Search found 1111 matches
- Tue Nov 15, 2022 4:33 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi Kevin: My last post for today! I am glad that you understand what I was trying to say. The factor of 100 is specific to the BLS methodology, not price indexes in general. We often fail to communicate when I am speaking in the general case and you are hearing specific terms that I am not actually using. I don’t think it is pedantic to reduce terms to their fundamental meanings. I realize that the term index ratio has a very specific meaning in terms of TIPS, and that it might be confusing to note that the index is itself a ratio. I am working through all of this because you requested that we “sort this out”; no intention at all to derail the discussion. The goal is to better understand the application of Canty’s equations. At least a coup...
- Tue Nov 15, 2022 1:51 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
No, what you posted is how to use the CPI to calculate inflation. How do you calculate the index value to begin with?
From EconPort the digital economics library:
https://www.econport.org/content/handbo ... Index.html
"To construct a price index we start by selecting a base year. Then we take a representative sample of goods and services and calculate their value in the base year and current prices. The ratio of the expenditures on the basket of goods at current prices to the expenditure at the base year prices is taken as the price index."
From EconPort the digital economics library:
https://www.econport.org/content/handbo ... Index.html
"To construct a price index we start by selecting a base year. Then we take a representative sample of goods and services and calculate their value in the base year and current prices. The ratio of the expenditures on the basket of goods at current prices to the expenditure at the base year prices is taken as the price index."
- Tue Nov 15, 2022 1:44 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
From the BLS factsheet "Brief Explanation pf the CPI"
https://www.bls.gov/regions/west/factsh ... rynote.pdf
"The indexes measure price change from a
designated reference date, 1982-84, which
equals 100.0. An increase of 7 percent, for
example, is shown as 107.0. This change can also
be expressed in dollars as follows: the price of a
base period market basket of goods and services
in the CPI has risen from $100 in 1982- 84 to $107.
https://www.bls.gov/regions/west/factsh ... rynote.pdf
"The indexes measure price change from a
designated reference date, 1982-84, which
equals 100.0. An increase of 7 percent, for
example, is shown as 107.0. This change can also
be expressed in dollars as follows: the price of a
base period market basket of goods and services
in the CPI has risen from $100 in 1982- 84 to $107.
- Tue Nov 15, 2022 1:39 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Again, I did not say CPI was a price, I said it was a ratio of prices. Please explain how the CPI is calculated, if not by dividing todays 'basket' price by the base 'basket' price.
- Tue Nov 15, 2022 1:06 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
OK, that's a full stop. If you don't recognize that a price index is a ratio of prices, then there is nothing more that I can say.
- Tue Nov 15, 2022 10:33 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Okay, it’s pretty clear that either I am not communicating clearly, or just I plain did something wrong. So, let’s go through this again slowly, with more detail and numerical examples, so we can find where the problem(s) lie. The CPI is an index defined by a ratio of prices for a basket of goods and services. Its base is the average price for that basket between 1982 and 1984. As this is an index of price in the United States, the prices that make up the ratio are denominated in US dollars. For example, October’s non-seasonally adjusted CPI was 298.012. We could say that a base ‘basket’ that cost an average of $100 between 1982-1984 is worth $298.01 today. We could also say, as you point out, that a CPI of 298.012 indicates 198.012% inflat...
- Tue Nov 15, 2022 5:32 am
- Forum: Investing - Theory, News & General
- Topic: Vanguard stale prices
- Replies: 4
- Views: 725
Vanguard stale prices
As of 6:29AM on the east coast, Vanguard has not yet updated the mutual fund NAV for Total Bond Market (VBTLX) or Inflation Protected Securities (VAIPX). Not terribly earthshaking; but disappointing.
- Mon Nov 14, 2022 4:52 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
When you take the ratio of two different CPI's the price at t0 drops out; leaving the ratio of the prices at t2.
- Mon Nov 14, 2022 4:28 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi Kevin:
Seems to be some confusion here. Maybe reread a little more carefully? I don't know.
In any case, I did not say that a price index was a price, I said it was a dimensionless ratio of prices.
Are you saying that a price index is not a dimensionless ratio of prices?
From the BLS: The Consumer Price Index (CPI) is a measure of the average change over time in the PRICES paid by urban consumers for a market basket of consumer goods and services.
Seems to be some confusion here. Maybe reread a little more carefully? I don't know.
In any case, I did not say that a price index was a price, I said it was a dimensionless ratio of prices.
Are you saying that a price index is not a dimensionless ratio of prices?
From the BLS: The Consumer Price Index (CPI) is a measure of the average change over time in the PRICES paid by urban consumers for a market basket of consumer goods and services.
- Mon Nov 14, 2022 3:32 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Thanks for that Kevin, It is good to continue the discussion. Surprised to hear you disagree about CPI-SF being a price index, as that is the way I used it in the post you thought was essentially correct. Let’s walk through a formal derivation of the CPI-SF index and see exactly where the disagreement lies. In general, a price index is a dimensionless ratio of price at t2 divided by some reference price, let’s call that the price at t0. In the particular case of the CPI’s we are dealing with the reference price is for a basket of goods from 1982-1984 priced at $100. So, if the price of that basket of goods is $273 at t2, then the price index at t2 is 273. So, let’s define a seasonal price index CPI-SF that has the same reference basket of g...
- Mon Nov 14, 2022 11:04 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
At Vanguard, I will enter a buy order for a bond, wait until it is executed (usually immediately) then place an order for a mutual fund sale to cover the price of the bond. So far, no problem. Both trades settle the next day.
- Mon Nov 14, 2022 6:01 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi Kevin: I am glad we got that sorted out, and I agree that algebra is clearer and cleaner. However, our misunderstandings often arise when I use a general term that has a specific meaning to you, and that is usually revealed when we try to walk through the math. In the post above, I did start with a Canty equation, as you suggest. If you agree with the overall framework I have set up, then it seems we have resolved a couple of points that were previously in dispute. 1) CPI-SF = CPI-NSA/CPI-SA. This removes the underlying secular trend and isolates the seasonal cycle. 2) CPI-SF is an index ratio in the same sense as CPI-NSA and SPI-SA, and can be used in a similar manner. If you agree, we can move forward, if not we can discuss. You will b...
- Sun Nov 13, 2022 1:00 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
I thought that I had showed above that my method gets exactly the same results as the formal treasury one. I think we are mixing up inflation adjusted par value and inflation adjusted market price. Of course, to calculate the inflation adjusted market price, you need the unadjusted market price. My formula calculates the inflation adjustment itself.
- Sun Nov 13, 2022 9:59 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi Kevin: Just trying to show a valid basis for understanding the Canty adjustment. OK, now that we have some confidence that the general formula; Inflation Adjusted Value(t2) = Initial Value(t1) x CPI(t2)/CPI(t1) is valid and provides accurate results when applied to specific situations, lets look at Canty’s multiplicative decomposition of inflation, which he modeled as I = TS, where I is total inflation, T is the secular trend and S is the seasonal factor. In terms of CPI we have: CPI-NSA = CPI-SA x CPI-SF, where CPI-SA is the non-seasonally adjusted price index, CPI-SA is the seasonally adjusted price index and CPI-SF is the seasonal price index. Rearranging: CPI-SF = CPI-NSA/CPI-SA. This removes the underlying secular trend and isolates...
- Sat Nov 12, 2022 7:03 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi jeffyscott:
Since I buy TIPS for their real yield, and not to speculate on their nominal yield, I will always pick the highest real yield near the maturity date of interest. Furthermore it is quite clear that you cannot actually buy the SA yield, which is a projection of the future.
Since I buy TIPS for their real yield, and not to speculate on their nominal yield, I will always pick the highest real yield near the maturity date of interest. Furthermore it is quite clear that you cannot actually buy the SA yield, which is a projection of the future.
- Fri Nov 11, 2022 1:32 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Of course my result is totally trivial and expected because in this particular case:
Inflation Adjusted Value(t2) = Initial Value(t1) x CPI(t2)/CPI(t1) is using the non-seasonally adjusted CPI.
And CPI(SA)(t2)/CPI(SA)(T1) is THE index ratio if t1 is the dated date, so its not possible for our answers to be different.
Going step wise from dated date to issue date to settlement date doesn't make any difference.
I believe that it is the published index ratios that are rounded values, is that right?
Of course, calculating straight from the CPI values gives a more precise answer, even if it doesn't match the ones that are given using the official Treasury methodology, not that those differences are meaningful in any practical way.
Inflation Adjusted Value(t2) = Initial Value(t1) x CPI(t2)/CPI(t1) is using the non-seasonally adjusted CPI.
And CPI(SA)(t2)/CPI(SA)(T1) is THE index ratio if t1 is the dated date, so its not possible for our answers to be different.
Going step wise from dated date to issue date to settlement date doesn't make any difference.
I believe that it is the published index ratios that are rounded values, is that right?
Of course, calculating straight from the CPI values gives a more precise answer, even if it doesn't match the ones that are given using the official Treasury methodology, not that those differences are meaningful in any practical way.
- Fri Nov 11, 2022 12:50 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi Kevin: Thanks for that, a specific example really helps to foster a common understanding. I tend to think in general terms because it helps my understanding, even though my terminology might not be quite right. You have a detailed knowledge about the actual calculations and 'official' terminology. I think we are a good team. Regarding the calculation for CUISP 912828B25: You are correct that Inflation Adjusted Value(t2) = Initial Value(t1) x CPI(t2)/CPI(t1) gives the inflation adjustment component and you have to multiply this by the market price to get the inflation adjusted market price. Specifically, for calculation of inflation adjusted market price, the equation will give you the inflation adjusted par value. Now the actual cranking...
- Fri Nov 11, 2022 12:18 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi jeffyscott: Yeah, Kevin and I are still batting this around and we don't agree. As I have said before, you don't earn the seasonally adjusted yield, you earn the actual quoted real yield. In my way of thinking, if you have two TIPS maturing close to the same time that have different real yields, traders are expecting that the nominal yields should be about the same. The real yields are different because traders expect a larger inflation adjustment for one of the bonds due to the seasonal inflation cycle. The bond with the lower real yield is expected to have a higher inflation adjustment, and the bond with the higher real yield is expected to have a lower inflation adjustment. So, ironically, the bond with the higher real yield is less e...
- Fri Nov 11, 2022 6:28 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Yes, the short end is holding up for now, because short yields are more closely tied to the Fed Funds Rate.
- Fri Nov 11, 2022 6:14 am
- Forum: Personal Finance (Not Investing)
- Topic: What is the current rate of inflation?
- Replies: 27
- Views: 3577
Re: What is the current rate of inflation?
The problem is that the "current' rate of inflation is always unknown. All inflation rate statistics are backward looking. This is compounded by the fact that SEC yields of bond funds, yields on bonds, and yields in general, are all forward looking. It is perfectly legit to say that investment 'x' lost to inflation over the last year. It is wrong to say that investment 'x' is losing to inflation now. That is unknown!
- Thu Nov 10, 2022 1:27 pm
- Forum: Personal Investments
- Topic: What are my TIP notes worth... should I keep them?
- Replies: 5
- Views: 742
Re: What are my TIP notes worth... should I keep them?
To get a general idea what they are worth you can look them up, for example, on the Wall Street Journal TIPS website. As of the close yesterday, the bid (selling) price per $100 face value for the 1/15/25 2.375% note was $100.19. But you also get the accrued principal (inflation adjustment of $1572 per $1,000 in face value. So for $1,000 bond you might get about of $1,575. The yield was listed as 2.061%. A big move in rates (bond prices) today, so you would get a higher price/lower yield today. If you go and start to execute the sale online, you can get an exact offer that you can accept if you want to. If it was me I think I would hold to maturity, but funny things happen to TIPS prices during the last year of the bond's life. I would be i...
- Thu Nov 10, 2022 1:05 pm
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Did we just blow past the peak in interest rates?
- Thu Nov 10, 2022 8:49 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Apologies, you guys are right and I am wrong. I mistook a year over year graph for the monthly.
- Thu Nov 10, 2022 8:17 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi Kevin: It is good to know that we are on the same page about the calculations, which gives us a solid basis for discussion. It is also clear that we disagree about the concepts, or at least the terminology. I suggest we work through this step by step to find out where the specific differences are, and try to resolve them if we possibly can. After that, we can just agree to disagree. You said the we had resolved the issue of my misusing the term index ratio. Just to double check, do you agree with the following statements: 1) The use of the TIPS index ratios to calculate the inflation adjusted values of TIPS is a specific application of a more general concept that algebraically is: Inflation Adjusted Initial Value(t1) = Final Value(t2) x ...
- Thu Nov 10, 2022 8:03 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
From today's BLS report, it looks like the non-seasonally adjusted CPI for the month (Chart 2), which the TIPS inflation adjustment is based on, is down again. That means inflation adjusted TIPS values will be adjusting downward for the month of December. The non-seasonally adjusted CPI has been going downward pretty steadily since the June data. This is pretty much expected from the seasonal cycles of inflation.
- Thu Nov 10, 2022 5:01 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Happy CPI day. Another data point!
- Wed Nov 09, 2022 2:47 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Glad to see you are finally coming around. It's really nothing more than an expanded version of what I posted a few posts ago, which you objected to rather strongly. I guess working it through with a real example really clarified what I was trying to get across.
- Wed Nov 09, 2022 8:23 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Warning! This long post is only for certified TIPS nerds, probably just Kevin and I. OK, yesterday we looked at the non-seasonally adjusted CPI values as applied to CUISP 912828VM9 in calculating changes to its inflation adjusted value over time. We demonstrated, with spreadsheet calculations, that one could calculate inflation adjusted values for any interval of time using a more general expression: Inflation Adjusted Value(t2) = Initial Value(t1) x CPI(t2)/CPI(t1) I previously forgot to put the initial value in there (Thanks, Kevin). We also confirmed that the inverse was also true: Inflation Adjusted Initial Value(t1) = Final Value(t2) x CPI(t1)/CPI(t2) Apologies for belaboring the obvious here, but it can be very helpful for understandi...
- Tue Nov 08, 2022 12:45 pm
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Good! We have some progress; I guess it really helps to use an actual numerical example than can be cranked through a spreadsheet if necessary. Sometimes words and algebra do not suffice. A couple of quick responses: "This in itself does not provide the inflation adjusted value, for which you need the starting value as well, as you show in your example." No, in the general case, you do not need the original starting value to calculate an inflation adjusted value from t1 to t2, just the value at t1 and the index values. Just used that example so it could be cross checked against the use of the published index ratios. Yes, "an index ratio"; not "the index ratio". It totally depends on what price index you are wor...
- Tue Nov 08, 2022 11:18 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Kevin:
I don't want to distract any further from this very useful thread, so I started posting on "TIPS yield curve and seasonal adjustment updates".
I will try to provide specific numerical examples to make my case. I am hopeful it might help move the discussion forward.
I don't want to distract any further from this very useful thread, so I started posting on "TIPS yield curve and seasonal adjustment updates".
I will try to provide specific numerical examples to make my case. I am hopeful it might help move the discussion forward.
- Tue Nov 08, 2022 11:14 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Kevin had a number of objections to my take on Canty. Fair enough, and I am sure he will chime in here. One objection that really surprised me was: "Index ratio for TIPS has a very specific meaning, and there is no other "index ratio in a general sense"." I would agree that inflation index ratio have a very specific usage in TIPS calculations and specific values that are published for particular TIPS. I disagree that one cannot write a legitimate algebraic expression that could be adapted for various purposes. I would propose something along the lines of: Inflation Adjusted value for the interval of t1 to t2 = CPI(t2)/CPI(t1) The CPI could be any price index that you wanted to investigate. I apologize in advance that I h...
- Tue Nov 08, 2022 10:50 am
- Forum: Investing - Theory, News & General
- Topic: TIPS yield curve and seasonal adjustment update
- Replies: 110
- Views: 14075
Re: TIPS yield curve and seasonal adjustment update
Hi Kevin: I think we are are going to get pretty far into the weeds with this discussion, so I thought I would move it here where it won't be a distraction, and maybe we can get some input from others. For anyone who might have an interest, here is something I posted on the "Trading Treasuries (nominals and TIPS)" thread, regarding Canty's method for 'correcting' market prices of TIPS. "The key thing to recognize is that the term S(settle)/S(maturity) in Canty’s equation (14) is nothing more than an inflation index ratio for the seasonal inflation cycle. I am using the term inflation index ratio here in a general sense; meaning the calculation of inflation between two points in time using CPI ratios. It is inverse, because we...
- Mon Nov 07, 2022 3:22 pm
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Are you really saying that CPI(t2)/CPI(t1) does not provide an index ratio for the time interval t1 to t2?
It might help my understanding if you could provide is simple numerical example where that is not the case.
It might help my understanding if you could provide is simple numerical example where that is not the case.
- Mon Nov 07, 2022 3:18 pm
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Wow, very surprised to hear what you say about inflation index ratios. As far as I can see, this is precisely how index ratios for TIPS are calculated and applied to calculate the nominal yield of a TIPS.
- Mon Nov 07, 2022 12:33 pm
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Artisan:
That all looks correct. Well done!
That all looks correct. Well done!
- Mon Nov 07, 2022 11:30 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
That all sounds pretty much right. You can buy in multiples of $1,000 face value. At some point in the order entry process you should get a screen that shows all the details and the total cost of the purchase. Review that carefully before you hit the buy button, especially since you are a newbie. After you do this a few times you will get more comfortable and knowledgeable about the process.
- Mon Nov 07, 2022 6:52 am
- Forum: Investing - Theory, News & General
- Topic: Zero coupon vs par treasury yields
- Replies: 2
- Views: 478
Re: Zero coupon vs par treasury yields
That's a good place to start. Ultimately, when you go to buy them at your broker, you will see the exact yield that is being offered at the moment of the transaction.
- Mon Nov 07, 2022 6:49 am
- Forum: Non-US Investing
- Topic: Reaction to interest change of Inflation linked bond ETF
- Replies: 5
- Views: 1147
Re: Reaction to interest change of Inflation linked bond ETF
It's the same inverse relationship for price and yield of TIPS, except inflation indexed bonds respond to changes in real interest rates instead of nominal ones.
- Mon Nov 07, 2022 5:45 am
- Forum: Personal Investments
- Topic: Should I remove bond funds from my IPS?
- Replies: 33
- Views: 3259
Re: Should I remove bond funds from my IPS?
Don't overlook the fact that Ibond real rates are quite low compared to the alternatives.
- Mon Nov 07, 2022 5:37 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Hi Kevin: Apologies for getting a little in the weeds there. This business of ratios of ratios is easy to get lost in. In the end, it is really fairly simple and transparent when you realize what you are looking at. The notation doesn’t help, and if one opens a spreadsheet and starts cranking away, it is easy to miss the forest for the trees. You are right, it is best to approach this from the price point of view, as Canty did. The key thing to recognize is that the term S(settle)/S(maturity) in Canty’s equation (14) is nothing more than an inflation index ratio for the seasonal inflation cycle. I am using the term inflation index ratio here in a general sense; meaning the calculation of inflation between two points in time using CPI ratios...
- Sun Nov 06, 2022 4:06 pm
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
So my rough algebraic analysis probably has a few missing details, particularly in converting price to yield. I will try tomorrow to come up with some actual numbers and see how to make it work. In the end though, I will hang my hat on the fact that the ratio of non-seasonally adjusted yields, which is some form of the Inflation Index ratio, is in the Canty equations. Once you adjust for inflation, you definitely have a nominal yield, not a real one.
- Sun Nov 06, 2022 3:04 pm
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
A couple of other points:
As I tried to say and demonstrate with the hypothetical, the Canty equation comes up with just the portion of the Inflation Index ratio that is attributable to the seasonal cycle, not total Inflation Index ratio. Similarly, in the case where SA yield = real yield; the SA yield is the portion of the nominal yield that is just due to the seasonal cycle, and we can subtract that from a full nominal treasury yield to get the breakeven, as you have shown!
Edit: Actually it is true in general that SA yield is the nominal yield that is just due to the seasonal cycle, not just that particular case.
As I tried to say and demonstrate with the hypothetical, the Canty equation comes up with just the portion of the Inflation Index ratio that is attributable to the seasonal cycle, not total Inflation Index ratio. Similarly, in the case where SA yield = real yield; the SA yield is the portion of the nominal yield that is just due to the seasonal cycle, and we can subtract that from a full nominal treasury yield to get the breakeven, as you have shown!
Edit: Actually it is true in general that SA yield is the nominal yield that is just due to the seasonal cycle, not just that particular case.
- Sun Nov 06, 2022 2:53 pm
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
So the key to all this is that the Canty equation has the Inflation Index ratio in it. The notation gets a little unwieldy here but I think you can follow it: So start with his equation (14) SA price = real price x S(maturity)/S(settle) Recall that S is the seasonal adjustment factor which is Non-seasonally Adjusted CPI/Seasonally Adjusted CPI Substituting these in we have: SA price = real price x (NA-CPI/SA-CPI)settle/(NA-CPI/SA-CPI)maturity Rearranging we have: SA price = real price x NA-CPI(settle)/NA-CPI(maturity) x SA-CPI(maturity)/SA-CPI(settle) Notice that we have the ratio of the non-seasonally adjusted CPIs in there; which is the definition of the Inflation Index Ratio! The problem is the ratio is upside down. Recall that yield is ...
- Sun Nov 06, 2022 10:02 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
There is no real way to know if you will do better at auction or the secondary market. Yes, there is a bid/ask spread on the secondary market, but it is usually pretty small, even for small orders. Sometimes the auction results are better than the secondary market, but not always. Each purchase method has its advantages, but no major differences.
- Sun Nov 06, 2022 9:09 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
Another way to think about this is to rearrange the Canty equation to show that:
SA yield = Real Yield x Inflation Index Ratio x SA CPI(settle)/SA CPI(maturity).
So this is the portion of the Inflation Index Ratio attributable to the seasonal cycle. Clearly converting a real yield into a nominal one.
SA yield = Real Yield x Inflation Index Ratio x SA CPI(settle)/SA CPI(maturity).
So this is the portion of the Inflation Index Ratio attributable to the seasonal cycle. Clearly converting a real yield into a nominal one.
- Sun Nov 06, 2022 8:30 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
OK, not quite right! I think that this statement is wrong: “This is because in the case that the Seasonally Adjusted CPI is constant; the Seasonal Adjustment ratio (NSA/SA*100) is simply the Non-seasonally Adjusted CPI.”
What does happen is that the Seasonally Adjusted CPI in the Seasonal Adjustment Ratio drops out of the Canty equation if it is a constant. This leaves the ratio of the Non-seasonally Adjusted CPIs in the Canty equation, which is the definition of the Inflation Index Ratio.
What does happen is that the Seasonally Adjusted CPI in the Seasonal Adjustment Ratio drops out of the Canty equation if it is a constant. This leaves the ratio of the Non-seasonally Adjusted CPIs in the Canty equation, which is the definition of the Inflation Index Ratio.
- Sun Nov 06, 2022 7:25 am
- Forum: Investing - Theory, News & General
- Topic: Trading Treasuries (nominal and TIPS)
- Replies: 4191
- Views: 466831
Re: Trading Treasuries (nominal and TIPS)
This hypothetical might help clarify what is being calculated here: Consider a situation where year over year inflation is zero, but the seasonal cycle exists and is exactly identical year to year. In this case, the differences in expected nominal yield are only from the seasonal cycle. The Seasonally Adjusted CPI would be constant and the non-seasonally adjusted CPI would exactly reflect the seasonal cycle. Under these special conditions the Inflation Index ratio (used to calculate the nominal return of a TIPS) and the Seasonal Adjustment ratio (used to calculate the adjusted yield) are identical. This is because in the case where the Seasonally Adjusted CPI is constant; the Seasonal Adjustment ratio (NSA/SA*100) is simply the Non-seasonal...
- Sat Nov 05, 2022 3:13 pm
- Forum: Personal Investments
- Topic: Any luck buying small amounts of individual TIPS?
- Replies: 8
- Views: 905
Re: Any luck buying small amounts of individual TIPS?
This is with Vanguard. No particular day. I generally buy in the morning, but have had no trouble at other times as well. Every once in a great while an order will not fill. I usually just wait until the next day to try again. 99% of the time the order fills pretty much instantly.
- Sat Nov 05, 2022 1:59 pm
- Forum: Investing - Theory, News & General
- Topic: Any difficulty selling treasuries?
- Replies: 3
- Views: 730
Re: Any difficulty selling treasuries?
OK, good to know!
- Sat Nov 05, 2022 12:31 pm
- Forum: Personal Investments
- Topic: Any luck buying small amounts of individual TIPS?
- Replies: 8
- Views: 905
Re: Any luck buying small amounts of individual TIPS?
I have had no problem at all buying as little as $1,000 face value.