This seems better than nominal treasury or corporate bonds, am I missing something?

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zaplunken
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This seems better than nominal treasury or corporate bonds, am I missing something?

Post by zaplunken »

Can someone tell me if I am out in left field or does this make sense.

I truly struggle to understand TIPS, I know what they are and I can usually follow the explanation of how they work but they are the most confusing of all the bonds to me.

So I want to put some of my rollover IRA money into a bond fund, I'd like safety with a moderate return in yield. I looked at short, intermediate and long term funds that are treasury and corporate. I understand duration. I understand that with more yield comes more risk so treasuries will yield less but be safer with no default vs corporate bond funds.

So the Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX) looks like a good place to park money with a 30 day SEC yield of 1.44% duration of 7.8 years and that does not include any adjustment for inflation which now is low and might remain so for a few years. Is this fund a better choice than say an Intermediate Term Treasury Admiral Shares fund (VFIUX) (I'll refer to this as ITT) with a 30 day SEC yield of 0.59% and a duration of 5.1 years? Both are treasury issues so no defaults to worry about, same minimum deposit and expense ratio and while the duration is a bit higher for the TIPS the yield is almost 2 1/2 times greater. The TIPS fund YTD returned 2.4% less, but the ITT fund gained a lot from dropping interest rates this year and I don't know how that effected the TIPS total return, TIPS pay a quarterly vs a monthly distribution for the ITT fund. It seems like a no brainer, the TIPS fund is a better choice than the ITT or corporate bond funds (re safety) so what am I missing?
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by venkman »

I wouldn't trust that SEC yield for VAIPX. It's likely some confluence of numbers that happened to produce a technically correct but misleading result when it got run through the SEC yield formula.

Currently, 5- and 10-year TIPS have a real yield of -0.63% and -0.55%, respectively. I would expect the real yield of VAIPX to be somewhere close to that range going forward (minus the 0.10% ER).
MadHungarian
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by MadHungarian »

Yes, i was just looking at the related Vanguard Short-Term TIPS Index Fund (VTAPX) myself. It claims a tantalizing SEC yield for a ST bond fund, but when i looked at the underlying bonds (all 17 of them!), the stated coupons didn't seem to be anywhere near that claimed SEC yield.
So i'm a bit confused as to that SEC yield. Maybe Vanguard bought the bonds at a discount and that's why the stated yields are higher? My bond knowledge starts breaking down here.

I did do some quick research into TIPS, and discovered that they actually seem to be quite complex beasts, with significantly greater volatility than traditional treasuries of the same duration. Also that they're apparently best used in tax-sheltered accounts.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by annu »

venkman wrote: Thu Jun 11, 2020 9:17 pm I wouldn't trust that SEC yield for VAIPX. It's likely some confluence of numbers that happened to produce a technically correct but misleading result when it got run through the SEC yield formula.

Currently, 5- and 10-year TIPS have a real yield of -0.63% and -0.55%, respectively. I would expect the real yield of VAIPX to be somewhere close to that range going forward (minus the 0.10% ER).
So real yield of -.8%?......so losing 1% almost ?
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by MadHungarian »

annu wrote: Fri Jun 12, 2020 12:51 am
venkman wrote: Thu Jun 11, 2020 9:17 pm I wouldn't trust that SEC yield for VAIPX. It's likely some confluence of numbers that happened to produce a technically correct but misleading result when it got run through the SEC yield formula.

Currently, 5- and 10-year TIPS have a real yield of -0.63% and -0.55%, respectively. I would expect the real yield of VAIPX to be somewhere close to that range going forward (minus the 0.10% ER).
So real yield of -.8%?......so losing 1% almost ?
Well that's where the annual inflation adjustment comes in. The principal amount gets adjusted annually by the declared CPI value for that year. It is to be hoped that the declared CPI will be greater than the current negative yield value. And that the combined net 'yield' won't be less than the yield you would've received from an equivalent traditional treasury bond.
A couple caveats: 1) if there's actually deflation, your principal amount will be DECREASED (subject to certain restrictions), thus really messing you over. 2) The annual CPI principal adjustment is taxable in that year, bleah.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by annu »

MadHungarian wrote: Fri Jun 12, 2020 1:28 am
annu wrote: Fri Jun 12, 2020 12:51 am
venkman wrote: Thu Jun 11, 2020 9:17 pm I wouldn't trust that SEC yield for VAIPX. It's likely some confluence of numbers that happened to produce a technically correct but misleading result when it got run through the SEC yield formula.

Currently, 5- and 10-year TIPS have a real yield of -0.63% and -0.55%, respectively. I would expect the real yield of VAIPX to be somewhere close to that range going forward (minus the 0.10% ER).
So real yield of -.8%?......so losing 1% almost ?
Well that's where the annual inflation adjustment comes in. The principal amount gets adjusted annually by the declared CPI value for that year. It is to be hoped that the declared CPI will be greater than the current negative yield value. And that the combined net 'yield' won't be less than the yield you would've received from an equivalent traditional treasury bond.
A couple caveats: 1) if there's actually deflation, your principal amount will be DECREASED (subject to certain restrictions), thus really messing you over. 2) The annual CPI principal adjustment is taxable in that year, bleah.
Thanks. I forgot about the CPI adjustment.....
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by zaplunken »

And that is why I did mention the inflation adjustment and the fact that inflation is low and expected to be low for some time. I forgot to mention that if there is deflation you will lose money in TIPS as deflation will reduce the yield or mess with the adjustment that reduces the NAV of the fund. This is why I say I struggle to understand TIPS and TIPS funds. So it looks like the yield is skewered by something.

I did a historical price history using the Vg link and on 5/21 the yield was -0.29% then next day +0.37%! Then on 5/29 + 1.34%, prior to 5/21 it was negative since 1/31 and barely above zero from 1/1 to 1/30.

Maybe it is best to just not go down this road based upon "if you can't explain an investment to a 10 year old it is too complex" and that you shouldn't invest in something you don't understand.

Thanks for the replies.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by KEotSK66 »

zaplunken wrote: Fri Jun 12, 2020 7:36 am And that is why I did mention the inflation adjustment and the fact that inflation is low and expected to be low for some time. I forgot to mention that if there is deflation you will lose money in TIPS as deflation will reduce the yield or mess with the adjustment that reduces the NAV of the fund. This is why I say I struggle to understand TIPS and TIPS funds. So it looks like the yield is skewered by something.

I did a historical price history using the Vg link and on 5/21 the yield was -0.29% then next day +0.37%! Then on 5/29 + 1.34%, prior to 5/21 it was negative since 1/31 and barely above zero from 1/1 to 1/30.

Maybe it is best to just not go down this road based upon "if you can't explain an investment to a 10 year old it is too complex" and that you shouldn't invest in something you don't understand.

Thanks for the replies.
you might consider a combination of intermediate treasuries and intermediate tips, 50/50?

the straight Ts give you protection against deflation and disinflation, the tips against inflation

(i don't know if this will help...for tips, the principal adjusts, swells or contracts with inflation or deflation/disinflation, then the interest is paid based on the adjusted principal)
"i just got fluctuated out of $1,500", jerry
dbr
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by KEotSK66 »

well what is it, long-term holder of stocks and bonds or parking money ???

go with intermediates, you'll get higher yield than short bonds and less interest rate risk than longs
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by nisiprius »

1) I like TIPS a lot. Of my brokerage "fixed income," half is Total Bond and half is VAIPX, the Vanguard Inflation-Protected Securities fund.

2) That said, inflation has been low and steady for about three decades. We have not seen any of the conditions that TIPS are "for." When you put stuff under a microscope and look at microscopic fluctuations you are going to see nonsense. It really does get hot in summer, but that doesn't mean that June 21st is going to be hotter than June 19th.

There's a reasonable amount of evidence that, for whatever reason--possibly lower popularity and less liquidity--TIPS have had more volatility, more "risk," and more occurrences of "strange things" than nominal bonds have had. Not enough to bother me.

And it doesn't make any particular sense that TIPS would have higher return, since (when measured in real dollars) TIPS have lower risk than nominal bonds because they don't have one risk factor--inflation--that nominal bonds have.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by bayview »

dbr wrote: Fri Jun 12, 2020 8:35 am Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
Isn’t it reasonable for long term holders of bonds to consider ways to mitigate inflation risk?
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

bayview wrote: Fri Jun 12, 2020 8:53 am
dbr wrote: Fri Jun 12, 2020 8:35 am Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
Isn’t it reasonable for long term holders of bonds to consider ways to mitigate inflation risk?
Then your selection of funds could be largely or all TIPS and leave it alone. You still have the rest of your portfolio to consider. Putting some money in TIPS does not create an armored shield protecting every thing else as well. But then everyone complains that the yield is too low. Even Mr. Bogle complained that Total Bond Index was too high in Treasuries and the yield was too low. In a portfolio about equally of stocks and bonds it is not obvious that there is a huge difference to the investor between holding all TIPS for bonds or all Total Bond Market for bonds over all probabilities of future events. Or you could put one third in cash, one third in TIPS, and one third in corporates and also hold stocks and it still comes out the same for all anyone can tell.

If you want to totally eliminate inflation risk and exactly predict the real income you'll get you can put everything in a ladder of 30 year TIPS. It will take a lot of money to do that and you will have to figure out where income will come from at the end of the thirty years, but the option is there.

Disclaimer: My bond allocation is about half intermediate Treasury fund and about half intermediate TIPS fund, but that should have nothing to do with what someone else does.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by zaplunken »

KEotSK66 wrote: Fri Jun 12, 2020 8:46 am well what is it, long-term holder of stocks and bonds or parking money ???

go with intermediates, you'll get higher yield than short bonds and less interest rate risk than longs
Maybe "park money" was a poor choice of terms. What would have been a better way to express this was to say "to place money in fixed income attempting to make a wise choice over the longer term with a portfolio that reflects my risk tolerance". Bonds are for stability, ballast, you typically don't make money in bonds or bond funds. Of course the past year in long term treasuries was a home run but interest rates were cratering. Treasuries really perform in times of financial crisis so today I lean more towards them and less towards corporates which I preferred in the past before retiring. I do have a position in the Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX) and wanted to place the money I have in the Vanguard Ultra-Short-Term Bond Fund Admiral Shares (VUSFX) into another treasury fund and wondered if TIPS with inflation protection made more sense than say a short or long term treasury fund. I'm looking more at wealth preservation and some moderate growth (40/60 asset allocation) vs income which I doubt I will ever need. Maybe periodically exchanging from the Ultra Short Term fund into equal dollars of the Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX) and the Vanguard Short-Term Treasury Fund Admiral Shares (VFIRX) with most in the ITT fund and rebalancing the short and long funds so one doesn't get wildly out of balance would be a good compromise?
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by retired@50 »

bayview wrote: Fri Jun 12, 2020 8:53 am
dbr wrote: Fri Jun 12, 2020 8:35 am Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
Isn’t it reasonable for long term holders of bonds to consider ways to mitigate inflation risk?
Yes, it is. I mitigate inflation risk by holding stock index funds.

Regards,
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

There are people who have made the suggestion that a long term bond investment should be 100% TIPS on the grounds that one should not endure inflation risk if one does not have to. It might be Larry Swedroe suggested that at one point, but I don't know for sure about that.

I think I made a comment recently that bond investing is a problem that is severely underspecified. That means there are far more choices in bonds than there are conditions that enable us to distinguish among the choices. Therefore we can't figure out how to decide. So the option is to develop ever increasing anxiety over what to do or to just do something and forget about it. You don't want to ruin your meal thinking that it was a mistake to get the excellent steak instead of the equally excellent fish when you are a person that likes both. That is especially true when after you order your dining companion chooses the opposite. (My wife refuses to order in a restaurant until I tell her what I am ordering.)

I would start by looking to see if there is anything you should NOT do in bonds, and having eliminated those just move on.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

retired@50 wrote: Fri Jun 12, 2020 10:23 am
bayview wrote: Fri Jun 12, 2020 8:53 am
dbr wrote: Fri Jun 12, 2020 8:35 am Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
Isn’t it reasonable for long term holders of bonds to consider ways to mitigate inflation risk?
Yes, it is. I mitigate inflation risk by holding stock index funds.

Regards,
Yes, and this is underlining the point that you depend on what your whole portfolio is and you should not try to address risks piecemeal, asset by asset.

The same applies to getting upset by small losses in bonds when it is the gain and loss of the whole portfolio that matters, etc., etc., etc.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by bigskyguy »

To put a slightly different spin on this subject, I find it easier to think of TIPS as a lock on purchasing power. If one focuses on inflation, it will vary from year to year. TIPS let one ignore inflation, since it is factored into the value of the bond as time progresses. That is not the case for any nominal bond instrument. As a retiree, I am more concerned about maintaining my purchasing power than my account balance. TIPS secure purchasing power going forward. Yes, the yield above inflation is now negative, but at least I know that going forward. With nominal bonds, I have no idea what the purchasing power will be as time progresses. Additionally, if one looks at the spread between 10 year TIPS and 10 year Treasuries, it is at 1.2% (the spread for 5 years is 0.9%, and for 30 years 1.5%), meaning that nominal Treasuries are preferred only if you believe that inflation over the next 10 years is under 1.2% (or under 0.9% for the next 5 years, or under 1.5% for the next 30 years). For me as a retiree, TIPS seem the logical way to go, both for insuring my purchasing power, and protecting me from inflation.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by retired@50 »

dbr wrote: Fri Jun 12, 2020 10:30 am (My wife refuses to order in a restaurant until I tell her what I am ordering.)
Naturally, she does this so she can have a bite of yours too. That way she gets to try the fish and the steak. Diversification in action.

Regards,
This is one person's opinion. Nothing more.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

retired@50 wrote: Fri Jun 12, 2020 10:34 am
dbr wrote: Fri Jun 12, 2020 10:30 am (My wife refuses to order in a restaurant until I tell her what I am ordering.)
Naturally, she does this so she can have a bite of yours too. That way she gets to try the fish and the steak. Diversification in action.

Regards,
Maybe so, although usually I end up finishing part of hers, but, it is true, only after sharing bites. I agree the experience does seem diminished if you both have the same thing and can't compare.

Maybe that really does apply to investing. People feel better if they have a sample of everything. Even the thread title asks " . . . am I missing something?"
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by HawkeyePierce »

bayview wrote: Fri Jun 12, 2020 8:53 am
dbr wrote: Fri Jun 12, 2020 8:35 am Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
Isn’t it reasonable for long term holders of bonds to consider ways to mitigate inflation risk?
I hold long term Treasurys. My inflation protection comes from equities and my earning potential, both of which tend to keep up with long-term inflation. I've accepted the risk of short-term unexpected inflation and do not hold any assets that actively guard against that risk.

What works for me (a young investor with lots of earning years ahead of him) may not be right for all investors.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by Ice-9 »

MadHungarian wrote: Fri Jun 12, 2020 1:28 am Well that's where the annual inflation adjustment comes in. The principal amount gets adjusted annually by the declared CPI value for that year.
I believe the "annual" part of this statement is incorrect. Articles by Tipswatch often refer to monthly adjustments.

The breakeven inflation rate for nominal Treasury bonds and TIPS has been in the neighborhood of around 1% for longer term bonds recently. Inflation has been low, but do we really expect 1% or lower inflation stretching out two decades or longer?

Conversationally, I think TIPS may be the better deal right now, but what do I know? I continue to stick to my half TIPS half nominal treasury fixed income allocation.
Last edited by Ice-9 on Fri Jun 12, 2020 10:49 am, edited 1 time in total.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by FIREchief »

annu wrote: Fri Jun 12, 2020 12:51 am
venkman wrote: Thu Jun 11, 2020 9:17 pm I wouldn't trust that SEC yield for VAIPX. It's likely some confluence of numbers that happened to produce a technically correct but misleading result when it got run through the SEC yield formula.

Currently, 5- and 10-year TIPS have a real yield of -0.63% and -0.55%, respectively. I would expect the real yield of VAIPX to be somewhere close to that range going forward (minus the 0.10% ER).
So real yield of -.8%?......so losing 1% almost ?
Well, -.63% minus .10% is -.73%. Not -.8%. No point in exaggerating this. That said, this is also what nominal treasuries will likely yield, so don't blame the TIPS for low interest rates. The fact is that all safe fixed income investments will likely provide negative real returns over the next several years. Also, why pay that extra .10% when individual TIPS are easy and free to buy and hold? venkman is spot on when recommending that folks just look at the real yield curves instead of trying to decipher and compare SEC yields. The later is pretty meaningless with interest rates bouncing around so much.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by FIREchief »

nisiprius wrote: Fri Jun 12, 2020 8:53 am We have not seen any of the conditions that TIPS are "for."
Actually, we have. There have been numerous recent periods of time where the realized inflation rate has exceeded the breakeven inflation rate at issuance for five, ten, etc. year TIPS versus nominals. Unexpected inflation doesn't just mean double-digit 70's esque hyper-inflation. It can also mean a 2.5% increase in CPI for a year or two when the treasury auctions were yielding breakeven rates of 1.5% - 2.0% inflation.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by MadHungarian »

nisiprius wrote: Fri Jun 12, 2020 8:53 am . . .
There's a reasonable amount of evidence that, for whatever reason--possibly lower popularity and less liquidity--TIPS have had more volatility, more "risk," and more occurrences of "strange things" than nominal bonds have had.
. . .
You'd expect that, since nominal bonds only have the interest-rate factor, whereas TIPS have both interest-rate and inflation factors compounding together. X^2 complexity. Makes it much harder to try to value them properly.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by Elysium »

zaplunken wrote: Fri Jun 12, 2020 10:13 am What would have been a better way to express this was to say "to place money in fixed income attempting to make a wise choice over the longer term with a portfolio that reflects my risk tolerance". Bonds are for stability, ballast, you typically don't make money in bonds or bond funds. Of course the past year in long term treasuries was a home run but interest rates were cratering. Treasuries really perform in times of financial crisis so today I lean more towards them and less towards corporates which I preferred in the past before retiring. I do have a position in the Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX) and wanted to place the money I have in the Vanguard Ultra-Short-Term Bond Fund Admiral Shares (VUSFX) into another treasury fund and wondered if TIPS with inflation protection made more sense than say a short or long term treasury fund. I'm looking more at wealth preservation and some moderate growth (40/60 asset allocation) vs income which I doubt I will ever need. Maybe periodically exchanging from the Ultra Short Term fund into equal dollars of the Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX) and the Vanguard Short-Term Treasury Fund Admiral Shares (VFIRX) with most in the ITT fund and rebalancing the short and long funds so one doesn't get wildly out of balance would be a good compromise?
You are looking at this the wrong way. Yield is almost irrelevant, that shouldn't be a prime factor, but of course we need to be yield aware. There is a role for different types of fixed income in your portfolio. You need to have a long term strategy that aligns with your accumulation, retirement, and glidepath.

To expand on this, think about the role of bonds as (1) providing maximum non-correlation with stocks (2) inflation protection (3) deflation protection (4) duration matching (5) stability. No one bond type will provide all of it. TIPS comes close to providing more protection than nominals, but they are poor choice for #1 and #5. Long term nominal Treasury provides #1, #3, #4. Short Team Treasury provides #2, #5.

Some people want simplicity of a single bond fund, and there isn't anything better than the Aggregate Bond Index for that, so one bond answer is Total Bond Index. Once you go beyond that you match the above criteria to your bonds and fit them to your portfolio. You are buying them for protection against those scenarios, and you have no need to worry about yields or returns so long as they are meeting those objectives. You should totally ignore interest rate projections.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by bayview »

dbr wrote: Fri Jun 12, 2020 10:31 am
retired@50 wrote: Fri Jun 12, 2020 10:23 am
bayview wrote: Fri Jun 12, 2020 8:53 am
dbr wrote: Fri Jun 12, 2020 8:35 am Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
Isn’t it reasonable for long term holders of bonds to consider ways to mitigate inflation risk?
Yes, it is. I mitigate inflation risk by holding stock index funds.

Regards,
Yes, and this is underlining the point that you depend on what your whole portfolio is and you should not try to address risks piecemeal, asset by asset.

The same applies to getting upset by small losses in bonds when it is the gain and loss of the whole portfolio that matters, etc., etc., etc.
And I hold stocks to mitigate against inflation risk as well.

I was just saying that it seems reasonable to investigate TIPS as “another arrow in the quiver”, especially if perhaps one’s AA leans toward bonds.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

bayview wrote: Fri Jun 12, 2020 9:50 pm
dbr wrote: Fri Jun 12, 2020 10:31 am
retired@50 wrote: Fri Jun 12, 2020 10:23 am
bayview wrote: Fri Jun 12, 2020 8:53 am
dbr wrote: Fri Jun 12, 2020 8:35 am Long term holders of portfolios of stocks and bonds should not be trying to cherry pick one kind of bond fund or another at all, let alone based on some present data about the fund. Short term investors who are "parking" money would not even be looking at intermediate bond funds.

So, the best thing is to select any of equally useful options in bonds and leave it alone.
Isn’t it reasonable for long term holders of bonds to consider ways to mitigate inflation risk?
Yes, it is. I mitigate inflation risk by holding stock index funds.

Regards,
Yes, and this is underlining the point that you depend on what your whole portfolio is and you should not try to address risks piecemeal, asset by asset.

The same applies to getting upset by small losses in bonds when it is the gain and loss of the whole portfolio that matters, etc., etc., etc.
And I hold stocks to mitigate against inflation risk as well.

I was just saying that it seems reasonable to investigate TIPS as “another arrow in the quiver”, especially if perhaps one’s AA leans toward bonds.
My fixed income holding is 50% TIPS.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by nedsaid »

nisiprius wrote: Fri Jun 12, 2020 8:53 am 1) I like TIPS a lot. Of my brokerage "fixed income," half is Total Bond and half is VAIPX, the Vanguard Inflation-Protected Securities fund.

2) That said, inflation has been low and steady for about three decades. We have not seen any of the conditions that TIPS are "for." When you put stuff under a microscope and look at microscopic fluctuations you are going to see nonsense. It really does get hot in summer, but that doesn't mean that June 21st is going to be hotter than June 19th.

There's a reasonable amount of evidence that, for whatever reason--possibly lower popularity and less liquidity--TIPS have had more volatility, more "risk," and more occurrences of "strange things" than nominal bonds have had. Not enough to bother me.

And it doesn't make any particular sense that TIPS would have higher return, since (when measured in real dollars) TIPS have lower risk than nominal bonds because they don't have one risk factor--inflation--that nominal bonds have.
Wow. The 50% Total Bond and 50% TIPS for the fixed income part of a portfolio used to be standard Boglehead wisdom. Good to see one Boglehead who has not abandoned TIPS. I have not.
A fool and his money are good for business.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by softwaregeek »

I don’t understand why TIPs are better than high yield savings account or an ultra short bond fund, each of which can ant their best approach or exceed the real yield.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

softwaregeek wrote: Sat Jun 13, 2020 11:06 am I don’t understand why TIPs are better than high yield savings account or an ultra short bond fund, each of which can ant their best approach or exceed the real yield.
Under more normal conditions of the yield curve TIPS will have the greater risk and return of longer duration bonds and still be inflation indexed. Today at low interest rates and low inflation TIPS per se are not better than savings accounts, CDs, or short bonds.

Over the long time spans of saving and then spending in retirement TIPS serve a person's purpose against a range of conditions, but it isn't usually about what is "better" rather than what suits the purpose all needs and risks considered.

To talk about optimizing bonds or gaining "advantages" at this point in time is kind of a comedy, really.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by #Cruncher »

zaplunken wrote: Thu Jun 11, 2020 7:34 pm... the Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX) looks like a good place to park money with a 30 day SEC yield of 1.44% ... and that does not include any adjustment for inflation ...
As others have pointed out, the reported 1.44% 30 day SEC yield is spurious. Someone at Vanguard messed up. Vanguard updates this figure every Friday. The past values can be see by clicking Search for more historical price information on the Price & Performance tab. Here they are going back to May 1st in the column "SEC Yld". It seems reasonable until May 22nd when -0.19% jumps up to +0.47%, and then to +1.44% a week later. On June 5th it falls back to a reasonable -0.33%.

Code: Select all

                  VAIPX (#5119) 1+ Index
                  NAV   SEC Yld  Avg YTM

Code: Select all

Fri 5/01/2020    26.99  (0.16%)  (0.14%)
Mon 5/04/2020    27.01  (0.16%)  (0.12%)
Tue 5/05/2020    27.02  (0.16%)  (0.17%)
Wed 5/06/2020    26.91  (0.16%)  (0.18%)
Thu 5/07/2020    27.05  (0.16%)  (0.21%)

Fri 5/08/2020    27.02  (0.21%)  (0.21%)
Mon 5/11/2020    26.96  (0.21%)  (0.17%)
Tue 5/12/2020    26.97  (0.21%)  (0.19%)
Wed 5/13/2020    27.00  (0.21%)  (0.21%)
Thu 5/14/2020    27.04  (0.21%)  (0.23%)

Fri 5/15/2020    27.08  (0.19%)  (0.24%)
Mon 5/18/2020    27.06  (0.19%)  (0.25%)
Tue 5/19/2020    27.08  (0.19%)  (0.28%)
Wed 5/20/2020    27.13  (0.19%)  (0.31%)
Thu 5/21/2020    27.10  (0.19%)  (0.30%)

Fri 5/22/2020    27.10   0.47%   (0.29%)
Tue 5/26/2020    27.03   0.47%   (0.30%)
Wed 5/27/2020    27.05   0.47%   (0.31%)
Thu 5/28/2020    27.13   0.47%   (0.34%)

Fri 5/29/2020    27.14   1.44%   (0.35%)
Mon 6/01/2020    27.16   1.44%   (0.39%)
Tue 6/02/2020    27.12   1.44%   (0.38%)
Wed 6/03/2020    27.03   1.44%   (0.35%)
Thu 6/04/2020    26.94   1.44%   (0.33%)

Fri 6/05/2020    26.95  (0.33%)  (0.35%)
Mon 6/08/2020    26.99  (0.33%)  (0.39%)
Tue 6/09/2020    27.04  (0.33%)  (0.45%)
Wed 6/10/2020    27.25  (0.33%)  (0.55%)
Thu 6/11/2020    27.25  (0.33%)  (0.54%)

Fri 6/12/2020    27.17  (0.38%)  (0.51%)
The SEC yield is based on the yield-to-maturity (YTM) of the bonds a fund holds. Even if Vanguard's figures were not messed up, the idea of averaging a YTM over a number of days is wrong in my opinion. Price and YTM of a bond or a bond fund are two sides of the same coin. To be useful both need to be based on a moment in time, not an average over a period of time. For instance, it would not be helpful in making a purchase decisision to know the average price of a bond or a bond fund over the past 30 days; we'd want to know the price now. Likewise it's not helpful to know the average YTM of bond or bond fund over the past 30 days; again we'd want to know it now.

The far right column above shows the weighted average YTM each day of all the TIPS maturing in one year or more ("1+ Index"). (I compute this each day based on the WSJ TIPS Quotes. See my post, Re: TIPS yielding almost 2% real, for the calculation for 6/10/2020.) VAIPX is not an index fund, but it does hold TIPS roughly in proportion to the 1+ index. Therefore, I believe that the "1+ Index" values (less the fund's expense ratio) is a better measure of its yield than the reported 30 day SEC yield -- even when Vanguard calculates it correctly.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by jinnix »

I think the deflation risk has a floor. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. I guess before maturity, the adjusted principal can go below original principal, making your coupon smaller, but at least the principal is protected.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by venkman »

UPDATE
Vanguard website currently is listing real SEC yield for VAIPX at -0.33%, as of 6/11/20.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by thermo »

jinnix wrote: Sat Jun 13, 2020 8:35 pm I think the deflation risk has a floor. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. I guess before maturity, the adjusted principal can go below original principal, making your coupon smaller, but at least the principal is protected.
How does this relate to TIPS held in an ETF?
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by Ben Mathew »

zaplunken wrote: Fri Jun 12, 2020 7:36 am if there is deflation you will lose money in TIPS as deflation will reduce the yield or mess with the adjustment that reduces the NAV of the fund. This is why I say I struggle to understand TIPS and TIPS funds.
I think a clearer way to look at it is to see TIPS as being unaffected by inflation risk. You know today exactly what you'll get in real dollars 30 years from now. With nominal bonds, you don't know what you won't get. If inflation is lower than expected, it will pay out more real dollars than you thought. If inflation is higher than expected, it will pay out less real dollars than you thought.

So saying "with deflation you lose money in TIPS" is misleading IMO. It would be more accurate to say that with less than expected inflation, you gain money with nominals.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by Lambert Strether »

Can someone explain the effective differences between TIPS held as individual notes and the anticipated performance of TIPS funds? I ask this because TIPS purchased directly and held to maturity offer seemingly clear guidelines; the big variable is dictated by the CPI. By contrast, TIPS funds seem to be based on speculation surrounding the notes held by the fund. To what extent can an investor expect a return from a TIPS fund equivalent to inflation? I am working on setting up a retirement portfolio, and this has been eluding my grasp.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by bigskyguy »

Lambert Strether wrote: Sun Jun 14, 2020 9:31 am Can someone explain the effective differences between TIPS held as individual notes and the anticipated performance of TIPS funds? I ask this because TIPS purchased directly and held to maturity offer seemingly clear guidelines; the big variable is dictated by the CPI. By contrast, TIPS funds seem to be based on speculation surrounding the notes held by the fund. To what extent can an investor expect a return from a TIPS fund equivalent to inflation? I am working on setting up a retirement portfolio, and this has been eluding my grasp.
Think of a bond fund as if it were a single bond with a maturity and duration that are essentially consistent (or close) over time. Its composition will evolve over time in order to maintain a relatively consistent maturity. Therefore, at any time in the future, its principle value and coupon will vary dependent upon its composition and upon the interest rate environment at the time of withdrawal.
This is distinct from an individual bond that has a maturity and duration that decrease predictably over time. If held to maturity you know in advance exactly what your principle return will be and exactly what your coupon payments will be.
Now one can create a mix of short term and longer term TIPS funds and adjust the relative composition so as to have a maturity and duration that decreases over time to reflect your needs, in essence mimicking a ladder of TIPS individual bonds. Bobcat2 has gone into great detail on prior posts on just how that is done.
As to the TIPS fund and inflation coverage, that will be completely dependent upon the bond composition of the fund. That is no different than is the case for a ladder of individual TIPS bonds. As of today, all individual TIPS bonds (5 year thru 30 year) have negative yields, meaning that if one were to purchase a TIPS bond ladder today from any brokerage, the composite yield of the bond ladder would be negative. The principle value of the ladder will still rise with the rate of inflation. It would, unfortunately, be discounted by the amount of the negative interest rate. In essence, your ladder would keep up with inflation, but you will be charged the value of the negative interest rate for that inflation coverage. And the same applies to a TIPS fund.
These concepts are not intuitive, but are definitely important to understand.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by Valuethinker »

nisiprius wrote: Fri Jun 12, 2020 8:53 am 1) I like TIPS a lot. Of my brokerage "fixed income," half is Total Bond and half is VAIPX, the Vanguard Inflation-Protected Securities fund.

2) That said, inflation has been low and steady for about three decades. We have not seen any of the conditions that TIPS are "for." When you put stuff under a microscope and look at microscopic fluctuations you are going to see nonsense. It really does get hot in summer, but that doesn't mean that June 21st is going to be hotter than June 19th.
Quibble - and only that. Inflation has been tending downwards for the past 3 decades. If you had sat in 1990, with inflation about 6% from memory? And knowing that it averaged around 5% in the 1980s and over 10% in the 1970s (and had risen steadily since the end of WW2) you'd never have imagined that the great concern in 2020 would be *deflation*, and that its average over the previous 10 years was probably a bit less than 2%?
There's a reasonable amount of evidence that, for whatever reason--possibly lower popularity and less liquidity--TIPS have had more volatility, more "risk," and more occurrences of "strange things" than nominal bonds have had. Not enough to bother me.

And it doesn't make any particular sense that TIPS would have higher return, since (when measured in real dollars) TIPS have lower risk than nominal bonds because they don't have one risk factor--inflation--that nominal bonds have.
Since inflation has been less than "market" expectations for most of the past 30 years, you'd expect the real return instrument (TIPS) to underperform the nominal one.

A quirk. US TIPS were first issued in 1998? from memory, at the instigation of Treasury Secretary Rubin, over much opposition, Congressional and institutional. As an unfamiliar, illiquid instrument when the conviction was that stocks were the only appropriate investment (culminating in the best decades stocks ever experienced, and then the bear market of 2000-03), they offered real yields as high as 4%.

Although expected inflation has been lower than that, if you bought at those high real yields available pre 2008 (from 4% down to about 2.5%) then you have done very well.

That's not doable again unless we have significant unexpected inflation - starting yields are too low.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

Lambert Strether wrote: Sun Jun 14, 2020 9:31 am Can someone explain the effective differences between TIPS held as individual notes and the anticipated performance of TIPS funds? I ask this because TIPS purchased directly and held to maturity offer seemingly clear guidelines; the big variable is dictated by the CPI. By contrast, TIPS funds seem to be based on speculation surrounding the notes held by the fund. To what extent can an investor expect a return from a TIPS fund equivalent to inflation? I am working on setting up a retirement portfolio, and this has been eluding my grasp.
The answer to this takes an essay, so we will see how the responses accumulate. Here are some points:

1. The direct answer to your question is that on any given day the return of a fund or of an individual bond is determined by the market price of that bond or fund on that day. There is no guarantee that on any given day your bond or fund will be priced at what you paid plus inflation -- not for TIPS and not for any other bond or bond fund. What does happen with TIPS is that the coupon paid is increased because the coupon yield is paid against a face value that has been increased by the intervening inflation. To that extent the price on the market, within the variation produced by other factors, should be increased by inflation to match the indexed increase in the face value. At the same time the expected face value at maturity has been increasing, meaning the bond is inherently more valuable. In that sense you pace inflation in the return of the bond.

2. It is correct that a bond held to maturity will be cashed in at that time for a definite amount. In the case of nominal bonds it is the face value in nominal dollars and in the case of TIPS it is the original face value incremented by all the intervening inflation. But the catch is that you can only do that at that date. Bonds, including TIPS, are marketable and their is no guaranteed amount you can get in the market prior to maturity. Whether or not a guarantee of money redeemed at a date far in the future is valuable or not depends on the investor. Generally the farther in the future a guarantee can be made good, the less it is worth. But that is up to you. Taking inflation out of the equation makes that guarantee more valuable.

3. A share in a bond fund can never be sold at the maturity value of bonds in the fund. The fund will always be holding bonds at various points along their approach to maturity. At any time you sell a share in a bond fund what you get is the market price on the day. That is the same as selling any other bond before maturity. Consequently the price is unpredictable and the return has variability. The difference is that you can get that price any day the market is open so the promise is 100% worthy. So the difference between 1. above and this is essentially a question of the value of liquidity. Lack of liquidity, as in 1. above is costly.

4. The market price of any bond is inversely related to the yield available in the market, nominal yields for nominal bonds and real yields for TIPS. As interest rates vary the price on any given day varies. In the case of TIPS the part of that related to inflation is compensated and in the case of nominal bonds changes in inflation also produce changes in interest rates. If you want an investment where inflation and its variations are compensated you buy TIPS and if you are willing to take the variations you don't. None of this guarantees, as explained above, that a TIPS bond or a TIPS fund will keep your money exactly even with inflation all the time unless you eliminate the interest rate variability by holding very short term bonds or by holding a cash equivalent inflation indexed bond called an I bond.

5. Whether or not you gain more holding TIPS than holding a nominal bond of similar duration and credit quality (Treasury) depends on whether or not the predictions of inflation priced into nominal bonds are realized or not. On average there is no difference in the return of TIPS and similar nominal bonds. The price of removing inflation risk, the risk premium, seems to be very small.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by Lambert Strether »

Thank you, dbr and bigskyguy, for addressing my query about TIPS vs. TIPS funds. I will look up Bobcat2’s posts as suggested.

Since the values of TIPS funds will change as the principal values of the bonds comprising the funds’ holdings change, the funds should track inflation. But we can expect sales prices at any time to reflect a deduction in the amount of the value assigned to liquidity. This seems clearer to me now.

In constructing a retirement portfolio, I am concerned about the potential effect of several years of unanticipated inflation on the order of, say, the period from 1974 to 1982. TIPS, and thus TIPS funds, have not been around long enough to provide a track record indicating how funds might respond to such a situation. Fund values should rise to reflect the changed valuation of the bonds held. But there may be no anticipating how liquidity will be valued.
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Re: This seems better than nominal treasury or corporate bonds, am I missing something?

Post by dbr »

Lambert Strether wrote: Sun Jun 14, 2020 3:13 pm Thank you, dbr and bigskyguy, for addressing my query about TIPS vs. TIPS funds. I will look up Bobcat2’s posts as suggested.

Since the values of TIPS funds will change as the principal values of the bonds comprising the funds’ holdings change, the funds should track inflation. But we can expect sales prices at any time to reflect a deduction in the amount of the value assigned to liquidity. This seems clearer to me now.

No, the daily value of a TIPS or a fund of TIPS varies with the daily/weekly/monthly/variation of interest rates translated by the duration into a change in asset value. The longer the duration the larger the effect. Paradoxically TIPS can be exactly compensated for inflation while varying significantly in value with time in a way unrelated to inflation. The fact that variation in value related to inflation (increase with inflation) has been separated from variation in value due to real interest rate changes is the whole point. I don't know if the metaphor is useful but it is like a sound track that has had one range of frequencies filtered out but still contains noise in a different range of frequencies. To filter out all the noise you have to compensate for inflation and you have to reduce the duration. It is not necessary to remove one kind of noise to be able to say the other kind of noise has been successfully eliminated. It all depends on what sources of noise (aka what sources of risk) bother you.

You should note that TIPS will not track inflation to the degree that other noise distracts from target. But that does not mean inflation noise has not been eliminated.

Here is another metaphor. Riding a bicycle in calm air is easier than riding against the wind, but letting the wind die does not mean riding uphill is not still harder than riding downhill.


In constructing a retirement portfolio, I am concerned about the potential effect of several years of unanticipated inflation on the order of, say, the period from 1974 to 1982. TIPS, and thus TIPS funds, have not been around long enough to provide a track record indicating how funds might respond to such a situation. Fund values should rise to reflect the changed valuation of the bonds held. But there may be no anticipating how liquidity will be valued.
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