Now that long TIPS yields have fluctuated between 2.0 and 2.25% I will…

[McQ]

8/6/2024: title updated. See my post near the top of page 72.

4/10/2024: Title updated after today's CPI print. You can find my take in the middle of page 61.

12/13/2023: Title updated after today’s Fed announcement; my answer to the updated title is near the bottom of page 44.

Title updated November 8th, my update near the bottom of page 42

Title updated 10/3/2021, about the middle of page 31. Newcomers may wish to read the OP, browse the first few comments from Fall 2022 (the temporary bottom in TIPS prices), and then pick up the last page or two of the thread. Welcome!

Title most recently updated 9/21/2023, about the middle of page 26.

For those just joining, the current module starts about page 18 (early August), when TIPS began to approach 2.0% real for the first time since the thread began in Fall 2022.

Prior update:
[thread dates to near the bond market bottom last Fall. Here in 2023, beginning about March, TIPS yields rose enough to be attractive again. Pages 12 and following contain recent dialogue about whether it is time to buy and how much to buy.]

This is the OP:

1. Stay the course and engage in no market timing. I bought TIPS in 2021 to match future liabilities and have all I need according to my investment policy statement.
2. Wait to see how high that real yield might go.
3. Jump on it and convert a substantial percentage of my fixed income portfolio to long TIPS
4. Convert *all* my bond holdings to long TIPS, including those embedded in Wellesley, Wellington or other balanced funds.
5. Continue to ignore TIPS because the real return potentially on offer in stocks is so much greater than 2.0% over the long term.
6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.

The real yield hasn’t hit that 2.0% threshold yet, of course; but Friday I did spot a real yield of 1.50% on a 20+ year TIPS. Up about two hundred basis points over the trailing 12 months, IIRC. And I believe it’s been over a decade since that level of real return was offered by TIPS.

I’m strongly considering option #4.

A little historical background: Dimson, Marsh & Staunton, earlier in their book Triumph of the Optimists, and more recently in the Credit Suisse Global Yearbooks, found the long term real return on long government bonds since 1900 to be 2.0%. That was the value for US bonds; and that was the value for World ex-USA bonds. Over the 120 years.

There was a long thread by willthrill181 recently, now locked, which argued that any bond other than TIPS/ibonds suffers from asymmetric inflation risk.

And that’s the market timing argument in a nutshell: once TIPS real yields pass 2.0%, it is highly unlikely that nominal bonds will do any better, over the long term, in real terms; and not unlikely they will do worse. So if fixed income assets have a place in your asset allocation … would 2.0% be the threshold to go all TIPS?

What will you do, if a purchase of TIPS can guarantee a real yield of 2.0% over the next 20+ years? (approximate life expectancy for someone in their later 60s).

PS: if 60% of the Wellesley balance goes into TIPS, where would you put the remaining 40% equity balance, assuming you had chosen Wellesley, with eyes open, to be a conservative balanced fund where the managers picked the equities to hold, not you and not any market index? Same question for Wellington, but what to do with the 65% equity portion?

Perfectly appropriate for Wellesley/Wellington investors to reply along lines of "we don't need no stinking TIPS," and / or, "You can take my W fund out of my portfolio when you pry it loose from my cold dead hands."

[whodidntante]

You might get to make this decision. The STIP ETF already has a real yield of 1.4%.

[sandramjet]

7. Jump on it and convert some as yet undetermined percentage of my fixed income portfolio to long TIPS

[JoMoney]

If we could get the whole 'real' yield curve to average something around 1.3% real again, that would be something.
One could guarantee a 30 year 4% then inflation adjusted "Safe Withdrawal Rate".

I think I would probably still be mostly in stocks though... so, option "5" but maybe not "ignoring" TIPS.

[CletusCaddy]

And how would one go about executing this?

[Dude2]

Perhaps if somebody had a pot of money laying around, and real yields hit a high number, then they would be able to solve their retirement income problem entirely, i.e. convert everything they've got to a LMP. The idea would be that at some points in time it is expensive to do this (real yield negative requires an up-front cost, so real yield strong positive would likewise require less up front money to buy the LMP).

On the other hand, the big picture is that real yields get suppressed to stimulate the economy. If real yields are rising, are we seeing that we have an amazing, robust economy? If not, then you might just have a blip, and if you can take full advantage of the blip to solve your retirement income problem, then bravo. Maybe be prepared that everything else that isn't TIPS, i.e. stocks, might go into a bad stage due to an unstimulated economy. Who knows? If you've got eggs in all baskets, some eggs are not going to do well when some do.

Who among us is able to trade all eggs for a satisfactory LMP when real rates rise to a point? Not many, I think. Otherwise, we ride the storm.

[Carl53]

I would probably buy some. More recently purchased shorter term positive rate TIPS but 20-30 years TIPS are interesting. First foray into TIPS was 2/11 30 year TIPS based on info I received from this forum as there was a theme 'Back up the bus' to load up on a fantastic deal (2+%) on them. Wish in retrospect I'd gone hog wild on them but did not much more than dip toe in water with a few percent of retirement assets. Sold them two years later when prevailing rates on them dipped to about 0.5%. Total gain was nearly 2/3. While I would have been content to hold them it was an opportunity not to be passed up. I believe that even had the proceeds not been reinvested I still would be ahead of what the same bonds would have returned/valued had I held them today. I did not look last year, but when prevailing rates for 30 years TIPS went below zero they would have likely been worth even more, albeit 8 years later.

[jeffyscott]

You might get to make this decision. The STIP ETF already has a real yield of 1.4%.

Of course a 0-5 year TIPS fund is not the long term TIPS that is the subject of the OP. However, the 1+ index is not too far behind at 1.22% by #cruncher's methodology: viewtopic.php?p=6754200&sid=fc93181915d ... f#p6754200


Anyway, I'd probably to a version of 3, but not as long as 20 year, I think I am too old for that. Because of the gap between 2032 and 2040, I'd probably do a mix of a TIPS index and 5-10 year individual TIPS.

Currently, I am redirecting most bond and CD dividends and interest to TIPS. If the rate got as high as 2%+, I might start selling some shares to buy TIPS, as well. I'd probably leave balanced/asset allocation funds alone. Also as CDs and individual nominal treasuries mature, I am likely to reinvest in TIPS even at the current rates.

[ScubaHogg]

4. Convert *all* my bond holdings to long TIPS, including those embedded in Wellesley, Wellington or other balanced funds.

Amen. I’ll say it till I’m blue in the face. I see no reason for retirees to hold long or intermediate nominal bonds unless they have nominal liabilities. It’s a ton of historical risk for an unclear payoff.

There was a long thread by willthrill181 recently, now locked, which argued that any bond other than TIPS/ibonds suffers from asymmetric inflation risk.

I was 100% onboard with Willthrill81. It’s a shame the thread was locked as a lot of folks still didn’t grasp that just mathematically there is an asymmetric risk between nominal and inflation indexed bonds. I think 40 years of declining inflation in the US has mislead many people.

[aj76er]

We are already putting most new contributions toward a TIPS fund (SCHP in my 401k brokerage link) and I-bonds (which are still at 0% real). At 3% real, I might consider extending duration of the TIPS fund by switching to LTPZ (to “lock in” the rate)

We are still young-ish (mid 40s) and have >50% of portfolio in taxable so we are still equity heavy (VT/VTI/VXUS) and likely will be for a long time. But for folks in their 50s/60s, it’s a great time to be building a TIPS ladder to fund some retirement expenses.

We still believe in holding some nominal bonds (BNDW) to protect against large, deflationary equity shocks, for which TIPS don’t help as much.

[Robot Monster]

I'd consider something like option #4, but my TIPS are in taxable--my tax advantaged space is tiny--and individual TIPS present something of a cash-flow problem--I have a high TIPS allocation, 63% of total portfolio. I suppose I could buy LTPZ, but the 20 bps expense ratio is off-putting compared to what Vanguard charges: 10 bps for VAIPX, and 7 bps for VIPIX.

[jeffyscott]

At 3% real, I might consider extending duration of the TIPS fund by switching to LTPZ (to “lock in” the rate)

I think that I would consider extending average duration at that point also. But since I can, I'd do it by keeping the 1+ index fund (with 0.05% ER) and just add some individual TIPS maturing in 2040+.

[CletusCaddy]

At 3% real, I might consider extending duration of the TIPS fund by switching to LTPZ (to “lock in” the rate)

But would this lock in the rate? Wouldn’t a TIPS fund’s real yield fluctuate?

[Jaylat]

6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.

I actually did just this, but not for all my bonds, just enough to cover most inflation-affected expenses. If the TIPS real rates keep rising I'll consider locking in the rest.

I have to say, it makes no sense to me why TIPS real rates are so high. You'd think people would pay a premium to be insured against inflation?

[CletusCaddy]

6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.

I actually did just this, but not for all my bonds, just enough to cover most inflation-affected expenses. If the TIPS real rates keep rising I'll consider locking in the rest.

I have to say, it makes no sense to me why TIPS real rates are so high. You'd think people would pay a premium to be insured against inflation?

The market based explanation would be that deflation is expected.

[jeffyscott]

6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.

I actually did just this, but not for all my bonds, just enough to cover most inflation-affected expenses. If the TIPS real rates keep rising I'll consider locking in the rest.

I have to say, it makes no sense to me why TIPS real rates are so high. You'd think people would pay a premium to be insured against inflation?

The market based explanation would be that deflation is expected.

Not really, perhaps a few months of expected decline in the non-seasonally adjusted CPI to explain the high yields on very short term
TIPS like Jan and April 2023, but the 10 year BEI is 2.38%, at 5 years it's 3.62%.

[Zosima]

6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.

I actually did just this, but not for all my bonds, just enough to cover most inflation-affected expenses. If the TIPS real rates keep rising I'll consider locking in the rest.

I have to say, it makes no sense to me why TIPS real rates are so high. You'd think people would pay a premium to be insured against inflation?

The market based explanation would be that deflation is expected.

Not really, perhaps a few months of expected decline in the non-seasonally adjusted CPI to explain the high yields on very short term
TIPS like Jan and April 2023, but the 10 year BEI is 2.38%, at 5 years it's 3.62%.

Nominal yields on Treasuries have increased along with real yields on TIPS. As of 9/19, 10-year Zero Coupon Treasuries in the secondary market at Fidelity are yielding 3.61% while July 2032 TIPS are yielding 1.08%, a difference of 2.53%. The St. Louis FED's break-even inflation rate as of 9/16 was 2.38%.

https://fred.stlouisfed.org/series/T10YIE

Investors can determine whether the 15bp insurance cost (net of the liquidity premium for TIPS) is worth it.

To answer Dr. McQ's original question, my answer would depend on what other assets do. If nominal yields rose by another 100 bp and equities had a corresponding drop in P/E ratio I would probably make a slight shift in my asset allocation from equities to fixed income (in my current 50/50 split between nominals and TIPS) because I simply need to take less risk to meet my goals (semi- early retirement in mid-50s).

[ScubaHogg]

6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.

I actually did just this, but not for all my bonds, just enough to cover most inflation-affected expenses. If the TIPS real rates keep rising I'll consider locking in the rest.

I have to say, it makes no sense to me why TIPS real rates are so high. You'd think people would pay a premium to be insured against inflation?

Read the Willthrill81 post the OP mentions. A lot of people don’t seem to even think you are getting something special with TIPS

[Jaylat]

Investors can determine whether the 15bp insurance cost (net of the liquidity premium for TIPS) is worth it.

Yeah, TIPS just seem like a no brainer now. A 15bp premium to cover "unexpected" inflation when the market just got blindsided by "unexpected" 8%+ inflation?

I also think the expectation of higher interest rates is a big factor. Tipswatch says it's possible real rates on 10 year TIPS could rise to 2.2% or more. But of course nobody knows for sure...

https://tipswatch.com/2022/09/18/this-w ... ious-look/

[Svensk Anga]

2% real yield would keep your spending power intact after taxes up to inflation rates of 6%, assuming we revert to the 25% bracket as scheduled. (6% inflation "yield" + 2% real yield = 8% nominal yield. Tax away 25% of that 8% nominal, so 2%, and you are left with 6% after tax growth, matching inflation. If you are in the 15% bracket, you would be good up to 11.3% inflation.) That looks quite robust if one assumes we have any control over inflation. I would move my remaining nominals to TIPS. I am already liability matching with TIPS up to max SS claiming age.

The current roughly 1.15% long TIPS real yield keeps one whole after tax up to 3.45% inflation (25% bracket) or 6.5% inflation for the 15% bracket. Not so compelling for those at 25%, but I think that could be a good deal for those looking to de-risk retirement at 15% bracket-level income.

These were figured on marginal tax rates. If liquidating TIPS is a big part of one's retirement income, average tax rates might better be used. Also, one has to watch out for the odd SS-induced marginal rates.

[Svensk Anga]

I had grabbed my 1.15% real yield for the post above from the Treasury's real yield curve page here: https://home.treasury.gov/resource-cent ... nth=202209 That yield is approximate for 10 and 20 year terms as Treasury reports 1.07% for 10-year and 1.16% for 20-year as of Friday close.

I see from the Wall Street Journal here https://www.wsj.com/market-data/bonds/tips that the 20-year is more like 1.47%.

Interesting that Treasury's page is at odds with the market.

[ScubaHogg]

Investors can determine whether the 15bp insurance cost (net of the liquidity premium for TIPS) is worth it.

Yeah, TIPS just seem like a no brainer now. A 15bp premium to cover "unexpected" inflation when the market just got blindsided by "unexpected" 8%+ inflation?

And unlike other things, there are essentially no mathematical constraints on what inflation can rise to.

I prefer nassim talebs formulation here. Instead of trying to “predict” something like inflation, just ask yourself how fragile you are to it. The correct answer is matching nominal bonds to real liabilities makes one very fragile to a dramatic rise in inflation.

[Escapevelocity]

I'm wondering at what real yield it makes sense to liquidate I-Bonds and move the money into intermediate or long TIPS. Is it reasonable to think I Bond fixed rates to start yielding above zero in step with real yields on TIPS?

[Kevin M]

If we could get the whole 'real' yield curve to average something around 1.3% real again, that would be something.
One could guarantee a 30 year 4% then inflation adjusted "Safe Withdrawal Rate".

I think I would probably still be mostly in stocks though... so, option "5" but maybe not "ignoring" TIPS.

The average ask yield of all TIPS currently is 1.35%, based on quotes just pulled from Fidelity.

[jeffyscott]

I'm wondering at what real yield it makes sense to liquidate I-Bonds and move the money into intermediate or long TIPS. Is it reasonable to think I Bond fixed rates to start yielding above zero in step with real yields on TIPS?

I'll probably keep my few 0% I-bonds as long as the lagged inflation adjusted interest rate continues to be anomalously high. So I guess that means until nominal Treasuries exceed the nominal rate on I-bonds.

(The 3 month interest penalty may also be a small additional factor)

[Escapevelocity]

I'm wondering at what real yield it makes sense to liquidate I-Bonds and move the money into intermediate or long TIPS. Is it reasonable to think I Bond fixed rates to start yielding above zero in step with real yields on TIPS?

I'll probably keep my few 0% I-bonds as long as the lagged inflation adjusted interest rate continues to be anomalously high. So I guess that means until nominal Treasuries exceed the nominal rate on I-bonds.

(The 3 month interest penalty may also be a small additional factor)

Makes sense in the short run, but could be passing up an opportunity to lock up longer term real yield. I thought about this same thing.

[Kevin M]

Ask yields on closest to 20-year maturity are 1.43% for the 2/15/42 (19.4-year) and 1.49% for the 2/15/43 (20.4-year).

Here is the entire TIPS ask yield curve as of a few minutes ago for TIPS at Fidelity:



"SA" = Seasonally-adjusted ask yield. The seasonal adjustments smooth out the curve at the short end, and account for regular, seasonal variations that affect the nominal returns of TIPS. As can be seen, the SA doesn't have much effect on longer-term TIPS.

Here is are breakeven inflation rates using ask yields and SA ask yields:



Kevin

[Escapevelocity]

Ask yields on closest to 20-year maturity are 1.43% for the 2/15/42 (19.4-year) and 1.49% for the 2/15/43 (20.4-year).

Here is the entire TIPS ask yield curve as of a few minutes ago for TIPS at Fidelity:

Kevin

Very helpful data. Thanks for posting this. I'm shocked at how quickly the shorter dates real yields rose from zero to circa 1.25%

[McQ]

Ask yields on closest to 20-year maturity are 1.43% for the 2/15/42 (19.4-year) and 1.49% for the 2/15/43 (20.4-year).

Here is the entire TIPS ask yield curve as of a few minutes ago for TIPS at Fidelity:



"SA" = Seasonally-adjusted ask yield. The seasonal adjustments smooth out the curve at the short end, and account for regular, seasonal variations that affect the nominal returns of TIPS. As can be seen, the SA doesn't have much effect on longer-term TIPS.

Here is are breakeven inflation rates using ask yields and SA ask yields:



Kevin

Thanks, Kevin, very helpful. I've got you in mind as one of the yield mavens on site, and have a few questions for you.

1. The hump in real yields at 20 years plus corresponds to the hump in nominal yields at that maturity. Presumably the nominal yield hump is the driver (much larger market than TIPS). I have often observed a dip in yields at 30 years, explained I think by the fact that some institutions have liabilities greater than 30 years, and have to double up on the longest available bond. But I don't recall such a sizable hump in the 20+ year space before (different look than a small dip out at 30). Your thoughts?

2. I was shocked by the volatility in long TIPS prices early this year: 6 points down (180 32nds) in a day, then 6 points up, then in a week or two, six points down again. Were you surprised? Had you seen it before in TIPS? Chastening to see that level of volatility on what I consider the ultimate in a risk-free security.

[jeffyscott]

I'm wondering at what real yield it makes sense to liquidate I-Bonds and move the money into intermediate or long TIPS. Is it reasonable to think I Bond fixed rates to start yielding above zero in step with real yields on TIPS?

I'll probably keep my few 0% I-bonds as long as the lagged inflation adjusted interest rate continues to be anomalously high. So I guess that means until nominal Treasuries exceed the nominal rate on I-bonds.

(The 3 month interest penalty may also be a small additional factor)

Makes sense in the short run, but could be passing up an opportunity to lock up longer term real yield. I thought about this same thing.

In what way?

I could sell 0% I-bonds, buy stocks in taxable with the money and trade stocks for TIPS at 1%+ real in tax deferred.

I'd gain 1%+ yield on the bonds in exchange for a minimal increase in annual taxes on the stock dividends (0% Federal and about 6.5% state).

[vineviz]

2. I was shocked by the volatility in long TIPS prices early this year: 6 points down (180 32nds) in a day, then 6 points up, then in a week or two, six points down again. Were you surprised? Had you seen it before in TIPS? Chastening to see that level of volatility on what I consider the ultimate in a risk-free security.

It's a good reminder that when it comes to fixed income assets, "risk-free" and "low price volatility" are often antithetical concepts.

[patrick]

TIPS are already 64% of my fixed income. I long ago abandoned marketable nominal bonds and money market funds in order to reduce inflation risk. I will not to guess which TIPS duration will outperform, or whether it is a good time to be in stocks.

However, there are other things I may move to TIPS:

Cash: A year ago, you could get 3.5% on cash at HMBradley (subject to a $100K limit and some requirements) while nominal treasuries topped out at only 1.91%. While I prefer inflation protected assets I deemed it worth the risk due to an above-market interest rate. Since treasury rates have risen greatly and HMBradley has fallen to 3.0%, I emptied HMBradley to TIPS. I am in the process of doing the same with other cash accounts with smaller limits. I will keep cash accounts yielding 5% or better, which sadly have much lower limits.

EE bonds: Although also not inflation protected, they double if held 20 years which is a 3.53% annualized yield, so I considered them worth buying as well. This is a trickier decision because they pay almost no interest until the big jump at the 20 year mark. An EE bond issued 10 years ago has only gained 6.4% so far but will reach the doubling point in another 10 years, equivalent to 6.51% annualized yield for the remaining 10 years, and so should not be sold. However, I may soon sell recently purchased EE bonds.

I bonds: They are inflation protected and also have a 0 nominal floor on semiannual rates. However, recently issued I bonds have much lower real yields (0% to 0.5% on mine) than the current rate on TIPS. The 9.62% semiannual rate seems to make them worth keeping for now, but once that has expired I will probably sell mine for TIPS unless TIPS rates have fallen significantly by then.

[Kevin M]

Ask yields on closest to 20-year maturity are 1.43% for the 2/15/42 (19.4-year) and 1.49% for the 2/15/43 (20.4-year).

Here is the entire TIPS ask yield curve as of a few minutes ago for TIPS at Fidelity:



"SA" = Seasonally-adjusted ask yield. The seasonal adjustments smooth out the curve at the short end, and account for regular, seasonal variations that affect the nominal returns of TIPS. As can be seen, the SA doesn't have much effect on longer-term TIPS.

Here is are breakeven inflation rates using ask yields and SA ask yields:



Kevin

Thanks, Kevin, very helpful. I've got you in mind as one of the yield mavens on site, and have a few questions for you.

1. The hump in real yields at 20 years plus corresponds to the hump in nominal yields at that maturity. Presumably the nominal yield hump is the driver (much larger market than TIPS). I have often observed a dip in yields at 30 years, explained I think by the fact that some institutions have liabilities greater than 30 years, and have to double up on the longest available bond. But I don't recall such a sizable hump in the 20+ year space before (different look than a small dip out at 30). Your thoughts?

2. I was shocked by the volatility in long TIPS prices early this year: 6 points down (180 32nds) in a day, then 6 points up, then in a week or two, six points down again. Were you surprised? Had you seen it before in TIPS? Chastening to see that level of volatility on what I consider the ultimate in a risk-free security.

1. Here is the nominal yield curve from Fido quotes pulled at about the same time:



I read an article a week or two ago that was about the lack of demand for 20-year Treasuries compared to 30-year due to the history of their issuance, liquidity, etc.

2. I've been buying mainly shorter-term TIPS, so haven't paid much attention to longer-term volatility. Shorter-term TIPS yields have been rising pretty steadily, but also with some volatility. Yield at last 5-year auction (4/15/27 maturity) was 0.34% (6/24/22 settlement); I bought some on 6/17/22 at 0.49%, and yield for the 4/15/27 now is 1.25% (1.12% SA).

Kevin

[jeffyscott]

I bonds: They are inflation protected and also have a 0 nominal floor on semiannual rates. However, recently issued I bonds have much lower real yields (0% to 0.5% on mine) than the current rate on TIPS. The 9.62% semiannual rate seems to make them worth keeping for now, but once that has expired I will probably sell mine for TIPS unless TIPS rates have fallen significantly by then.

With one more monthly inflation report to go, it looks like the subsequent rate is likely to be 5%+ (we'd have to see more than 0.5% deflation for September for it to be below 5%). Won't you want to keep them for another 6 months at that interest rate?

[Escapevelocity]

I'm wondering at what real yield it makes sense to liquidate I-Bonds and move the money into intermediate or long TIPS. Is it reasonable to think I Bond fixed rates to start yielding above zero in step with real yields on TIPS?

I'll probably keep my few 0% I-bonds as long as the lagged inflation adjusted interest rate continues to be anomalously high. So I guess that means until nominal Treasuries exceed the nominal rate on I-bonds.

(The 3 month interest penalty may also be a small additional factor)

Makes sense in the short run, but could be passing up an opportunity to lock up longer term real yield. I thought about this same thing.

In what way?

I could sell 0% I-bonds, buy stocks in taxable with the money and trade stocks for TIPS at 1%+ real in tax deferred.

I'd gain 1%+ yield on the bonds in exchange for a minimal increase in annual taxes on the stock dividends (0% Federal and about 6.5% state).

I wasn't referring to stocks. Let's say you wait a year from now to liquidate I-Bonds because they're still paying out a high rate. OK, you have a nice return for that year, but let's say at the end of that year that TIPS real return has dipped to zero or less never to revert to today's ask yield. Now, you''ve lost the opportunity to make ~1.5% real for the next 10-20 years potentially had you bought and held the TIPS that are available today. Now that decision to hold tight on the I Bonds ain't looking so spiffy.

[jeffyscott]

I'm wondering at what real yield it makes sense to liquidate I-Bonds and move the money into intermediate or long TIPS. Is it reasonable to think I Bond fixed rates to start yielding above zero in step with real yields on TIPS?

I'll probably keep my few 0% I-bonds as long as the lagged inflation adjusted interest rate continues to be anomalously high. So I guess that means until nominal Treasuries exceed the nominal rate on I-bonds.

(The 3 month interest penalty may also be a small additional factor)

Makes sense in the short run, but could be passing up an opportunity to lock up longer term real yield. I thought about this same thing.

In what way?

I could sell 0% I-bonds, buy stocks in taxable with the money and trade stocks for TIPS at 1%+ real in tax deferred.

I'd gain 1%+ yield on the bonds in exchange for a minimal increase in annual taxes on the stock dividends (0% Federal and about 6.5% state).

I wasn't referring to stocks. Let's say you wait a year from now to liquidate I-Bonds because they're still paying out a high rate. OK, you have a nice return for that year, but let's say at the end of that year that TIPS real return has dipped to zero or less never to revert to today's ask yield. Now, you''ve lost the opportunity to make ~1.5% real for the next 10-20 years potentially had you bought and held the TIPS that are available today. Now that decision to hold tight on the I Bonds ain't looking so spiffy.

I can just reverse the process and go back to I-bonds. We have only a very small taxable account, now nearly 0 after buying $40K of I-bonds in the past 2 years. Also the TIPS yield falling back to 0 would add some additional gains in your scenario.

Stocks were only involved to demonstrate how I would trade I-bonds for TIPS, without having to hold the TIPS in taxable.

[Northern Flicker]

Wouldn't this depend more on the TIPS breakeven rate than the specific real yield? If the 20-yr TIPS real yield is 2% how would your decision change if the 20-year nominal rate were 10% or 2.05%?

I'm skeptical of the relevance of 200 year treasury return histories. What were the credit risk premium and inflation risk premium for a US treasury obligation in 1822 vs today?

[Escapevelocity]

I'll probably keep my few 0% I-bonds as long as the lagged inflation adjusted interest rate continues to be anomalously high. So I guess that means until nominal Treasuries exceed the nominal rate on I-bonds.

(The 3 month interest penalty may also be a small additional factor)

Makes sense in the short run, but could be passing up an opportunity to lock up longer term real yield. I thought about this same thing.

In what way?

I could sell 0% I-bonds, buy stocks in taxable with the money and trade stocks for TIPS at 1%+ real in tax deferred.

I'd gain 1%+ yield on the bonds in exchange for a minimal increase in annual taxes on the stock dividends (0% Federal and about 6.5% state).

I wasn't referring to stocks. Let's say you wait a year from now to liquidate I-Bonds because they're still paying out a high rate. OK, you have a nice return for that year, but let's say at the end of that year that TIPS real return has dipped to zero or less never to revert to today's ask yield. Now, you''ve lost the opportunity to make ~1.5% real for the next 10-20 years potentially had you bought and held the TIPS that are available today. Now that decision to hold tight on the I Bonds ain't looking so spiffy.

I can just reverse the process and go back to I-bonds. We have only a very small taxable account, now nearly 0 after buying $40K of I-bonds in the past 2 years. Also the TIPS yield falling back to 0 would add some additional gains in your scenario.

Stocks were only involved to demonstrate how I would trade I-bonds for TIPS, without having to hold the TIPS in taxable.

You're missing the point. The 1.5% real yield may never return after a year in I-Bonds nor in TIPS. You're risking missing the boat permanently and being stuck with zero or worse real yields instead of the 1.5% that are available now. I guess you are in a different situation as an accumulator. I just retired and this could be a seminal moment in my fixed income plan for the next 10+ years.

[Northern Flicker]

6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.

I actually did just this, but not for all my bonds, just enough to cover most inflation-affected expenses. If the TIPS real rates keep rising I'll consider locking in the rest.

I have to say, it makes no sense to me why TIPS real rates are so high. You'd think people would pay a premium to be insured against inflation?

The market based explanation would be that deflation is expected.

Not really, perhaps a few months of expected decline in the non-seasonally adjusted CPI to explain the high yields on very short term
TIPS like Jan and April 2023, but the 10 year BEI is 2.38%, at 5 years it's 3.62%.

5 year BEI is 2.44%.

https://home.treasury.gov/resource-cent ... value=2022

https://home.treasury.gov/resource-cent ... value=2022

[CletusCaddy]

The time when bonds are most attractive relative to stocks is also probably the time to back up the truck on stocks.

[Northern Flicker]

Ask yields on closest to 20-year maturity are 1.43% for the 2/15/42 (19.4-year) and 1.49% for the 2/15/43 (20.4-year).

Here is the entire TIPS ask yield curve as of a few minutes ago for TIPS at Fidelity:



"SA" = Seasonally-adjusted ask yield. The seasonal adjustments smooth out the curve at the short end, and account for regular, seasonal variations that affect the nominal returns of TIPS. As can be seen, the SA doesn't have much effect on longer-term TIPS.

Here is are breakeven inflation rates using ask yields and SA ask yields:



Kevin

Thanks, Kevin, very helpful. I've got you in mind as one of the yield mavens on site, and have a few questions for you.

1. The hump in real yields at 20 years plus corresponds to the hump in nominal yields at that maturity. Presumably the nominal yield hump is the driver (much larger market than TIPS). I have often observed a dip in yields at 30 years, explained I think by the fact that some institutions have liabilities greater than 30 years, and have to double up on the longest available bond. But I don't recall such a sizable hump in the 20+ year space before (different look than a small dip out at 30). Your thoughts?

2. I was shocked by the volatility in long TIPS prices early this year: 6 points down (180 32nds) in a day, then 6 points up, then in a week or two, six points down again. Were you surprised? Had you seen it before in TIPS? Chastening to see that level of volatility on what I consider the ultimate in a risk-free security.

I'm not Kevin, but I think the bump in the nominal yield curve at 20 years is a liquidity issue due to the 20-year bond only having been reissued in the near past after a long hiatus.

With respect to "2" it is only risk-free in the sense that real liabilities of the same duration will move in lockstep with it. That does not preclude the TIPS and the corresponding present value of liabilities from being extremely volatile, only that they realize the volatility in the same way by moving in lockstep.

[jeffyscott]

Makes sense in the short run, but could be passing up an opportunity to lock up longer term real yield. I thought about this same thing.

In what way?

I could sell 0% I-bonds, buy stocks in taxable with the money and trade stocks for TIPS at 1%+ real in tax deferred.

I'd gain 1%+ yield on the bonds in exchange for a minimal increase in annual taxes on the stock dividends (0% Federal and about 6.5% state).

I wasn't referring to stocks. Let's say you wait a year from now to liquidate I-Bonds because they're still paying out a high rate. OK, you have a nice return for that year, but let's say at the end of that year that TIPS real return has dipped to zero or less never to revert to today's ask yield. Now, you''ve lost the opportunity to make ~1.5% real for the next 10-20 years potentially had you bought and held the TIPS that are available today. Now that decision to hold tight on the I Bonds ain't looking so spiffy.

I can just reverse the process and go back to I-bonds. We have only a very small taxable account, now nearly 0 after buying $40K of I-bonds in the past 2 years. Also the TIPS yield falling back to 0 would add some additional gains in your scenario.

Stocks were only involved to demonstrate how I would trade I-bonds for TIPS, without having to hold the TIPS in taxable.

You're missing the point. The 1.5% real yield may never return after a year in I-Bonds nor in TIPS. You're risking missing the boat permanently and being stuck with zero or worse real yields instead of the 1.5% that are available now. I guess you are in a different situation as an accumulator. I just retired and this could be a seminal moment in my fixed income plan for the next 10+ years.

No, I am retired also. I misunderstood what decision you were referring to. I thought you meant the decision to sell I-bonds at all.

So, instead I can treat the I-bonds as if they are nominals. I buy all the TIPS now and trade I-bonds for nominals when nominal Treasuries (or CDs) have yields above those for I-bonds.

[AnnetteLouisan]

Yes is there some magic moment when a bell will ring and we will know it’s the ideal moment to buy medium or long term treasuries? Is it when the Fed says, “ok we’re done raising rates?” Will they actually say that? Or do we just have to intuit the right moment?

I’ve bought I bonds, 4 week auto rolling t-bills and 12 week auto rolling treasuries but I want to buy some 18 or 36 monthers or whatever is optimal.

[jeffyscott]

5 year BEI is 2.44%.

Thanks for correcting my error.

[Escapevelocity]

Yes is there some magic moment when a bell will ring and we will know it’s the ideal moment to buy medium or long term treasuries? Is it when the Fed says, “ok we’re done raising rates?” Will they actually say that? Or do we just have to intuit the right moment?

I’ve bought I bonds, 4 week auto rolling t-bills and 12 week auto rolling treasuries but I want to buy some 18 or 36 monthers or whatever is optimal.

This thread was made to talk about the unique opportunity with juicy yields on TIPS not nominal treasuries. The OP was trying to address how to leverage a potential 2% real yield on TIPS if and when that opportunity arises. The magic of locking in a long term position on TIPS at a 2% or similar real yield is that you never have to worry about losing purchasing power on your return.

[vineviz]

Yes is there some magic moment when a bell will ring and we will know it’s the ideal moment to buy medium or long term treasuries? Is it when the Fed says, “ok we’re done raising rates?” Will they actually say that? Or do we just have to intuit the right moment?

The magic moment is "when you need them".

[Kevin M]

<snip>

<snip>

The market based explanation would be that deflation is expected.

Not really, perhaps a few months of expected decline in the non-seasonally adjusted CPI to explain the high yields on very short term
TIPS like Jan and April 2023, but the 10 year BEI is 2.38%, at 5 years it's 3.62%.

5 year BEI is 2.44%.

https://home.treasury.gov/resource-cent ... value=2022

https://home.treasury.gov/resource-cent ... value=2022

For CMT real rate, OK, but for actual Treasuries, closest to 5-year maturity is the 7/15/27, for which the standard BEI is 2.56% based on Fidelity quotes earlier today. Seasonally-adjusted (SA) it's 2.58%.

BEI for the 4/15/27 is 2.50%, and SA it's 2.62%. Seasonal adjustment has a larger impact on 4/15 maturity dates since it's further from settlement for purchase today.

I trust the SA numbers more.

Kevin

[Northern Flicker]

TIPS should be purchased instead of nominal bonds for one of these two reasons:

1. To match the asset to real liabilities.

2. To protect against inflation over the term of the bond turning out to be higher than what the market projects.

[midnightrun]

I've never purchased individual treasuries and have a few questions about how to practically implement a LMP using individual TIPS. Both my spouse and myself are age 42 with plans to retire at age 55. We hold a fixed rate 30 year mortgage well below the EE bond doubling rate-we've covered that nominal liability with our yearly EE purchase. We also max I bonds yearly ($25k). Our projected fixed essential expenses (healthcare premiums, utilities, groceries, transportation, etc) are approximately equal to anticipated combined social security at age 70 of roughly $55k. Additional expenses (travel/restaurants/leisure) will be funded by equity heavy risk portfolio. If we want to set up a LMP for essential expenses to fund the gap between early retirement and taking social security (2035-2050), what's the best way to practically implement this?

1. Purchase 30 year TIPS at issue and sell before maturity to fund each year's expenses
2. Purchase a mix of 10&20 year TIPS with plan to hold until maturity. For years that mature before expenses are due, hold in TBills/short term TIPS until needed.
3. another option? We will have a sizable chunk of I Bonds that can be redeemed at any time to fill in holes.

In addition, is it better to hold individual TIPS at Treasury Direct, a standard taxable brokerage, or a tax-deferred account with a brokerage window?

[Northern Flicker]

<snip>

The market based explanation would be that deflation is expected.

Not really, perhaps a few months of expected decline in the non-seasonally adjusted CPI to explain the high yields on very short term
TIPS like Jan and April 2023, but the 10 year BEI is 2.38%, at 5 years it's 3.62%.

5 year BEI is 2.44%.

https://home.treasury.gov/resource-cent ... value=2022

https://home.treasury.gov/resource-cent ... value=2022

For CMT real rate, OK, but for actual Treasuries, closest to 5-year maturity is the 7/15/27, for which the standard BEI is 2.56% based on Fidelity quotes earlier today. Seasonally-adjusted (SA) it's 2.58%.

BEI for the 4/15/27 is 2.50%, and SA it's 2.62%. Seasonal adjustment has a larger impact on 4/15 maturity dates since it's further from settlement for purchase today.

I trust the SA numbers more.

Kevin

I don't think the seasonal adjustments are particularly meaningful when COVID and the war in Ukraine are the drivers of the current inflation spike. The unadjusted numbers you posted are consistent with the treasury interpolations-- 2 months shorter and 6bp higher BEI.