Shifting fixed income to inflation protected bonds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Badger1754
Posts: 230
Joined: Thu Jan 25, 2018 1:00 pm
Location: Upstate NY

Shifting fixed income to inflation protected bonds

Post by Badger1754 »

I currently have the fixed income portion of my highly-disciplined three-fund portfolio split between (for optimal tax efficiency):
  • Municipal bonds (VTEB) in my taxable accounts
  • Corporate bonds (VTC equivalent) in my Traditional 401k
It occurred to me that with inflation being what it is, and unlikely to get better in the near term, that a case might be made to swap to inflation-protected bonds. So my question is, is there a Municipal Inflation-Protected Bond ETF or fund that you might consider (for the taxable account; there's already an inflation-protected option in my Traditional 401k)?

AllianceBernstein has this, but it looks like 1) there's loaded versions with sales charges, etc., and 2) it looks monstrously expensive.
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Shifting fixed income to inflation protected bonds

Post by vineviz »

It’s hard to give specific advice without the full picture.

If you’re not retired or very close to retirement you probably get little benefit from TIPS.

If stocks represent a strong majority of your portfolio you might not need TIPS.

Also, investing is a lot like driving on a curvy road: you should make course corrections based on what you see through the windshield and not what you see in the rear view mirror.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Shifting fixed income to inflation protected bonds

Post by Taylor Larimore »

Badger1754 wrote: Sat Jan 15, 2022 2:11 pm I currently have the fixed income portion of my highly-disciplined three-fund portfolio split between (for optimal tax efficiency):
  • Municipal bonds (VTEB) in my taxable accounts
  • Corporate bonds (VTC equivalent) in my Traditional 401k
It occurred to me that with inflation being what it is, and unlikely to get better in the near term, that a case might be made to swap to inflation-protected bonds. So my question is, is there a Municipal Inflation-Protected Bond ETF or fund that you might consider (for the taxable account; there's already an inflation-protected option in my Traditional 401k)?

AllianceBernstein has this, but it looks like 1) there's loaded versions with sales charges, etc., and 2) it looks monstrously expensive.
Badger1754:

If you look at historical returns for the Three-Fund Portfolio here, you will see that your Three-Fund Portfolio did quite well during the late 70s when inflation was double digit. I would stay-the-course.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
"Simplicity is the master key to financial success." -- Jack Bogle
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Shifting fixed income to inflation protected bonds

Post by Admiral »

If (or really when) the Fed raises interest rates, yields will go up.

That begs the question: why do you want to abandon your current bond choices when the return is most likely to go up?
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Shifting fixed income to inflation protected bonds

Post by abuss368 »

vineviz wrote: Sat Jan 15, 2022 2:31 pm It’s hard to give specific advice without the full picture.

If you’re not retired or very close to retirement you probably get little benefit from TIPS.

If stocks represent a strong majority of your portfolio you might not need TIPS.

Also, investing is a lot like driving on a curvy road: you should make course corrections based on what you see through the windshield and not what you see in the rear view mirror.
Hi Vince -

It is possible that investors may not be as exposed to unexpected inflation as much as they may initially think. Social Security, Wages, and other income typically has cost of living adjustments. In addition, fixed rate debt can be impacted by inflation as it becomes less valuable.

What are your thoughts?
Tony
John C. Bogle: “Simplicity is the master key to financial success."
Topic Author
Badger1754
Posts: 230
Joined: Thu Jan 25, 2018 1:00 pm
Location: Upstate NY

Re: Shifting fixed income to inflation protected bonds

Post by Badger1754 »

Taylor Larimore wrote: Sat Jan 15, 2022 2:45 pm If you look at historical returns for the Three-Fund Portfolio here, you will see that your Three-Fund Portfolio did quite well during the late 70s when inflation was double digit. I would stay-the-course.
Taylor, as always, thank you!

PS. Happy forthcoming 98th!!!!
Dude2
Posts: 1780
Joined: Fri Jun 08, 2007 3:40 pm
Location: FL

Re: Shifting fixed income to inflation protected bonds

Post by Dude2 »

My 2 cents is that if TIPS were a clear solution to a problem that the demand for them would drastically increase. For example, wouldn't you consider it a no-brainer for a bank to offer to pay clients, say, 0.4 % in interest on their money market fund -- subject to the ravages of inflation -- when they can arbitrage their own inflation risk by purchasing TIPS? Extend that example to the entire fixed-income financial industry. If TIPS were so great, the demand for them would be off the charts. Those of us that invest in total markets would be fine by just riding the wave of enthusiasm. Unfortunately it is near impossible to find a total bond fund that includes TIPS, so we have to be active tinkerers of proportionality.

The question becomes if you feel you have a valid reason to switch to including TIPS as part of a total bond approach. Many might tell you that nominal bonds already account for expected inflation, that the government will not permit rampant "unexpected" inflation without stepping in (assuming they have some control). Bottom line is to stay the course.

On the other hand, TIPS are built for people that have real liabilities. Constructing a ladder to help provide you with income in retirement is a practical guarantee that your needs will be met. It is a solution to a problem. Our advice to anyone should be to solve the problem they are trying to solve versus a sort of "let it ride for infinity" mentality, i.e. continue to take risk, hoping for reward. Anyway, only saying that TIPS have a purpose.

So, if you want to take some of your fixed income and put it away in a LMP type instrument for yourself, that's one way to look at things.
Then ’tis like the breath of an unfee’d lawyer.
Call_Me_Op
Posts: 9881
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Shifting fixed income to inflation protected bonds

Post by Call_Me_Op »

There is no way to predict whether TIPS will do better than nominal bonds. Inflation expectations are already built into both. TIPS will win only if inflation exceeds what is currently expected by the (bond) market as a whole. Given this, it is not unreasonable to split your bonds 50:50, but by no means essential as long as you stick to short and intermediate term on the nominals.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Shifting fixed income to inflation protected bonds

Post by dbr »

It is completely reasonable to hold a position in a TIPS fund for the long run. Changing everything around because there is a sudden uptick in inflation is not good decision making. The question is why aren't you already invested in TIPS if inflation might be a concern?

In general an intermediate duration TIPS fund is low credit risk, moderate duration risk, and indexed for increases in inflation. If that is a fit for your long term investing plans then possibly you should hold a position in TIPS.

As far as switching though, the SEC real yields on anything are negative, so it might be a wash.

People who think the current yields on I bonds or the current paid dividend on TIPS are a windfall have made a big mistake in not having been invested in those assets already. Keep in mind however, that those yields have to be invested back into the asset for the asset to keep pace with inflation. They are not some sort of windfall income that you can spend. The real yield on I bonds is 0% and on TIPS right now about -1.7%.

My fixed income is half an intermediate TIPS fund and half an intermediate Treasury fund, but that is an allocation I settled on twenty years ago. VIPSX was launched in 2000.

A note on the TIPS LMP: That is a general idea that makes sense if a person wants to provide an inflation indexed certain income stream for a period of time. Unfortunately it is not risk free. The risk is historical risk that the benefit depends on buying the ladder when real yields are favorable. Today they are not favorable. At -2% real yield the LMP delivers a payout of 2.4%. At +2% real yield the payout is 4.4%. At 0% real yield the payout is 3.3%.
Dude2
Posts: 1780
Joined: Fri Jun 08, 2007 3:40 pm
Location: FL

Re: Shifting fixed income to inflation protected bonds

Post by Dude2 »

dbr wrote: Mon Jan 17, 2022 10:04 am A note on the TIPS LMP: That is a general idea that makes sense if a person wants to provide an inflation indexed certain income stream for a period of time. Unfortunately it is not risk free. The risk is historical risk that the benefit depends on buying the ladder when real yields are favorable. Today they are not favorable. At -2% real yield the LMP delivers a payout of 2.4%. At +2% real yield the payout is 4.4%. At 0% real yield the payout is 3.3%.
Hmm. I see it a bit differently. Granted this is difficult to achieve -- that we have only so many pennies to put away into our piggy banks -- and you may not be able to "get there from here." Still, the end goal is to arrive at a stream of income in retirement. If I say that I need 50k per year to survive for x years of retirement, and I am able to buy x years of a TIPS ladder of 50k a year, then I win the game. Risk equals zero, given my assumptions about amount needed and number of years is correct. (Big IF).

It didn't mean that the price for that TIPS ladder was a bit steeper than I wanted to pay for it. Like Merton tried to argue, I just want to acknowledge that people with sufficient assets that can stop playing the game (stop investing in a risk portfolio) can. There seems to be a large number of people on the forum that fit this description, including perhaps the OP, but it's as if they don't know they can do that. A TIPS LMP is a possible solution.

Your point may be that any deviation from a risk portfolio during accumulation, i.e. to bend over backwards to include a TIPS ladder, is risky and is time sensitive to real rates. Fair enough.

Put another way, solving backwards, we can arrive at what we need in a TIPS ladder when retirement starts and remove all risk. Accumulating enough to make it happen is where we must take risk.

Question, if somebody is going to hold bonds as part of their risk portfolio, is it wrong to suggest they start chunking away TIPS?
Then ’tis like the breath of an unfee’d lawyer.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Shifting fixed income to inflation protected bonds

Post by dbr »

Dude2 wrote: Mon Jan 17, 2022 12:52 pm
dbr wrote: Mon Jan 17, 2022 10:04 am A note on the TIPS LMP: That is a general idea that makes sense if a person wants to provide an inflation indexed certain income stream for a period of time. Unfortunately it is not risk free. The risk is historical risk that the benefit depends on buying the ladder when real yields are favorable. Today they are not favorable. At -2% real yield the LMP delivers a payout of 2.4%. At +2% real yield the payout is 4.4%. At 0% real yield the payout is 3.3%.
Hmm. I see it a bit differently. Granted this is difficult to achieve -- that we have only so many pennies to put away into our piggy banks -- and you may not be able to "get there from here." Still, the end goal is to arrive at a stream of income in retirement. If I say that I need 50k per year to survive for x years of retirement, and I am able to buy x years of a TIPS ladder of 50k a year, then I win the game. Risk equals zero, given my assumptions about amount needed and number of years is correct. (Big IF).

It didn't mean that the price for that TIPS ladder was a bit steeper than I wanted to pay for it. Like Merton tried to argue, I just want to acknowledge that people with sufficient assets that can stop playing the game (stop investing in a risk portfolio) can. There seems to be a large number of people on the forum that fit this description, including perhaps the OP, but it's as if they don't know they can do that. A TIPS LMP is a possible solution.

Your point may be that any deviation from a risk portfolio during accumulation, i.e. to bend over backwards to include a TIPS ladder, is risky and is time sensitive to real rates. Fair enough.

Put another way, solving backwards, we can arrive at what we need in a TIPS ladder when retirement starts and remove all risk. Accumulating enough to make it happen is where we must take risk.

Question, if somebody is going to hold bonds as part of their risk portfolio, is it wrong to suggest they start chunking away TIPS?
Yes, all of this is right. It really says that you can't escape historical risk, meaning that you have to deal with what you have at the time you have it. In any case the expense of a TIPS ladder is known up front, so you have a low risk option. At the same time the usual 4% SWR for risky investments is also an acknowledgement that you might have started at a bad time. The problem is that you don't know what kind of time it is until it is too late. Generally it is expensive to reduce risk.

As far as TIPS per se, I think it is credible in general to just invest all the fixed income in TIPS and let the chips fall where they may. It might be for some that is a step too far, so one can moderate a bit. All of this makes some assumptions about the total investment situation. I don't think we are talking about someone who owns no stocks. There is a lot more leeway when there is more diversity in what is held.
Post Reply