for building a TIPS ladder

Post by kaesler »

MtnBiker wrote: Wed Feb 05, 2025 8:58 pm
kaesler wrote: Wed Feb 05, 2025 4:07 pm ...
First problem to be solved would be: estimating the duration of a bond that does not yet exist.
The logical assumptions would be:
...

I hope this gives a general idea of how it could be done.
Thanks very much. That is most helpful.
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Re: New tool for building a TIPS ladder

Post by Kevin M »

MtnBiker wrote: Wed Feb 05, 2025 8:58 pm
kaesler wrote: Wed Feb 05, 2025 4:07 pm First problem to be solved would be: estimating the duration of a bond that does not yet exist.
The logical assumptions would be:

1) Each gap year is covered by a duration-matched mixture of bracket years, such as Jan 2035 and Feb 2040.
2) The yield of each gap year is assumed to be as linearly interpolated between the present day 2035 and 2040 yields.
3) Noting that the ladder computes the interest in years prior to 2035 based on the coupons from the bracket year mix, we then make the assumption that the coupon rate of each gap year is a linear interpolation between the 2035 and 2040 coupon rates.
1. This is what I do, although only as an intermediate step. Different strokes ...
2. This is what I do.
3. I calculate coupon based on the assumed yield, using the same formula as Treasury.
I think these 4 assumptions are enough information to calculate the duration of the bonds that do not exist. I'm too lazy to do the calculations at the moment, but I would suggest that the resulting durations would likely be very close to what one would calculate by linear interpolation between the bracket year durations.

I use modified duration, as it is the duration measure relevant to interest rate sensitivity calculations, but the values are close enough that it does not matter enough to worry about given the other uncertainties involved. It's easy enough to calculate duration using the spreadsheet DURATION or MDURATION formula that linear interpolation is not required for this step, but again, it's not going to make much difference.
Here is what we have today using linear interpolation:

Code: Select all

Year    Duration
2040     12.81
2039     12.05
2038     11.29
2037     10.53
2036     9.77
2035     9.01
Here are the results using the approach I've specified, which of course is covered in detail in Covering the TIPS gap years with bracket year duration matching. I'm using today's ask yields from Schwab:

Image

Although I use modified duration, I've added a column for Macaulay duration for comparison purposes.
If I make a calculation error, #Cruncher probably will let me know.
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Re: New tool for building a TIPS ladder

Post by MtnBiker »

MtnBiker wrote: Wed Feb 05, 2025 8:58 pm The logical assumptions would be:
1) Each gap year is covered by a duration-matched mixture of bracket years, such as Jan 2035 and Feb 2040.
2) The yield of each gap year is assumed to be as linearly interpolated between the present day 2035 and 2040 yields.
3) Noting that the ladder computes the interest in years prior to 2035 based on the coupons from the bracket year mix, we then make the assumption that the coupon rate of each gap year is a linear interpolation between the 2035 and 2040 coupon rates.
Kevin M wrote: Thu Feb 06, 2025 2:48 pm 1. This is what I do, although only as an intermediate step. Different strokes ...
2. This is what I do.
3. I calculate coupon based on the assumed yield, using the same formula as Treasury.
Thanks Kevin, for confirming that (1) and (2) are appropriate.

Under the present conditions (yield near 2% and bracket-year coupon rates near 2%), what I proposed for (3) and what Kevin uses for (3) give essentially identical results for gap-year durations and excess bracket-year holdings. However, for clarity, I think it should be noted that what I proposed for (3) and what Kevin uses for (3) would give very different results in a case where the prevailing yield is quite different from the existing bracket-year coupon rates.

For example, if today's prevailing yield was near 0%, Kevin's approach would set the coupon rates for the hypothetical gap year bonds at 0.125% while the bracket-year coupon rates would remain at 2.125%. With that low of a coupon rate, the calculated durations of the hypothetical gap year bonds would be about 1 year longer than calculated under my assumptions. This would lead to significantly different assignments for the mixture ratios of 2035 and 2040 bonds assigned to cover each gap year. Under my assumption (3), the mixture ratios wouldn't change much.

We don't know what the future gap-year coupons will be; we can only make assumptions. The question then comes down to which assumption (3) would be better to use in tipsladder.com? The reality is that the existing ladder tool calculates interest from the excess bracket-year bonds covering the gap years based on the coupon rates of the existing bracket-year holdings. Thus, my assumption (3) is self-consistent with the existing ladder builder. If the ladder tool instead calculated interest from the excess bracket-year bonds covering the gap years based on the current prevailing yield, then Kevin's method (3) would be self-consistent and appropriate.

So, what happens if my assumption (3) is used, and gap-year coupon rates turn out to be substantially different than assumed? To the extent that the actual, realized gap-year coupon rates turn out to be different from the prediction of my assumption (3), the duration-matched hedging against changes in interest rates remains intact if annual real income smoothing is applied. (For anyone interested, the math showing that my assumption (3) is valid with annual real income smoothing is given in this post.)

If Kevin's method (3) is used, I would suggest that tipsladder.com would need to be modified for self-consistency by calculating interest from the excess bracket-year bonds covering the gap years based on the current prevailing yield. (Presumably, smoothing of annual real income would still need to be applied in the case where the actual gap-year coupon turns out to be substantially different than initially assumed.) Under this method, bracket year holdings would need to be rebalanced to maintain duration matching in response to any major yield shifts. Smoothing of annual real income after swapping for the actual gap year bond may be ill-advised since it would tend to compromise the efficacy of the duration-matched hedging against interest rate risk. (Edited comments about impact of yield shifts when using this method.)
Last edited by MtnBiker on Fri Feb 07, 2025 12:07 am, edited 1 time in total.
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Raspberry-503
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Re: New tool for building a TIPS ladder

Post by Raspberry-503 »

Kevin M wrote: Thu Feb 06, 2025 2:48 pm
Image
why isn't the coupon rate of the gap years 2.15%? am I misunderstanding the use "extrapolated"?

EDIT: nevermind, it's the coupon rate, not the yield, go it.
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Re: New tool for building a TIPS ladder

Post by dcabler »

kaesler wrote: Wed Feb 05, 2025 3:44 pm
Kevin M wrote: Wed Feb 05, 2025 1:42 pm
Not recommending or requesting an update to do this, but a few comments ...

The maturity dates of TIPS are a function of the auction frequencies, which you can read about on this TreasuryDirect web page. To summarize, for initial offerings, the auctions are tentatively planned for the following months:
  • 30-year: Feb
  • 10-year: Jan and Jul
  • 5-year Apr and Oct
This is why we currently see TIPS maturities available quarterly through Oct 2029, in Jan and Jul for 2030-2034, in Jan only for 2035, and in Feb only for 2040-2054 (the 2055 should be auctioned this month, on Feb 20).

The implication is that one can only achieve quarterly maturities for funded years about four years into the future. So if you want to build your ladder now, you have to live with what's available, but of course could do additional transactions to achieve more frequent maturities as the shorter-maturity TIPS become available.

Finally, you currently can choose more than one maturity per funded year with the #Cruncher TIPS ladder spreadsheet. For example, where TIPS maturities are available quarterly, you can use 0.25 as the multipliers for each of Jan, Apr, Jul and Oct for a given funded year.
Thanks for that Kevin. I guess one could already use the manual "Build" aspect of tipsladder.com to choose multiple maturities per year where available. For that matter it would be pretty easy to implement an option in the ladder auto-generator to "Choose multiple maturities per year where available, best effort". I'll put it on the possible list for now.
I went through the exercise myself and ultimately decided that having only a few years with quarterly maturing TIPS just wasn't worth it if I couldn't do it for the entire 30. And the thought selling existing bonds to purchase new bonds so that I always had quarterly maturing TIPS was pretty much the opposite of my goal of having the hands-off income I was shooting for. If I were willing to continue to put effort into it, then I would have just stayed with duration targeting with TIPS funds.

Cheers.
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Re: New tool for building a TIPS ladder

Post by 17outs »

Tried to purchase a ladder today from the tool, but there were minimum 100 of next years bond. Is this normal?
telstar
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Re: New tool for building a TIPS ladder

Post by telstar »

This might be normal near the start or end of the trading day or after. I haven't looked at TIPS that close to maturity so I wonder if that is a factor too.
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Re: New tool for building a TIPS ladder

Post by RyeBourbon »

17outs wrote: Thu Feb 06, 2025 9:45 pm Tried to purchase a ladder today from the tool, but there were minimum 100 of next years bond. Is this normal?
Was the bond market closed when you looked? Try after 8am EST today.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, target AA = 65/30/5
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Kevin M
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Re: New tool for building a TIPS ladder

Post by Kevin M »

17outs wrote: Thu Feb 06, 2025 9:45 pm Tried to purchase a ladder today from the tool, but there were minimum 100 of next years bond. Is this normal?
Did you look at depth of book?

Typically bond search results will show only the best prices/yields (you can modify this at Schwab), which may be for larger minimum quantities. All of the big three brokers provide a way to view "depth of book" quotes, and these usually will include smaller minimum quantity quotes, typically as low as 1. Occasionally even depth of book will not include smaller minimum quantities, but this is rare in my experience. I typically buy and sell quantity 10, and I've almost never been unable to find a relevant offer.

Another option for earlier funded years is to buy one of the other maturities; e.g., Apr, Jul or Oct instead of Jan. Or just wait a bit to buy.
If I make a calculation error, #Cruncher probably will let me know.
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