TIPS -- "When the Numbers Lie"

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dcabler
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Re: TIPS -- "When the Numbers Lie"

Post by dcabler »

Angst wrote: Sat Sep 18, 2021 11:28 am
dcabler wrote: Sat Sep 18, 2021 4:56 am This is why I follow #cruncher's thread where he regularly calculates real yield and duration of the major TIPs indexes that funds track. Nice spreadsheet that, if you're into spreadsheets, is easy to modify to allow you to dump the actual current holdings of your favorite fund into it.

viewtopic.php?f=10&t=104845&start=100

cheers.
Yes, really anyone comparing TIPS funds, or comparing them to nominal bond funds in terms of YTM, is almost obligated to consider #Cruncher's thread, and you don't need to actually use his spreadsheets. From its first post, note the following funds associations with their respective indexes:
#Cruncher wrote: Fri Oct 26, 2012 8:53 pm[Snip]...
The three main statistics to help in making this decision are, in my opinion, average Real Yield-to-Maturity (YTM), average Real Duration, and Expense Ratio. Unfortunately TIPS funds don't always calculate the first two or do so inconsistently.

[Snip]...
Here are the TIPS ETFs I'm aware of that fit into these four maturity categories. Since they are index funds all of the ones in the same category will have pretty much the same average real YTM and duration as shown in the table above.
0 - 5 Years: iShares STIP, Vanguard VTIP (2)
1 - 5 Years: PIMCO STPZ
1+ Years: SPDR IPE, Schwab SCHP, iShares TIP, PIMCO TIPZ
15+ Years: PIMCO LTPZ
Also Note: Although Vanguard's VAIPX TIPS fund is not technically an index fund, it's reasonable to use the "1+ Years" index for comparison purposes.

To find #Cruncher's latest YTM and Duration calculations for these different indexes (for their associated funds), you need to navigate to the latest page and latest post within the thread. The most recent post I see that #Cruncher has done is dated June 30, 2021, including a few edits within it as recently as yesterday, 9/17: https://www.bogleheads.org/forum/viewtopic.php?p=6094640#p6094640

Within that post you'll find the all-important YTM and Duration numbers, which I believe are current thru 6-30-2021:

Code: Select all

  #     Real       Avg  - Real Duration -   - Fall if Rates Rise -
TIPS     YTM      Life  Macaulay Modified     1%       2%       3%       Index
----    -----     ----  -------- --------   -----    -----    -----   ------------
  19   (2.40%)    2.83     2.81    2.84%    2.78%    5.45%    8.02%   0 - 5 Years
  16   (2.23%)    3.13     3.10    3.13%    3.07%    6.01%    8.84%   1 - 5 Years
  31   (1.77%)    5.01     4.89    4.93%    4.77%    9.24%   13.43%   1 - 10 Years
  44   (1.47%)    8.70     8.18    8.21%    7.62%   14.22%   19.97%   1+ Years
  12   (0.28%)   23.30    21.18   21.20%   18.90%   33.89%   45.80%   15+ Years
Correct - you don't have to use his spreadsheet as he regularly posts this info in the thread. Didn't mean to imply otherwise, since it's pretty obvious once somebody goes to the thread. I, on the other hand, actually like spreadsheets and prefer to dump the actual holdings of my funds into it, which I do once per quarter. Naturally the results are similar, but not always exactly the same since at any given point in time, funds won't necessarily hold have exactly the same bonds as its index in exactly the same proportions. Biggest issue here is that some fund companies have up to a quarter lag regarding when they report their holdings. Others have the data available daily and already downloadable in convenient spreadsheet form.

Besides, some day #cruncher may choose to no longer provide this service and there may be no other BH'er willing to pick it up. Of course the right answer is for the fund companies to give this info directly or for the indexes to provide it easily.
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Re: TIPS -- "When the Numbers Lie"

Post by burritoLover »

So the point of this thread is that one metric of an investment is confusing, you simply stop investing in it and call that simplifying? Seems like with a little research you could have overcome your confusion. Although nothing is a perfect hedge for unexpected inflation, there's nothing that is going to be more reliable in that respect than TIPS.
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Re: TIPS -- "When the Numbers Lie"

Post by Angst »

dcabler wrote: Mon Sep 20, 2021 5:58 am
Angst wrote: Sat Sep 18, 2021 11:28 am [Snip] ...
Correct - you don't have to use his spreadsheet as he regularly posts this info in the thread. Didn't mean to imply otherwise, since it's pretty obvious once somebody goes to the thread. I, on the other hand, actually like spreadsheets and prefer to dump the actual holdings of my funds into it, which I do once per quarter. Naturally the results are similar, but not always exactly the same since at any given point in time, funds won't necessarily hold have exactly the same bonds as its index in exactly the same proportions. Biggest issue here is that some fund companies have up to a quarter lag regarding when they report their holdings. Others have the data available daily and already downloadable in convenient spreadsheet form.

Besides, some day #cruncher may choose to no longer provide this service and there may be no other BH'er willing to pick it up. Of course the right answer is for the fund companies to give this info directly or for the indexes to provide it easily.
:thumbsup Totally understood - my post was simply for the benefit of the many spreadsheet-phobes out there. As easy as #Cruncher's thread alone is to use, I think there are still some readers intimidated by it, or at least who don't quickly appreciate its usefulness.
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

burritoLover wrote: Mon Sep 20, 2021 8:02 am So the point of this thread is that one metric of an investment is confusing, you simply stop investing in it and call that simplifying?
Pretty much.

If the issue is reducing the number of funds one owns, one could very plausibly just move from a TBM fund to a TIPS fund, protecting one's fixed income holdings from unexpected inflation for arguably no cost at all. In fact, that would seem like a downright good move to me.
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Re: TIPS -- "When the Numbers Lie"

Post by Ramjet »

willthrill81 wrote: Mon Sep 20, 2021 9:25 am
burritoLover wrote: Mon Sep 20, 2021 8:02 am So the point of this thread is that one metric of an investment is confusing, you simply stop investing in it and call that simplifying?
Pretty much.

If the issue is reducing the number of funds one owns, one could very plausibly just move from a TBM fund to a TIPS fund, protecting one's fixed income holdings from unexpected inflation for arguably no cost at all. In fact, that would seem like a downright good move to me.
Agree. Don't know why that portfolio isn't more popular on this forum. Nominal bonds are more uncertain, I thought Bogleheads didn't have a crystal ball
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

Ramjet wrote: Mon Sep 20, 2021 9:46 am
willthrill81 wrote: Mon Sep 20, 2021 9:25 am
burritoLover wrote: Mon Sep 20, 2021 8:02 am So the point of this thread is that one metric of an investment is confusing, you simply stop investing in it and call that simplifying?
Pretty much.

If the issue is reducing the number of funds one owns, one could very plausibly just move from a TBM fund to a TIPS fund, protecting one's fixed income holdings from unexpected inflation for arguably no cost at all. In fact, that would seem like a downright good move to me.
Agree. Don't know why that portfolio isn't more popular on this forum. Nominal bonds are more uncertain, I thought Bogleheads didn't have a crystal ball
Making portfolio changes of that perceived magnitude is very difficult for many BHs, who have been trained to never deviate from their originally chosen plan whatsoever. Also, I think that TIPS' yield being negative is a hard pill for many to swallow; they're holding out hope that TBM will somehow eek out a positive real return, despite the simple math indicating that to be a very unlikely possibility going forward for a while.
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Re: TIPS -- "When the Numbers Lie"

Post by dbr »

Ramjet wrote: Mon Sep 20, 2021 9:46 am
willthrill81 wrote: Mon Sep 20, 2021 9:25 am
burritoLover wrote: Mon Sep 20, 2021 8:02 am So the point of this thread is that one metric of an investment is confusing, you simply stop investing in it and call that simplifying?
Pretty much.

If the issue is reducing the number of funds one owns, one could very plausibly just move from a TBM fund to a TIPS fund, protecting one's fixed income holdings from unexpected inflation for arguably no cost at all. In fact, that would seem like a downright good move to me.
Agree. Don't know why that portfolio isn't more popular on this forum. Nominal bonds are more uncertain, I thought Bogleheads didn't have a crystal ball
I agree that the basic argument would suggest just holding all TIPS and going away. I hold half TIPS and half Treasuries. I guess the hang up at being all TIPS is that it just doesn't feel right to have a large part of one's whole portfolio in one narrow corner of the market, and TIPS have sometimes shown some short term liquidity issues.

Maybe someone can suggest a good reason not to hold all one's bonds in TIPS. Should I put it all in VAIPX? The duration and default risk are right for me.
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

dbr wrote: Mon Sep 20, 2021 5:46 pm
Ramjet wrote: Mon Sep 20, 2021 9:46 am
willthrill81 wrote: Mon Sep 20, 2021 9:25 am
burritoLover wrote: Mon Sep 20, 2021 8:02 am So the point of this thread is that one metric of an investment is confusing, you simply stop investing in it and call that simplifying?
Pretty much.

If the issue is reducing the number of funds one owns, one could very plausibly just move from a TBM fund to a TIPS fund, protecting one's fixed income holdings from unexpected inflation for arguably no cost at all. In fact, that would seem like a downright good move to me.
Agree. Don't know why that portfolio isn't more popular on this forum. Nominal bonds are more uncertain, I thought Bogleheads didn't have a crystal ball
I agree that the basic argument would suggest just holding all TIPS and going away. I hold half TIPS and half Treasuries. I guess the hang up at being all TIPS is that it just doesn't feel right to have a large part of one's whole portfolio in one narrow corner of the market, and TIPS have sometimes shown some short term liquidity issues.
I don't see why the 'narrow corner of the market' issue is relevant as TIPS have no credit risk. And I'm not sure if funds needed in the short-term should be intermediate- or long-term TIPS anyway.
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Re: TIPS -- "When the Numbers Lie"

Post by dbr »

willthrill81 wrote: Mon Sep 20, 2021 5:49 pm
dbr wrote: Mon Sep 20, 2021 5:46 pm
Ramjet wrote: Mon Sep 20, 2021 9:46 am
willthrill81 wrote: Mon Sep 20, 2021 9:25 am
burritoLover wrote: Mon Sep 20, 2021 8:02 am So the point of this thread is that one metric of an investment is confusing, you simply stop investing in it and call that simplifying?
Pretty much.

If the issue is reducing the number of funds one owns, one could very plausibly just move from a TBM fund to a TIPS fund, protecting one's fixed income holdings from unexpected inflation for arguably no cost at all. In fact, that would seem like a downright good move to me.
Agree. Don't know why that portfolio isn't more popular on this forum. Nominal bonds are more uncertain, I thought Bogleheads didn't have a crystal ball
I agree that the basic argument would suggest just holding all TIPS and going away. I hold half TIPS and half Treasuries. I guess the hang up at being all TIPS is that it just doesn't feel right to have a large part of one's whole portfolio in one narrow corner of the market, and TIPS have sometimes shown some short term liquidity issues.
I don't see a 'narrow corner of the market' is relevant as TIPS have no credit risk. And I'm not sure if funds needed in the short-term should be intermediate- or long-term TIPS anyway.
I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

dbr wrote: Mon Sep 20, 2021 5:52 pm
willthrill81 wrote: Mon Sep 20, 2021 5:49 pm
dbr wrote: Mon Sep 20, 2021 5:46 pm
Ramjet wrote: Mon Sep 20, 2021 9:46 am
willthrill81 wrote: Mon Sep 20, 2021 9:25 am

Pretty much.

If the issue is reducing the number of funds one owns, one could very plausibly just move from a TBM fund to a TIPS fund, protecting one's fixed income holdings from unexpected inflation for arguably no cost at all. In fact, that would seem like a downright good move to me.
Agree. Don't know why that portfolio isn't more popular on this forum. Nominal bonds are more uncertain, I thought Bogleheads didn't have a crystal ball
I agree that the basic argument would suggest just holding all TIPS and going away. I hold half TIPS and half Treasuries. I guess the hang up at being all TIPS is that it just doesn't feel right to have a large part of one's whole portfolio in one narrow corner of the market, and TIPS have sometimes shown some short term liquidity issues.
I don't see a 'narrow corner of the market' is relevant as TIPS have no credit risk. And I'm not sure if funds needed in the short-term should be intermediate- or long-term TIPS anyway.
I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
I'd be one of those people. Duration matching, if done correctly, reduces interest rate risk as much as possible. Far too many here are concerned with short-term volatility in their fixed income.
Last edited by willthrill81 on Tue Sep 21, 2021 9:15 am, edited 1 time in total.
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Re: TIPS -- "When the Numbers Lie"

Post by grabiner »

dbr wrote: Mon Sep 20, 2021 5:52 pm I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
Unless you have a long-term fixed-dollar liability, such as a 30-year mortgage, long-term Treasuries are likely not a good deal because of the inflation risk. You are not adequately rewarded for taking this risk, because pension funds and insurance companies with long-term fixed-dollar liabilities reduce their risk with long-term bonds.

Long-term TIPS are great for risk-averse long-term investors, because they are the least risky investments for that purpose. If you are 20 years from retirement, you can buy TIPS maturing in 20-30 years and lock in purchasing power for the first ten years of retirement. The prices will be volatile along the way, but you care about the value at maturity.
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Re: TIPS -- "When the Numbers Lie"

Post by 000 »

dbr wrote: Mon Sep 20, 2021 5:46 pm I agree that the basic argument would suggest just holding all TIPS and going away. I hold half TIPS and half Treasuries. I guess the hang up at being all TIPS is that it just doesn't feel right to have a large part of one's whole portfolio in one narrow corner of the market, and TIPS have sometimes shown some short term liquidity issues.

Maybe someone can suggest a good reason not to hold all one's bonds in TIPS. Should I put it all in VAIPX? The duration and default risk are right for me.
What about unexpected deflation? TIPS are priced to expectations.
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Re: TIPS -- "When the Numbers Lie"

Post by 000 »

Echoing other posters I don't think supposedly confusingly stated SEC yields on TIPS funds are a legitimate reason at all to avoid this asset class.

Investors following The Bogleheads Way shouldn't even be using current yields to make asset allocation decisions anyway.
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Re: TIPS -- "When the Numbers Lie"

Post by absolute zero »

willthrill81 wrote: Sat Sep 18, 2021 10:40 am
David Althaus wrote: Sat Sep 18, 2021 10:32 am It is reassuring to note other people seem just as baffled by TIPS as me. Bogleheads (I think) are big believers in simplicity, mean reversion, and that popularity too often results in less than stellar outcomes. TIPS are discussed about every day. Who doesn't know they are purchasing inflation protection (often at a high premium), are we really sure there's going to be a lot of it, and are we willing to make such a big bet to have meaningful impact (we hope positive) on the portfolio? Is it possible they are just another sector bet?
Why do you think that TIPS' inflation protection is 'often at a high premium'? Right now at least, the breakeven inflation rate on 10 year TIPS is only 2.33% (i.e., inflation at that level would produce identical real returns for both TIPS and nominal Treasuries).
I think there’s a (in my opinion) convincing theoretical reason to expect that TIPS are priced such that they have a slightly lower expected real return than nominal treasuries. Most people have future obligations that more closely resemble real ones (as opposed to future nominal obligations). So all else equal, for most people TIPS would make more sense (you are making this argument yourself, and I agree with you).

In an efficient market, there would have to be some sort of expected premium of nominal over inflation protected bonds. If not, who would buy nominal bonds??? (Beyond the few edge cases that grabiner likes to point out eg pensions).

The problem is that there’s no way, to my knowledge, of measuring that expected premium. All we can see is the breakeven inflation rate. You cited 2.33%. Maybe the market expects 1.83% inflation and there is a whopping 50 bps premium that’s priced in. Or maybe the market expects 2.30% inflation and there is a puny 3 bps premium. Who knows.
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

absolute zero wrote: Mon Sep 20, 2021 10:34 pm The problem is that there’s no way, to my knowledge, of measuring that expected premium. All we can see is the breakeven inflation rate. You cited 2.33%. Maybe the market expects 1.83% inflation and there is a whopping 50 bps premium that’s priced in. Or maybe the market expects 2.30% inflation and there is a puny 3 bps premium. Who knows.
The issue you raise is certainly valid, but there are other means of measuring inflation expectations than comparing TIPS and nominal bond yields to one another. For instance, as of last month, the Federal Reserve Bank of Philadelphia panel of 36 professional forecasters were predicting 'headline inflation' of 2.44% over the next 10 years. If that is accurate, then TIPS have a higher expected real return than nominal Treasuries.
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Re: TIPS -- "When the Numbers Lie"

Post by dcabler »

willthrill81 wrote: Mon Sep 20, 2021 11:28 pm
absolute zero wrote: Mon Sep 20, 2021 10:34 pm The problem is that there’s no way, to my knowledge, of measuring that expected premium. All we can see is the breakeven inflation rate. You cited 2.33%. Maybe the market expects 1.83% inflation and there is a whopping 50 bps premium that’s priced in. Or maybe the market expects 2.30% inflation and there is a puny 3 bps premium. Who knows.
The issue you raise is certainly valid, but there are other means of measuring inflation expectations than comparing TIPS and nominal bond yields to one another. For instance, as of last month, the Federal Reserve Bank of Philadelphia panel of 36 professional forecasters were predicting 'headline inflation' of 2.44% over the next 10 years. If that is accurate, then TIPS have a higher expected real return than nominal Treasuries.
Premia and expected inflation are also estimated on a monthly basis by the Cleveland FED (with a downloadable spreadsheet with additional info). https://www.clevelandfed.org/our-resear ... tions.aspx

Cheers
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Re: TIPS -- "When the Numbers Lie"

Post by grabiner »

dcabler wrote: Tue Sep 21, 2021 6:52 am
willthrill81 wrote: Mon Sep 20, 2021 11:28 pm
absolute zero wrote: Mon Sep 20, 2021 10:34 pm The problem is that there’s no way, to my knowledge, of measuring that expected premium. All we can see is the breakeven inflation rate. You cited 2.33%. Maybe the market expects 1.83% inflation and there is a whopping 50 bps premium that’s priced in. Or maybe the market expects 2.30% inflation and there is a puny 3 bps premium. Who knows.
The issue you raise is certainly valid, but there are other means of measuring inflation expectations than comparing TIPS and nominal bond yields to one another. For instance, as of last month, the Federal Reserve Bank of Philadelphia panel of 36 professional forecasters were predicting 'headline inflation' of 2.44% over the next 10 years. If that is accurate, then TIPS have a higher expected real return than nominal Treasuries.
Premia and expected inflation are also estimated on a monthly basis by the Cleveland FED (with a downloadable spreadsheet with additional info). https://www.clevelandfed.org/our-resear ... tions.aspx

Cheers
This model estimates that the ten-year inflation risk premium is a relatively consistent 0.4%; that is, a ten-year TIPS should have an expected return 0.4% less than a ten-year Treasury. (This estimate is significantly off only twice, in April 2019 and March 2020. I don't know what happened in 2019; in March 2020, market prices were unreliable).

And the real term risk premium is also a consistent 1.2%; that is the expected return of a ten-year TIPS minus the return of a short-term TIPS. This is not the difference in yields, but what the difference in yields would be if investors did not expect rates to change. If the yield curve is steeper than indicated by the term risk premium, investors must expect rates to rise, so that the difference in expected returns for short-term and long-term bonds is less than the yield difference.

The market doesn't always agree with the models. Currently, the model based on expected inflation and risk premiums observed elsewhere says that ten-year TIPS should yield near zero; they actually yield about -1%. The model was most off in November 2008, when the flight to safety during the market crash caused nominal Treasury yields to fall, and inflation expectations as measured by the market also fell; TIPS yielded 2% more than predicted. It also suggests that TIPS were underpriced when they first came out, with yields of 3-4% in 1999-2003 that the model said should be 2-3%.
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Re: TIPS -- "When the Numbers Lie"

Post by hudson »

willthrill81 wrote: Mon Sep 20, 2021 7:02 pm
dbr wrote: Mon Sep 20, 2021 5:52 pm
willthrill81 wrote: Mon Sep 20, 2021 5:49 pm
dbr wrote: Mon Sep 20, 2021 5:46 pm
Ramjet wrote: Mon Sep 20, 2021 9:46 am

Agree. Don't know why that portfolio isn't more popular on this forum. Nominal bonds are more uncertain, I thought Bogleheads didn't have a crystal ball
I agree that the basic argument would suggest just holding all TIPS and going away. I hold half TIPS and half Treasuries. I guess the hang up at being all TIPS is that it just doesn't feel right to have a large part of one's whole portfolio in one narrow corner of the market, and TIPS have sometimes shown some short term liquidity issues.
I don't see a 'narrow corner of the market' is relevant as TIPS have no credit risk. And I'm not sure if funds needed in the short-term should be intermediate- or long-term TIPS anyway.
I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
I'd be one of those people. Duration matching, if done correctly, reduces interest rate risk as possible. Far too many here are concerned with short-term volatility in their fixed income.
I vote for duration matching with TIPS.
Best: non-rolling TIPS ladder
Almost as good: Duration matched TIPS funds or ETFs like SCHP, VAIPX, or LTPZ.

Almost Off the subject: SEC Yield is hypothetical; I always look at the SEC Yield, but I realize that the SEC Yield isn't the payout (The payout is never published; you have to figure it yourself.)
SEC yield is worthwhile....but one always needs to check into the other yields.
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Re: TIPS -- "When the Numbers Lie"

Post by ScubaHogg »

willthrill81 wrote: Mon Sep 20, 2021 11:28 pm
absolute zero wrote: Mon Sep 20, 2021 10:34 pm The problem is that there’s no way, to my knowledge, of measuring that expected premium. All we can see is the breakeven inflation rate. You cited 2.33%. Maybe the market expects 1.83% inflation and there is a whopping 50 bps premium that’s priced in. Or maybe the market expects 2.30% inflation and there is a puny 3 bps premium. Who knows.
The issue you raise is certainly valid, but there are other means of measuring inflation expectations than comparing TIPS and nominal bond yields to one another. For instance, as of last month, the Federal Reserve Bank of Philadelphia panel of 36 professional forecasters were predicting 'headline inflation' of 2.44% over the next 10 years. If that is accurate, then TIPS have a higher expected real return than nominal Treasuries.
If an economic “professional forecaster” isn’t an oxymoron I don’t know what is
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Re: TIPS -- "When the Numbers Lie"

Post by hudson »

grabiner wrote: Mon Sep 20, 2021 7:58 pm
dbr wrote: Mon Sep 20, 2021 5:52 pm I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
Unless you have a long-term fixed-dollar liability, such as a 30-year mortgage, long-term Treasuries are likely not a good deal because of the inflation risk. You are not adequately rewarded for taking this risk, because pension funds and insurance companies with long-term fixed-dollar liabilities reduce their risk with long-term bonds.

Long-term TIPS are great for risk-averse long-term investors, because they are the least risky investments for that purpose. If you are 20 years from retirement, you can buy TIPS maturing in 20-30 years and lock in purchasing power for the first ten years of retirement. The prices will be volatile along the way, but you care about the value at maturity.
I agree with the bolded comments above about TIPS. Regular long treasuries would give me heartburn.
What else can do what long TIPS can do?
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Re: TIPS -- "When the Numbers Lie"

Post by Ben Mathew »

nisiprius wrote: Fri Sep 17, 2021 11:05 am People think that a TIPS has some mysterious inflation bet in it. But if you think in real dollars, which is what I think we should be doing, it is just the opposite. In real dollars, it is TIPS that are simple, and nominal bonds that have the peculiar extra inflation bet in them.
#Cruncher wrote: Sun Sep 19, 2021 5:55 am We don't feel the need to add in a past change in the USD:EUR currency conversion to get a USD yield for the bund. Why should we feel the need to add in a nominal$:constant$ conversion to get a nominal$ yield for the TIPS?
Well said.

Once we realize that real dollars is what matters, it's the nominal yields of nominal bonds that is opaque and needs adjusting and estimating using an unknown future inflation expectation.

The puzzle discussed in economics classes is why aren't all contracts written in inflation adjusted terms? Why make a long term contract subject to an unknown future inflation rate? It's introducing a risk that doesn't need to exist. Writing contracts in real dollars reduces risk for both parties. The reason that's not more popular seems to be money illusion. People anchor to nominal dollars. That's fine for day to day transactions, but a problem when dealing with a 30 year bond.
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Re: TIPS -- "When the Numbers Lie"

Post by dbr »

Ben Mathew wrote: Tue Sep 21, 2021 10:28 am
nisiprius wrote: Fri Sep 17, 2021 11:05 am People think that a TIPS has some mysterious inflation bet in it. But if you think in real dollars, which is what I think we should be doing, it is just the opposite. In real dollars, it is TIPS that are simple, and nominal bonds that have the peculiar extra inflation bet in them.
#Cruncher wrote: Sun Sep 19, 2021 5:55 am We don't feel the need to add in a past change in the USD:EUR currency conversion to get a USD yield for the bund. Why should we feel the need to add in a nominal$:constant$ conversion to get a nominal$ yield for the TIPS?
Well said.

Once we realize that real dollars is what matters, it's the nominal yields of nominal bonds that is opaque and needs adjusting and estimating using an unknown future inflation expectation.

The puzzle discussed in economics classes is why aren't all contracts written in inflation adjusted terms? Why make a long term contract subject to an unknown future inflation rate? It's introducing a risk that doesn't need to exist. Writing contracts in real dollars reduces risk for both parties. The reason that's not more popular seems to be money illusion. People anchor to nominal dollars. That's fine for day to day transactions, but a problem when dealing with a 30 year bond.
I suppose there can be disputes regarding what the number is for inflation. People certainly dispute that in other conexts.
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Re: TIPS -- "When the Numbers Lie"

Post by Ben Mathew »

dbr wrote: Tue Sep 21, 2021 10:30 am
Ben Mathew wrote: Tue Sep 21, 2021 10:28 am
nisiprius wrote: Fri Sep 17, 2021 11:05 am People think that a TIPS has some mysterious inflation bet in it. But if you think in real dollars, which is what I think we should be doing, it is just the opposite. In real dollars, it is TIPS that are simple, and nominal bonds that have the peculiar extra inflation bet in them.
#Cruncher wrote: Sun Sep 19, 2021 5:55 am We don't feel the need to add in a past change in the USD:EUR currency conversion to get a USD yield for the bund. Why should we feel the need to add in a nominal$:constant$ conversion to get a nominal$ yield for the TIPS?
Well said.

Once we realize that real dollars is what matters, it's the nominal yields of nominal bonds that is opaque and needs adjusting and estimating using an unknown future inflation expectation.

The puzzle discussed in economics classes is why aren't all contracts written in inflation adjusted terms? Why make a long term contract subject to an unknown future inflation rate? It's introducing a risk that doesn't need to exist. Writing contracts in real dollars reduces risk for both parties. The reason that's not more popular seems to be money illusion. People anchor to nominal dollars. That's fine for day to day transactions, but a problem when dealing with a 30 year bond.
I suppose there can be disputes regarding what the number is for inflation. People certainly dispute that in other conexts.
Yes, you would need to agree beforehand on what price index will be used for inflation adjustments. Price indexes aren't perfect. But even a flawed ex-post price index is more likely to get closer to actual inflation over 30 years than a guess from 30 years ago.
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Re: TIPS -- "When the Numbers Lie"

Post by Ramjet »

hudson wrote: Tue Sep 21, 2021 8:49 am
willthrill81 wrote: Mon Sep 20, 2021 7:02 pm
dbr wrote: Mon Sep 20, 2021 5:52 pm
willthrill81 wrote: Mon Sep 20, 2021 5:49 pm
dbr wrote: Mon Sep 20, 2021 5:46 pm

I agree that the basic argument would suggest just holding all TIPS and going away. I hold half TIPS and half Treasuries. I guess the hang up at being all TIPS is that it just doesn't feel right to have a large part of one's whole portfolio in one narrow corner of the market, and TIPS have sometimes shown some short term liquidity issues.
I don't see a 'narrow corner of the market' is relevant as TIPS have no credit risk. And I'm not sure if funds needed in the short-term should be intermediate- or long-term TIPS anyway.
I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
I'd be one of those people. Duration matching, if done correctly, reduces interest rate risk as possible. Far too many here are concerned with short-term volatility in their fixed income.
I vote for duration matching with TIPS.
Best: non-rolling TIPS ladder
Almost as good: Duration matched TIPS funds or ETFs like SCHP, VAIPX, or LTPZ.

Almost Off the subject: SEC Yield is hypothetical; I always look at the SEC Yield, but I realize that the SEC Yield isn't the payout (The payout is never published; you have to figure it yourself.)
SEC yield is worthwhile....but one always needs to check into the other yields.
When duration matching TIPS you would want to use the reported "effective duration" metric and not something like "weighted average maturity", correct?
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Re: TIPS -- "When the Numbers Lie"

Post by Mel Lindauer »

Consider $25k per couple per year in I Bonds for the first level of inflation protection. They're easy to understand and can never go negative, as can TIPS, which means I Bonds also protect against deflation.
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Re: TIPS -- "When the Numbers Lie"

Post by Thesaints »

Ben Mathew wrote: Tue Sep 21, 2021 10:28 am The puzzle discussed in economics classes is why aren't all contracts written in inflation adjusted terms? Why make a long term contract subject to an unknown future inflation rate? It's introducing a risk that doesn't need to exist. Writing contracts in real dollars reduces risk for both parties. The reason that's not more popular seems to be money illusion. People anchor to nominal dollars. That's fine for day to day transactions, but a problem when dealing with a 30 year bond.
Long term contracts written in nominal dollars contain a large element of risk. Inflation measures are certainly approximate; the solution is not to ignore inflation, but to write short-dated contracts.
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Re: TIPS -- "When the Numbers Lie"

Post by dcabler »

Ramjet wrote: Tue Sep 21, 2021 11:17 am
hudson wrote: Tue Sep 21, 2021 8:49 am
willthrill81 wrote: Mon Sep 20, 2021 7:02 pm
dbr wrote: Mon Sep 20, 2021 5:52 pm
willthrill81 wrote: Mon Sep 20, 2021 5:49 pm

I don't see a 'narrow corner of the market' is relevant as TIPS have no credit risk. And I'm not sure if funds needed in the short-term should be intermediate- or long-term TIPS anyway.
I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
I'd be one of those people. Duration matching, if done correctly, reduces interest rate risk as possible. Far too many here are concerned with short-term volatility in their fixed income.
I vote for duration matching with TIPS.
Best: non-rolling TIPS ladder
Almost as good: Duration matched TIPS funds or ETFs like SCHP, VAIPX, or LTPZ.

Almost Off the subject: SEC Yield is hypothetical; I always look at the SEC Yield, but I realize that the SEC Yield isn't the payout (The payout is never published; you have to figure it yourself.)
SEC yield is worthwhile....but one always needs to check into the other yields.
When duration matching TIPS you would want to use the reported "effective duration" metric and not something like "weighted average maturity", correct?
Yes you want effective duration. But you might want to read #crunchers thread referenced upstream in this thread to understand what the funds actually report vs what he's calculating in his thread, depending on how accurate you want to be.

I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

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Re: TIPS -- "When the Numbers Lie"

Post by Elysium »

Thinking 100% of fixed income in TIPS may not have any major arguments against it. Given, unexpected inflation is the biggest risk to retiree or near retiree portfolios, a combination of some equities to keep the growth component and the rest in TIPS to protect principal against unexpected inflation should do a decent job, when not many other options look even more bleak. Can't say nominal bonds would do a better job given the rates are where they are. Perhaps a combination of nominal Treasury & TIPS is a good balance.
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Re: TIPS -- "When the Numbers Lie"

Post by GaryA505 »

Elysium wrote: Tue Sep 21, 2021 5:07 pm Thinking 100% of fixed income in TIPS may not have any major arguments against it. Given, unexpected inflation is the biggest risk to retiree or near retiree portfolios, a combination of some equities to keep the growth component and the rest in TIPS to protect principal against unexpected inflation should do a decent job, when not many other options look even more bleak. Can't say nominal bonds would do a better job given the rates are where they are. Perhaps a combination of nominal Treasury & TIPS is a good balance.
As some have suggested, perhaps 50% short TIPS and 50% long treasuries.
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Re: TIPS -- "When the Numbers Lie"

Post by willthrill81 »

GaryA505 wrote: Tue Sep 21, 2021 6:09 pm
Elysium wrote: Tue Sep 21, 2021 5:07 pm Thinking 100% of fixed income in TIPS may not have any major arguments against it. Given, unexpected inflation is the biggest risk to retiree or near retiree portfolios, a combination of some equities to keep the growth component and the rest in TIPS to protect principal against unexpected inflation should do a decent job, when not many other options look even more bleak. Can't say nominal bonds would do a better job given the rates are where they are. Perhaps a combination of nominal Treasury & TIPS is a good balance.
As some have suggested, perhaps 50% short TIPS and 50% long treasuries.
Long-term TIPS funds are available. Best of both worlds.
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Re: TIPS -- "When the Numbers Lie"

Post by 000 »

GaryA505 wrote: Tue Sep 21, 2021 6:09 pm
Elysium wrote: Tue Sep 21, 2021 5:07 pm Thinking 100% of fixed income in TIPS may not have any major arguments against it. Given, unexpected inflation is the biggest risk to retiree or near retiree portfolios, a combination of some equities to keep the growth component and the rest in TIPS to protect principal against unexpected inflation should do a decent job, when not many other options look even more bleak. Can't say nominal bonds would do a better job given the rates are where they are. Perhaps a combination of nominal Treasury & TIPS is a good balance.
As some have suggested, perhaps 50% short TIPS and 50% long treasuries.
I've thought about how to combine the two and it seems that using different maturities is making an inflation bet (a more modest kind though).

If inflation is higher than expected, you'd have rather had LT TIPS to lock in the inflation protection and STT to reinvest sooner at higher rates.

If inflation is lower than expected, you'd have rather had ST TIPS to reinvest at new CPI rate and LTT to lock in deflation protection.

So my conclusion is that if combining TIPS and Treasuries one should really consider the investment horizon, which may be the same or different for the two classes of bonds.
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Re: TIPS -- "When the Numbers Lie"

Post by Whakamole »

JBTX wrote: Sun Sep 19, 2021 6:49 pm
Northern Flicker wrote: Fri Sep 17, 2021 8:15 pm
nedsaid wrote: Fri Sep 17, 2021 5:06 pm
Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Bogleheads:

Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3

Best wishes
Taylor
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You have posted this several times and it is reassuring to those of us with substantial investments in U.S. Bond Index Funds. This post should be in the Wiki - it is that good. Thank you for taking the time to put this together.

That all being said, I do own TIPS funds and may buy more if it looks like we are headed for a higher sustained rate of inflation. So far Total Bond Market Index has been plenty well good enough but I like my TIPS funds. I want the protection from unexpected inflation.
It looks a bit better by starting in 1976. That was the only year from 1967-1981 (the inflationary period under discussion) when intermediate bonds had a positive real return for the year.

From 1967-1981 the real return of:

1. S&P500 was zero
2. Intermediate bonds was negative
3. Developed markets EAFE stocks was positive.

As long as you held a decent allocation to international stocks, you had a positive real return.

I always find that graphic Taylor posts very informative and somewhat reassuring. However the bigger message in there is a healthy allocation to international is a good inflation defense, and I would argue more than the 20% some advocate.

Of course the next inflationary period could be completely different.
Correct. I've found that table much more accurate if you look at real returns. A 2% return when inflation is 13% is a negative return no matter how you look at it.
Image

Bonds did very well when inflation dropped and you held onto bonds issued when interest rates were high. They did not do well when we were hit with inflation.
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Re: TIPS -- "When the Numbers Lie"

Post by Whakamole »

A more readable version of the table showing real returns:
YEAR----------REAL-BOND--REAL-S&P--REAL-EAFE
1976---------------10.7------18.9------(1.3)
1977--------------(3.7)----(13.9)-------10.8
1978--------------(7.6)-----(2.4)-------24.1
1979-------------(11.4)-------5.1------(2.4) Lowest bond return
1980--------------(9.8)------19.9-------12.9
1981--------------(2.6)----(13.8)-----(11.4)
1982---------------28.8------17.8------(4.1) Highest bond return
1983----------------4.6------18.8---------21
1984---------------11.3-------2.4------(0.4)
1985---------------18.3------27.9-------47.6
1986---------------14.1------17.6-------64.7 Highest international return
1987--------------(1.6)-------0.8-------20.2
1988----------------3.5------12.2-------23.4
1989----------------9.9------27.1--------6.8
1990----------------2.8-----(9.2)-----(28.9)
1991---------------12.9------27.4--------9.3
1992----------------4.5------4.7------(14.8)
1993------------------7-------7.4-------29.9
1994--------------(5.6)-----(1.4)--------4.9
1995-----------------16------35.1--------9.3 Highest S&P return
1996----------------0.3------19.7--------3.9
1997------------------8------31.7--------0.9
1998----------------7.1--------27-------17.5
1999--------------(3.5)------18.3-------25.6
2000----------------8.2----(12.5)-----(19.2)
2001----------------6.8----(13.5)-----(21.4)
2002----------------7.9----(24.5)-----(17.7)
2003----------------2.2------26.8-------38.5
2004------------------1-------7.6-------17.6
2005----------------(1)-------1.5-------12.4
2006----------------1.8------13.3-------24.3
2007----------------2.9-------1.4--------7.5
2008----------------5.1----(37.1)-----(43.2) Lowest S&P/international return
2009----------------3.2------23.8-------29.8
2010------------------5------13.6--------6.7
2011----------------4.7-----(0.9)-----(14.7)
2012----------------2.6------14.3-------16.2
2013--------------(3.5)------30.9-------21.8
2014----------------4.4------12.1------(6.1)
2015--------------(0.2)-------0.7------(1.1)
2016----------------0.5-------9.9------(0.6)
2017----------------1.4------19.7-------23.5
2018--------------(2.6)-----(6.9)-----(15.9)
2019----------------6.4------29.2-------20.4
2020----------------6.3--------17--------9.9
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Re: TIPS -- "When the Numbers Lie"

Post by secondopinion »

Whakamole wrote: Wed Sep 22, 2021 10:32 am
JBTX wrote: Sun Sep 19, 2021 6:49 pm
Northern Flicker wrote: Fri Sep 17, 2021 8:15 pm
nedsaid wrote: Fri Sep 17, 2021 5:06 pm
Taylor Larimore wrote: Fri Sep 17, 2021 11:25 am Bogleheads:

Another reason I discontinued our TIPS fund is that the three funds in The Three-Fund Portfolio worked quite well together during the high-inflation of the late 70s:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3

Best wishes
Taylor
You have posted this several times and it is reassuring to those of us with substantial investments in U.S. Bond Index Funds. This post should be in the Wiki - it is that good. Thank you for taking the time to put this together.

That all being said, I do own TIPS funds and may buy more if it looks like we are headed for a higher sustained rate of inflation. So far Total Bond Market Index has been plenty well good enough but I like my TIPS funds. I want the protection from unexpected inflation.
It looks a bit better by starting in 1976. That was the only year from 1967-1981 (the inflationary period under discussion) when intermediate bonds had a positive real return for the year.

From 1967-1981 the real return of:

1. S&P500 was zero
2. Intermediate bonds was negative
3. Developed markets EAFE stocks was positive.

As long as you held a decent allocation to international stocks, you had a positive real return.

I always find that graphic Taylor posts very informative and somewhat reassuring. However the bigger message in there is a healthy allocation to international is a good inflation defense, and I would argue more than the 20% some advocate.

Of course the next inflationary period could be completely different.
Correct. I've found that table much more accurate if you look at real returns. A 2% return when inflation is 13% is a negative return no matter how you look at it.
Image

Bonds did very well when inflation dropped and you held onto bonds issued when interest rates were high. They did not do well when we were hit with inflation.
Part of the international stocks doing well during inflation is that most international stock funds are not currency hedged. So that is one reason that might support not doing currency hedging.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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EFFECTIVE DURATION OR WEIGHTED AVERAGE MATURITY

Post by hudson »

dcabler wrote: Tue Sep 21, 2021 2:04 pm
Ramjet wrote: Tue Sep 21, 2021 11:17 am
hudson wrote: Tue Sep 21, 2021 8:49 am
willthrill81 wrote: Mon Sep 20, 2021 7:02 pm
dbr wrote: Mon Sep 20, 2021 5:52 pm

I tend to agree. As to duration, my comment is about me and the time line is long term. Some people say people like me ought to throw in long Treasuries or even long TIPS(?).
I'd be one of those people. Duration matching, if done correctly, reduces interest rate risk as possible. Far too many here are concerned with short-term volatility in their fixed income.
I vote for duration matching with TIPS.
Best: non-rolling TIPS ladder
Almost as good: Duration matched TIPS funds or ETFs like SCHP, VAIPX, or LTPZ.

Almost Off the subject: SEC Yield is hypothetical; I always look at the SEC Yield, but I realize that the SEC Yield isn't the payout (The payout is never published; you have to figure it yourself.)
SEC yield is worthwhile....but one always needs to check into the other yields.
When duration matching TIPS you would want to use the reported "effective duration" metric and not something like "weighted average maturity", correct?
Yes you want effective duration. But you might want to read #crunchers thread referenced upstream in this thread to understand what the funds actually report vs what he's calculating in his thread, depending on how accurate you want to be.

I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

Cheers
For Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX), it doesn't show "effective duration."
The Portfolio and Management tab (https://investor.vanguard.com/mutual-fu ... olio/vaipx)
shows:
Average Effective Maturity 8.2 years
Average Duration 7.8 years

PIMCO's15+ Year U.S. TIPS Index Exchange-Traded Fund, LTPZ's Portfolio Composition Tab (https://www.pimco.com/en-us/investments ... raded-fund)
shows:
Effective Duration 22.09 years
Effective Maturity 23.52 years

Schwab U.S. TIPS ETF's Fact Sheet, SCHP (https://www.schwabassetmanagement.com/r ... fact-sheet)
shows:
Weighted Average Maturity 8.0 years
Weighted Average Duration 7.5 years

Different brokerages use different terms. I'm guessing that the bolded expressions above are the ones to use.
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Re: EFFECTIVE DURATION OR WEIGHTED AVERAGE MATURITY

Post by Ramjet »

hudson wrote: Thu Sep 23, 2021 10:42 am
dcabler wrote: Tue Sep 21, 2021 2:04 pm
Ramjet wrote: Tue Sep 21, 2021 11:17 am
hudson wrote: Tue Sep 21, 2021 8:49 am
willthrill81 wrote: Mon Sep 20, 2021 7:02 pm

I'd be one of those people. Duration matching, if done correctly, reduces interest rate risk as possible. Far too many here are concerned with short-term volatility in their fixed income.
I vote for duration matching with TIPS.
Best: non-rolling TIPS ladder
Almost as good: Duration matched TIPS funds or ETFs like SCHP, VAIPX, or LTPZ.

Almost Off the subject: SEC Yield is hypothetical; I always look at the SEC Yield, but I realize that the SEC Yield isn't the payout (The payout is never published; you have to figure it yourself.)
SEC yield is worthwhile....but one always needs to check into the other yields.
When duration matching TIPS you would want to use the reported "effective duration" metric and not something like "weighted average maturity", correct?
Yes you want effective duration. But you might want to read #crunchers thread referenced upstream in this thread to understand what the funds actually report vs what he's calculating in his thread, depending on how accurate you want to be.

I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

Cheers
For Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX), it doesn't show "effective duration."
The Portfolio and Management tab (https://investor.vanguard.com/mutual-fu ... olio/vaipx)
shows:
Average Effective Maturity 8.2 years
Average Duration 7.8 years

PIMCO's15+ Year U.S. TIPS Index Exchange-Traded Fund, LTPZ's Portfolio Composition Tab (https://www.pimco.com/en-us/investments ... raded-fund)
shows:
Effective Duration 22.09 years
Effective Maturity 23.52 years

Schwab U.S. TIPS ETF's Fact Sheet, SCHP (https://www.schwabassetmanagement.com/r ... fact-sheet)
shows:
Weighted Average Maturity 8.0 years
Weighted Average Duration 7.5 years

Different brokerages use different terms. I'm guessing that the bolded expressions above are the ones to use.
Good call out and I would have to agree
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Re: EFFECTIVE DURATION OR WEIGHTED AVERAGE MATURITY

Post by dcabler »

Ramjet wrote: Thu Sep 23, 2021 11:10 am
hudson wrote: Thu Sep 23, 2021 10:42 am
dcabler wrote: Tue Sep 21, 2021 2:04 pm
Ramjet wrote: Tue Sep 21, 2021 11:17 am
hudson wrote: Tue Sep 21, 2021 8:49 am
I vote for duration matching with TIPS.
Best: non-rolling TIPS ladder
Almost as good: Duration matched TIPS funds or ETFs like SCHP, VAIPX, or LTPZ.

Almost Off the subject: SEC Yield is hypothetical; I always look at the SEC Yield, but I realize that the SEC Yield isn't the payout (The payout is never published; you have to figure it yourself.)
SEC yield is worthwhile....but one always needs to check into the other yields.
When duration matching TIPS you would want to use the reported "effective duration" metric and not something like "weighted average maturity", correct?
Yes you want effective duration. But you might want to read #crunchers thread referenced upstream in this thread to understand what the funds actually report vs what he's calculating in his thread, depending on how accurate you want to be.

I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

Cheers
For Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX), it doesn't show "effective duration."
The Portfolio and Management tab (https://investor.vanguard.com/mutual-fu ... olio/vaipx)
shows:
Average Effective Maturity 8.2 years
Average Duration 7.8 years

PIMCO's15+ Year U.S. TIPS Index Exchange-Traded Fund, LTPZ's Portfolio Composition Tab (https://www.pimco.com/en-us/investments ... raded-fund)
shows:
Effective Duration 22.09 years
Effective Maturity 23.52 years

Schwab U.S. TIPS ETF's Fact Sheet, SCHP (https://www.schwabassetmanagement.com/r ... fact-sheet)
shows:
Weighted Average Maturity 8.0 years
Weighted Average Duration 7.5 years

Different brokerages use different terms. I'm guessing that the bolded expressions above are the ones to use.
Good call out and I would have to agree
The problem is that fund providers don't always specify how they calculate their effective/average/weighted average duration and whether they use real rates or nominal rates to calculate their durations
#cruncher discusses this topic in this post: viewtopic.php?p=1521914#p1521914

If you're doing duration matching with 2 funds, you really want duration calculated using real rates for the most accuracy, though you could probably do OK if what the funds are reporting is "nominal" duration.

By the way, Morningstar uses only one term for duration of bond funds: Effective duration
But sometimes their data lags what the fund websites show, however.

Then there is FIPDX. I still can't figure out what they're doing as the duration they report is significantly lower than other funds that track the same index. I've had some back and forth emails with Fidelity before I gave up. They stated that their duration is lower because of some fixed income instruments they hold. Given that it was well under 1%, that made no sense. Besides the other funds hold similar amounts. However if you go to Fidelity's web page and click on propsectus then portfolio characteristics report, they list a spread duration that's close to what the other funds show for effective/average/weighted average duration. I gave up asking for a full explanation...

Cheers.
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Re: EFFECTIVE DURATION OR WEIGHTED AVERAGE MATURITY

Post by grabiner »

hudson wrote: Thu Sep 23, 2021 10:42 am For Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX), it doesn't show "effective duration."
The Portfolio and Management tab (https://investor.vanguard.com/mutual-fu ... olio/vaipx)
shows:
Average Effective Maturity 8.2 years
Average Duration 7.8 years

PIMCO's15+ Year U.S. TIPS Index Exchange-Traded Fund, LTPZ's Portfolio Composition Tab (https://www.pimco.com/en-us/investments ... raded-fund)
shows:
Effective Duration 22.09 years
Effective Maturity 23.52 years

Schwab U.S. TIPS ETF's Fact Sheet, SCHP (https://www.schwabassetmanagement.com/r ... fact-sheet)
shows:
Weighted Average Maturity 8.0 years
Weighted Average Duration 7.5 years

Different brokerages use different terms. I'm guessing that the bolded expressions above are the ones to use.
For TIPS funds, I don't think there is a difference between duration and effective duration (nor maturity). The difference is important for callable bonds.
Wiki David Grabiner
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dcabler: Using LTPZ, SCHP, and STIP to Reach Average Duration

Post by hudson »

dcabler wrote: Tue Sep 21, 2021 2:04 pm
I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

Cheers
dcabler's choices with Effective Durations:
PIMCO LTPZ = 22.09 Years
Schwab SCHP = 8.0 Years
iShares STIP = 2.68 Years

So every quarter, you are selling and buying.
I guess capital gains and losses even out?
Do you ever wish that you had gone with individual TIPS?
You hold enough to cover basic expenses in retirement?
What am I forgetting to ask?
Many thanks!

I'm considering moving in the same direction.
dcabler
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Re: dcabler: Using LTPZ, SCHP, and STIP to Reach Average Duration

Post by dcabler »

hudson wrote: Thu Sep 23, 2021 6:51 pm
dcabler wrote: Tue Sep 21, 2021 2:04 pm
I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

Cheers
dcabler's choices with Effective Durations:
Current Effective Durations. They do move around over time. Updating once per quarter to target that quarter's desired duration also takes this into account as well.
PIMCO LTPZ = 22.09 Years
Schwab SCHP = 8.0 Years
iShares STIP = 2.68 Years

So every quarter, you are selling and buying.
That's right
I guess capital gains and losses even out?
Neither. I hold these in a Rollover IRA
Do you ever wish that you had gone with individual TIPS?
Nope. This is pretty easy. Between the once per quarter buy/sell, I just let them reinvest whatever they throw off. Then once a quarter I can either take the current durations that #cruncher calculates or, more likely, I take his spreadsheet and download the current holdings and dollar amounts of the two funds I hold and run each of them through #cruncher's spreadsheet to calculate their current effective duration.
I then put the calculated durations into my spreadsheet, along with the dollar amount I hold in each fund, and that tells me how much of 1 fund to sell to buy the same amount of the other fund. If I take #cruncher's data directly the whole thing takes about 5 minutes then a couple of minutes to do the transaction. If I plug my current funds into my hacked version of his spreadsheet, it takes a little longer. Each quarter I tell myself I'm going to write a script to automate the process but I haven't yet.

You hold enough to cover basic expenses in retirement?
Yes. I do this + an Ibonds ladder and treat them as a supplement to SS. The 3 together will create a COLA'd income stream for 15 years, starting at age 70, which will cover my absolute minimum living expenses. The rest of my stock/bond portfolio is to make life actually worth living. :D This is me predicting what sorts of things might keep my future 70+ year old self from sleeping at night. Once that 15 years is done, if we're still going strong we'll consider a SPIA to help carry us the rest of the way.
What am I forgetting to ask?
How do you calculate what the effective duration needs to be each quarter? Bobcat2 first posted about this in this thread:
viewtopic.php?f=10&t=240325
Vineviz also posted about it in another thread with some more details and I believe there are several other people who have brought this up as well.

Many thanks!
No problem and good luck!
One final note. Absolutely nothing wrong with holding actual individual TIPs. One advantage is that there is no e/r to deal with. Many people like them. I have just chosen to go this path because it suits me.

I'm considering moving in the same direction.
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Re: dcabler: Using LTPZ, SCHP, and STIP to Reach Average Duration

Post by Angst »

dcabler wrote: Thu Sep 23, 2021 9:35 pm
hudson wrote: Thu Sep 23, 2021 6:51 pm
dcabler wrote: Tue Sep 21, 2021 2:04 pm
I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

Cheers
[Snip] ...

One final note. Absolutely nothing wrong with holding actual individual TIPs. One advantage is that there is no e/r to deal with. Many people like them. I have just chosen to go this path because it suits me.
Certainly, another advantage is that there is no duration to deal with! With a LMP of (non-rolling) TIPS (and I Bonds), the burden of managing duration evaporates. This is very nice.
hudson
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Re: TIPS -- "When the Numbers Lie"

Post by hudson »

dcabler,
Many thanks! I hope you didn't type all of that on an iPad or the like.
Extremely useful!
Bookmarked!
If and when I do a liability matching portfolio like yours, mine will also be mostly in tax advantaged.
Thanks also to bobcat2, #cruncher, and vineviz!
Last edited by hudson on Fri Sep 24, 2021 6:07 am, edited 1 time in total.
dcabler
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Re: dcabler: Using LTPZ, SCHP, and STIP to Reach Average Duration

Post by dcabler »

Angst wrote: Fri Sep 24, 2021 5:58 am
dcabler wrote: Thu Sep 23, 2021 9:35 pm
hudson wrote: Thu Sep 23, 2021 6:51 pm
dcabler wrote: Tue Sep 21, 2021 2:04 pm
I do this by the way and update the relative percentage of two funds I hold every quarter to achieve my desired overall effective duration. Right now I hold LTPZ and SCHP. Over time the duration I need will be shorter than SCHP. At that point the two funds will be SCHP and something like STIP. Once the duration I need drops below STIP's effective duration then it becomes problematic because there are no ultrashort TIPs funds today. Proshares had an ultrashort TIPs ETF for a little while but it closed. So it'll be something nominal like an ultrashort bond fund or CD or maybe something like that to mix with STIP. Some people just use LTPZ and STIP by the way. You can do that but you'll be dealing with LTPZ's higher e/r for a longer time. Unless of course somebody else finally opens up a competitive alternative to LTPZ or if they lower their e/r at some point.

Cheers
[Snip] ...

One final note. Absolutely nothing wrong with holding actual individual TIPs. One advantage is that there is no e/r to deal with. Many people like them. I have just chosen to go this path because it suits me.
Certainly, another advantage is that there is no duration to deal with! With a LMP of (non-rolling) TIPS (and I Bonds), the burden of managing duration evaporates. This is very nice.
Correct! And in my case, if I had to do it all over again, I would have started Ibonds much earlier than I did and would have foregone TIPs. I do plan, however, to continue to buy Ibonds and will reduce my TIPs load accordingly.
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Re: TIPS -- "When the Numbers Lie"

Post by HappyJack »

+1 decabler
I use VTIP and LTPZ duration matched for necessary expenses until age 92.
Almost all in 401K. (Currently spending down a small amount of LTPZ in taxable).
Each month I take out expenses from LTPZ and rebalance both.
First two years expenses are roughly 50% in VTIP and Stable Value fund to account for the years below the 2.7 duration on VTIP.
Using Grok's duration matching formula to find the balance.

This might not provide PERFECT duration matching, but it is pretty close. Also flexible. I only take out what I need. Can also supplement from equities if I choose. When LTPZ in taxable is exhausted, I will sell VTI in taxable and rebalance LTPZ and VTIP in tax deferred.

Its really not hard to adjust the duration and weighting of funds when you have Grok's formula. You do pay for the ER's. But you have flexibility.

All this per bobk, grok and vineviz. Find their threads for the specifics.
Just my two cents.
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