Trading Treasuries (nominal and TIPS)

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bpg1234
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

Kevin M wrote: Wed Aug 17, 2022 1:17 pm Bought 10 more of the 1/15/23 TIPS at 99.632 for a yield of 1.03%, seasonally adjusted 0.04% (positive!). Principal amount (not including accrued interest) was 12,711.75. Principal amount for my last purchase on 8/16 was 12,716.42, with real yield 0.71% and SA yield -0.26%. So at least the nominal return should be greater through Oct 1, as well as having a higher real yield.

Kevin
Kevin,
This is less than a 5 month time period so if inflation were to be reigned in further with additional CPI decreases as we saw in the latest report over this timeframe with net deflation then you could get back less than your $12,711.75 purchase (leaving out small coupon payments)?

If inflation were steady from here then you would get a similar amount to your purchase price back?

If inflation is positive from here then you would get more back in return?

Trying to understand the potentials of buying such a short-term TIPS at this time.

Thanks,
bpg
billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

I am puzzled about the 'seasonally adjusted' TIPS yields.

1) I see that there is a seasonal cycle in monthly inflation; therefore an anticipated cycle in future TIPS inflation index ratio adjustments.

2) The bidding of professional TIPS traders, who anticipate the seasonal cycle sets the TIPS prices/yields so there is a seasonal cycle in the quoted real yields.

The real yield quoted for TIPS is calculated without reference to the Inflation index ratios. Why do those yields need adjusting? I can see it would affect the break even analysis, but in that case you should be adjusting the real yield of nominal treasuries for the seasonal inflation cycle, no? But don't nominal treasuries incorporate anticipated inflation, including the well known seasonal cycle? The real yield of a TIPS is the real yield, no? One 'adjusts' the real TIPS yield to make rate comparisons, I get that, but what one is doing in that case is predicting the inflation index ratios and therefore the nominal yield to maturity of the TIPS. Aren't TIPS for real yield? It seems to be that if you believe in efficient markets, there should be no advantage to be gained.

Just checking my understanding (or lack thereof)
Thanks!
beebog
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Re: Trading Treasuries (nominal and TIPS)

Post by beebog »

Hopefully this is the right place to post this. I am a little confused about Treasury Bills. I am only looking for new offerings and always make sure I click on that tab. I am trying to buy at Fidelity and looking at the auction schedule, it looks like the 4 and 8 week bills get auctioned today. I logged in a couple time yesterday and once the day before, but the only ones I saw with maturity dates 4 and 8 weeks out were Reissued Offerings. I believe those were bills of longer duration because issue date was month ago. Those are different than the 4 and 8 week bills that are offered every week, right? The expected yield seemed lower than I expected which is when I noticed the RI in the attributes and then looked at the Issue date.

Sorry I can't give details, but there a none available currently except TIPS with 30 year maturity.

Have the tbills been selling out fast at Fidelity and I missed it? Or are these RI bills what I am supposed to be buying?

Thanks
MisterMister
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

beebog wrote: Thu Aug 18, 2022 9:31 am Hopefully this is the right place to post this. I am a little confused about Treasury Bills. I am only looking for new offerings and always make sure I click on that tab. I am trying to buy at Fidelity and looking at the auction schedule, it looks like the 4 and 8 week bills get auctioned today. I logged in a couple time yesterday and once the day before, but the only ones I saw with maturity dates 4 and 8 weeks out were Reissued Offerings. I believe those were bills of longer duration because issue date was month ago. Those are different than the 4 and 8 week bills that are offered every week, right? The expected yield seemed lower than I expected which is when I noticed the RI in the attributes and then looked at the Issue date.

Sorry I can't give details, but there a none available currently except TIPS with 30 year maturity.

Have the tbills been selling out fast at Fidelity and I missed it? Or are these RI bills what I am supposed to be buying?

Thanks
Don't worry about whether it's a reissue, the term and yield are what's important in your case. Yes the 4- and 8-week bonds auction today but it is too late to buy; yesterday would have been the last full day to do so, you had only a few hours or less today.

The next auction is for 13- and 26- week bonds. You'll be able to buy them this afternoon if you're interested.

Hope this helps.
beebog
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Re: Trading Treasuries (nominal and TIPS)

Post by beebog »

MisterMister wrote: Thu Aug 18, 2022 9:38 am Don't worry about whether it's a reissue, the term and yield are what's important in your case. Yes the 4- and 8-week bonds auction today but it is too late to buy; yesterday would have been the last full day to do so, you had only a few hours or less today.

The next auction is for 13- and 26- week bonds. You'll be able to buy them this afternoon if you're interested.

Hope this helps.
Thanks I will pick up 13 week instead. What I really want is a ladder of 13 weeks with autoroll anyway.

For the 4 and 8 I looked at, the yield seemed low though. Not super low, but when I googled what to expect for the 4 and 8 week tbill, fidelity was showing me a lower expected yield than the site I googled. Maybe that is because I don't really understand the whole zero coupon thing and the two websites were giving percentages for two different things and I misunderstood.

So do the normal 4 and 8 week often show up as RI? And 13/26 too? I thought maybe the regular ones issued weekly sold out and I was seeing what was left to buy.
MisterMister
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

beebog wrote: Thu Aug 18, 2022 9:50 am
MisterMister wrote: Thu Aug 18, 2022 9:38 am Don't worry about whether it's a reissue, the term and yield are what's important in your case. Yes the 4- and 8-week bonds auction today but it is too late to buy; yesterday would have been the last full day to do so, you had only a few hours or less today.

The next auction is for 13- and 26- week bonds. You'll be able to buy them this afternoon if you're interested.

Hope this helps.
Thanks I will pick up 13 week instead. What I really want is a ladder of 13 weeks with autoroll anyway.

For the 4 and 8 I looked at, the yield seemed low though. Not super low, but when I googled what to expect for the 4 and 8 week tbill, fidelity was showing me a lower expected yield than the site I googled. Maybe that is because I don't really understand the whole zero coupon thing and the two websites were giving percentages for two different things and I misunderstood.

So do the normal 4 and 8 week often show up as RI? And 13/26 too? I thought maybe the regular ones issued weekly sold out and I was seeing what was left to buy.
Not sure about the 13- 26. Reissue or not does not affect yields which are based on the auction. You will likely get a slightly better yield by buying at auction vs waiting and buying on the secondary market, though that's not guaranteed.

The down side is you can't be sure what your yield will be. I've bought recently and the yields at auction were slightly higher than what Fidelity reported as being expected for the yield; but it could go the other way, too.

I've bought both at auction and on the secondary market; I don't have a strong opinion about which is the better choice. Some here prefer the secondary market because they know exactly what their yield will be when they buy a nominal bond.
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

bpg1234 wrote: Wed Aug 17, 2022 2:48 pm
Kevin M wrote: Wed Aug 17, 2022 1:17 pm Bought 10 more of the 1/15/23 TIPS at 99.632 for a yield of 1.03%, seasonally adjusted 0.04% (positive!). Principal amount (not including accrued interest) was 12,711.75. Principal amount for my last purchase on 8/16 was 12,716.42, with real yield 0.71% and SA yield -0.26%. So at least the nominal return should be greater through Oct 1, as well as having a higher real yield.

Kevin
Kevin,
This is less than a 5 month time period so if inflation were to be reigned in further with additional CPI decreases as we saw in the latest report over this timeframe with net deflation then you could get back less than your $12,711.75 purchase (leaving out small coupon payments)?

If inflation were steady from here then you would get a similar amount to your purchase price back?

If inflation is positive from here then you would get more back in return?

Trying to understand the potentials of buying such a short-term TIPS at this time.

Thanks,
bpg
Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Thu Aug 18, 2022 7:56 am I am puzzled about the 'seasonally adjusted' TIPS yields.

1) I see that there is a seasonal cycle in monthly inflation; therefore an anticipated cycle in future TIPS inflation index ratio adjustments.

2) The bidding of professional TIPS traders, who anticipate the seasonal cycle sets the TIPS prices/yields so there is a seasonal cycle in the quoted real yields.

The real yield quoted for TIPS is calculated without reference to the Inflation index ratios. Why do those yields need adjusting? I can see it would affect the break even analysis, but in that case you should be adjusting the real yield of nominal treasuries for the seasonal inflation cycle, no? But don't nominal treasuries incorporate anticipated inflation, including the well known seasonal cycle? The real yield of a TIPS is the real yield, no? One 'adjusts' the real TIPS yield to make rate comparisons, I get that, but what one is doing in that case is predicting the inflation index ratios and therefore the nominal yield to maturity of the TIPS. Aren't TIPS for real yield? It seems to be that if you believe in efficient markets, there should be no advantage to be gained.

Just checking my understanding (or lack thereof)
Thanks!
First, if you want to discuss this further, perhaps we should move the discussion to the TIPS yield curve and seasonal adjustment update thread.

The question about the nominal yield curve is a good one--I'd never thought of it. However, the nominal Treasury yield curve does not show the cyclical sawtooth pattern that we see in shorter-term TIPS yields, so there does not appear to be any seasonality in nominal yields.

My view of the seasonal adjustment is that it factors in the expected nominal return for TIPS. If we know there will be lower inflation due to seasonal effects, then the expected nominal return will be lower than for a TIPS where the seasonality results in higher inflation, adjusted for maturity.

So yes, the real yield is the real yield, and that's what you'll earn in real terms. But if you can earn the same real return on two TIPS, but higher nominal return on one of them, I'd want the one with the higher nominal return. We've seen in discussions here how you could have a higher nominal return even though the real return is lower, which is something new to me.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Thu Aug 18, 2022 1:08 pm
billyt wrote: Thu Aug 18, 2022 7:56 am I am puzzled about the 'seasonally adjusted' TIPS yields.

1) I see that there is a seasonal cycle in monthly inflation; therefore an anticipated cycle in future TIPS inflation index ratio adjustments.

2) The bidding of professional TIPS traders, who anticipate the seasonal cycle sets the TIPS prices/yields so there is a seasonal cycle in the quoted real yields.

The real yield quoted for TIPS is calculated without reference to the Inflation index ratios. Why do those yields need adjusting? I can see it would affect the break even analysis, but in that case you should be adjusting the real yield of nominal treasuries for the seasonal inflation cycle, no? But don't nominal treasuries incorporate anticipated inflation, including the well known seasonal cycle? The real yield of a TIPS is the real yield, no? One 'adjusts' the real TIPS yield to make rate comparisons, I get that, but what one is doing in that case is predicting the inflation index ratios and therefore the nominal yield to maturity of the TIPS. Aren't TIPS for real yield? It seems to be that if you believe in efficient markets, there should be no advantage to be gained.

Just checking my understanding (or lack thereof)
Thanks!
First, if you want to discuss this further, perhaps we should move the discussion to the TIPS yield curve and seasonal adjustment update thread.

The question about the nominal yield curve is a good one--I'd never thought of it. However, the nominal Treasury yield curve does not show the cyclical sawtooth pattern that we see in shorter-term TIPS yields, so there does not appear to be any seasonality in nominal yields.

My view of the seasonal adjustment is that it factors in the expected nominal return for TIPS. If we know there will be lower inflation due to seasonal effects, then the expected nominal return will be lower than for a TIPS where the seasonality results in higher inflation, adjusted for maturity.

So yes, the real yield is the real yield, and that's what you'll earn in real terms. But if you can earn the same real return on two TIPS, but higher nominal return on one of them, I'd want the one with the higher nominal return. We've seen in discussions here how you could have a higher nominal return even though the real return is lower, which is something new to me.

Kevin
I responded there:
viewtopic.php?p=6830714#p6830714
billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Hi Kevin: I also responded in the other thread, although it is certainly germane to this one, as the 'adjustment' appears to be influencing your buying recommendations. I think it is enough to understand why there are seasonal yield differences, and accept that the market accurately reflects the present fair market value. Do we know more than the market?

Sincerely,
billyt
FactualFran
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Re: Trading Treasuries (nominal and TIPS)

Post by FactualFran »

beebog wrote: Thu Aug 18, 2022 9:31 am Hopefully this is the right place to post this. I am a little confused about Treasury Bills. I am only looking for new offerings and always make sure I click on that tab. I am trying to buy at Fidelity and looking at the auction schedule, it looks like the 4 and 8 week bills get auctioned today. I logged in a couple time yesterday and once the day before, but the only ones I saw with maturity dates 4 and 8 weeks out were Reissued Offerings. I believe those were bills of longer duration because issue date was month ago. Those are different than the 4 and 8 week bills that are offered every week, right? The expected yield seemed lower than I expected which is when I noticed the RI in the attributes and then looked at the Issue date.
That fact that an auction of T-Bills is marked a "Reissue Offering" is irrelevant. In an auction of 4-week T-Bills the Treasury sells more of the same security that was auctioned 4 weeks ago as 8-week T-Bills. The auction of those 8-week T-Bills could have been a "Reissue Offering" of previously auctioned 17-week Cash Management Bills.

If you are concerned about auction of T-Bills being a "Reissue Offering", then you should be concerned about auctions of 13-week T-Bills. Those auctions sell more of the same security that was previously auctioned as 26-week or 52-week T-Bills.
drzzzzz
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Re: Trading Treasuries (nominal and TIPS)

Post by drzzzzz »

Can someone explain the differences between the two different series that mature on the same date and have different coupons and inflation factors.
Why might I purchase one over the other? Do I just use highest yield to maturity to decide or is there something else I should focus on? Thanks

Cusip Description Coupon Maturity Date Price Bid Price Ask Yield Bid Ask Yield to Maturity Inflation Factor Adjusted Price Bid Adjusted Price Ask

="912810FR4" UNITED STATES TREAS BDS 2.37500% 01/15/2025 2.375 01/15/2025 104.367 104.539 0.539 0.468 1.5651 163.344791 163.61398
="912828H45" UNITED STATES TREAS NTS 0.25000% 01/15/2025 0.25 01/15/2025 99.394 99.545 0.504 0.441 1.24556 123.80119 123.98927
FactualFran
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Re: Trading Treasuries (nominal and TIPS)

Post by FactualFran »

drzzzzz wrote: Fri Aug 19, 2022 8:42 am Can someone explain the differences between the two different series that mature on the same date and have different coupons and inflation factors.
Why might I purchase one over the other? Do I just use highest yield to maturity to decide or is there something else I should focus on? Thanks

Cusip Description Coupon Maturity Date Price Bid Price Ask Yield Bid Ask Yield to Maturity Inflation Factor Adjusted Price Bid Adjusted Price Ask

="912810FR4" UNITED STATES TREAS BDS 2.37500% 01/15/2025 2.375 01/15/2025 104.367 104.539 0.539 0.468 1.5651 163.344791 163.61398
="912828H45" UNITED STATES TREAS NTS 0.25000% 01/15/2025 0.25 01/15/2025 99.394 99.545 0.504 0.441 1.24556 123.80119 123.98927
The one with a CUSIP of 912810FR4 was originally auctioned in Jul. 2004 with a 20-year 6-month term. The one with a CUSIP of 912828H45 was originally auctioned in Jan. 2015 with a 10-year term.

You might prefer one to the other for various reasons. The one with a higher coupon rate will make higher interest payments, which some might prefer. The one with a lower unadjusted price (99.545) is below par value and that discount will be received in the maturity value, which some might prefer.
silvergga
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Re: Trading Treasuries (nominal and TIPS)

Post by silvergga »

Kevin M wrote: Thu Aug 18, 2022 12:54 pm Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
Sorry, I am still trying to wrap my head around TIPs vs nominal treasuries.

Say we buy the 1/15/2023 TIPs and ~1/15/23 maturing nominal Treasury today 8/19/2022. "if there is net deflation of more than 0.56% between 10/1/22 to 1/15/23" - the net nominal return for the TIPs bond will be a loss when it matures on 1/15?

Whereas the nominal Treasury would have returned ~3% annualized (current YTD for ~6 month maturing nominal Treasuries as of 8/19/2022)?

I think my head is stuck at the TIPs returning 0% while the nominal Treasury returning 3%, if there is a net 0.56% deflation.

Is my understanding wrong?
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

silvergga wrote: Fri Aug 19, 2022 2:35 pm
Kevin M wrote: Thu Aug 18, 2022 12:54 pm Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
Sorry, I am still trying to wrap my head around TIPs vs nominal treasuries.

Say we buy the 1/15/2023 TIPs and ~1/15/23 maturing nominal Treasury today 8/19/2022. "if there is net deflation of more than 0.56% between 10/1/22 to 1/15/23" - the net nominal return for the TIPs bond will be a loss when it matures on 1/15?

Whereas the nominal Treasury would have returned ~3% annualized (current YTD for ~6 month maturing nominal Treasuries as of 8/19/2022)?

I think my head is stuck at the TIPs returning 0% while the nominal Treasury returning 3%, if there is a net 0.56% deflation.

Is my understanding wrong?
First, a forum member as PM'd me with an alternative calculation that indicates that the breakeven CPI change for nominal loss is closer to -1% than to -0.56%. I haven't had a chance to review those calculations in detail yet, but whatever the number is, the point is the same.

Why is your head stuck at a nominal loss for the TIPS and a positive nominal return for the nominal Treasury? How is that harder to understand than a real loss on a nominal Treasury and a real gain for a TIPS of same maturity?

Kevin
If I make a calculation error, #Cruncher probably will let me know.
asif408
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Re: Trading Treasuries (nominal and TIPS)

Post by asif408 »

Kevin M wrote: Thu Aug 18, 2022 12:54 pm Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
Interesting. So if an investor's primary concern is maintaining purchasing power of a certain amount of money for a future expense and no concern about the nominal return a TIPS would always be preferred over nominal Treasuries, assuming the yield is positive and I hold to maturity, is that correct? Because I could live with a potentially lower nominal return vs. a nominal Treasury for assurance that I will at least receive a positive real return and maintain purchasing power, which I am not guaranteed with using nominal Treasuries (I think?).
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

asif408 wrote: Fri Aug 19, 2022 3:04 pm
Kevin M wrote: Thu Aug 18, 2022 12:54 pm Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
Interesting. So if an investor's primary concern is maintaining purchasing power of a certain amount of money for a future expense and no concern about the nominal return a TIPS would always be preferred over nominal Treasuries, assuming the yield is positive and I hold to maturity, is that correct? Because I could live with a potentially lower nominal return vs. a nominal Treasury for assurance that I will at least receive a positive real return and maintain purchasing power, which I am not guaranteed with using nominal Treasuries (I think?).
I would go even further and say that if you want a guaranteed real return to match a known real liability (future expense in real dollars), TIPS are always preferred over nominal Treasuries, even if the real yield is negative. If the real yield is negative, the expected real return on a nominal Treasury of same maturity also is negative, but there is uncertainty as to what it actually will be. With the TIPS, there is little uncertainty in the real return.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
protagonist
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

Forgive me if I missed a previous post explaining this....but why is the yield on the 1/15/23 TIPS so high?
If it can be purchased at (an inflation adjusted) price of less than 100, I would think fear of deflation would not be a factor since one cannot lose principal upon maturity.
Is it that short term inflation expectations are so low that investors expect to be able to do better with other investments than 1.613% real?
silvergga
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Re: Trading Treasuries (nominal and TIPS)

Post by silvergga »

Kevin M wrote: Fri Aug 19, 2022 3:01 pm
silvergga wrote: Fri Aug 19, 2022 2:35 pm
Kevin M wrote: Thu Aug 18, 2022 12:54 pm Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
Sorry, I am still trying to wrap my head around TIPs vs nominal treasuries.

Say we buy the 1/15/2023 TIPs and ~1/15/23 maturing nominal Treasury today 8/19/2022. "if there is net deflation of more than 0.56% between 10/1/22 to 1/15/23" - the net nominal return for the TIPs bond will be a loss when it matures on 1/15?

Whereas the nominal Treasury would have returned ~3% annualized (current YTD for ~6 month maturing nominal Treasuries as of 8/19/2022)?

I think my head is stuck at the TIPs returning 0% while the nominal Treasury returning 3%, if there is a net 0.56% deflation.

Is my understanding wrong?
First, a forum member as PM'd me with an alternative calculation that indicates that the breakeven CPI change for nominal loss is closer to -1% than to -0.56%. I haven't had a chance to review those calculations in detail yet, but whatever the number is, the point is the same.

Why is your head stuck at a nominal loss for the TIPS and a positive nominal return for the nominal Treasury? How is that harder to understand than a real loss on a nominal Treasury and a real gain for a TIPS of same maturity?

Kevin
I guess for the TIPs case, we are getting protected for un-expected inflation between 10/1 and Jan 2023. If there's deflation we will get hit as well with a lower nominal return.

For nominal treasury, we are locked in for ~3% annualized to Jan 2023, but we are not protected for un-expected inflation (or deflation).

My trouble is possibly the newbie (or old granny) mentality that getting 3% from nominal is good - I didn't lose $. But without regard of inflation being 0% or 10%.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

protagonist wrote: Fri Aug 19, 2022 3:19 pm Forgive me if I missed a previous post explaining this....but why is the yield on the 1/15/23 TIPS so high?
If it can be purchased at (an inflation adjusted) price of less than 100, I would think fear of deflation would not be a factor since one cannot lose principal upon maturity.
Is it that short term inflation expectations are so low that investors expect to be able to do better with other investments than 1.613% real?
While it is not safe from deflation, the under 100 price is the unadjusted price. Each $1000 bond has about $1276 in accrued principle and is only guaranteed to pay at least $1000 at maturity.

But it does seem that low non-seasonally adjusted inflation (or deflation) is expected. WSJ shows a price of 99.13, so I think that means that today you would have paid $1264.90 (plus a few cents of accrued interest) for about $1276 in accrued principle had you paid that price. We already know that the reference CPI goes up by about 0.56% from now to Oct. 1. That means that the 1276 in accrued principle will grow to about $1283. If net future inflation is 0%, meaning the reference CPI for Jan. 15, 2023 is the same as it is for Oct. 1, then that TIPS will pay out at about $1283, plus a coupon of about 80 cents. So you get around $1284 from your ~$1265 investment, that's about 1.5% for about a 5 month investment, or around 3.6% annualized.

If all those figures and calculations are correct, that easily beats the nominal treasury rate of about 3.15% for that term. So it does look like the expectation is for there to be little net change to CPI over the next few months.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

protagonist wrote: Fri Aug 19, 2022 3:19 pm Forgive me if I missed a previous post explaining this....but why is the yield on the 1/15/23 TIPS so high?
If it can be purchased at (an inflation adjusted) price of less than 100, I would think fear of deflation would not be a factor since one cannot lose principal upon maturity.
Is it that short term inflation expectations are so low that investors expect to be able to do better with other investments than 1.613% real?
It's the adjusted price that can't go below 100 at maturity. The inflation factor for purchase today is 1.27811, so there would need to be about 22% deflation before the adjusted price hits 100. So you could lose adjusted principal at maturity with net deflation.

I would use the seasonally-adjusted (SA) ask yield to compare to nominal investments, as the SA yield factors expected nominal return into the real yield. From quotes pulled earlier today, real ask yield was 1.50% and SA ask yield was 0.46%. The SA ask yield still is significantly higher than the 4/14/23 SA ask yield of 0.10%. The SA yield curve is quite flat after that at about 0.2% to 0.3% for 7/15/23 to 7/15/27.

#Cruncher showed in a previous post how the real yield of this short term TIPS can increase significantly based just on the large increases in index ratio for August, even if the expected nominal return remains constant, so that certainly explains a lot of it.

Even though the real yield of the 1/15/23 has increased about 42 basis points since my purchase on Wednesday (real price lower today), I would have paid slightly more than my Wednesday purchase if I bought more today, and my nominal return would have been lower through at least 10/1/22. This is because the index ratio has increased more than the price has decreased (percent change). I think after 10/1/22 it depends on the realized inflation rate (increase in reference CPI) from 10/1/23 to maturity.

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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

silvergga wrote: Fri Aug 19, 2022 3:59 pm I guess for the TIPs case, we are getting protected for un-expected inflation between 10/1 and Jan 2023. If there's deflation we will get hit as well with a lower nominal return.

For nominal treasury, we are locked in for ~3% annualized to Jan 2023, but we are not protected for un-expected inflation (or deflation).
TIPS case right. Protected from unexpected inflation and lose to deflation.

Nominals, we are not protected from unexpected inflation but are protected against unexpected deflation. (We actually gain from unexpected deflation with nominals because we don't eat the "insurance" cost with the TIPS.)

I don't belive any of these what if's are very meaningful when we are only looking at six months not six years.

I prefer the nominals for the short term but because of liquidity not the return considerations.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Fri Aug 19, 2022 3:01 pm
silvergga wrote: Fri Aug 19, 2022 2:35 pm
Kevin M wrote: Thu Aug 18, 2022 12:54 pm Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
Sorry, I am still trying to wrap my head around TIPs vs nominal treasuries.

Say we buy the 1/15/2023 TIPs and ~1/15/23 maturing nominal Treasury today 8/19/2022. "if there is net deflation of more than 0.56% between 10/1/22 to 1/15/23" - the net nominal return for the TIPs bond will be a loss when it matures on 1/15?

Whereas the nominal Treasury would have returned ~3% annualized (current YTD for ~6 month maturing nominal Treasuries as of 8/19/2022)?

I think my head is stuck at the TIPs returning 0% while the nominal Treasury returning 3%, if there is a net 0.56% deflation.

Is my understanding wrong?
First, a forum member as PM'd me with an alternative calculation that indicates that the breakeven CPI change for nominal loss is closer to -1% than to -0.56%. I haven't had a chance to review those calculations in detail yet, but whatever the number is, the point is the same.

Why is your head stuck at a nominal loss for the TIPS and a positive nominal return for the nominal Treasury? How is that harder to understand than a real loss on a nominal Treasury and a real gain for a TIPS of same maturity?

Kevin
I also get about 1% deflation from today for zero nominal return, but from Oct. 1, it would be about 1.5%% in non-seasonally adjusted (and not annualized) deflation, to achieve a zero nominal return.

For this to happen the adjusted principle would have to equal what was actually paid. So if it was about $1265 to buy one TIPS with $1276 in adjusted principle, the adjusted principle would have to fall to $1265 (or maybe $1264 to account for the small coupon). The adjusted principle will be about 1283 on Oct. 1. A decline of 1% would make it about $1270 (but -1% from the 1276 value for today, would make it about 1263), and -1.5% from 1283 (Oct. 1 accrued principle) would make it about $1264 and result in about 0 nominal return, if I have calculated correctly.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Fri Aug 19, 2022 4:50 pm
Kevin M wrote: Fri Aug 19, 2022 3:01 pm
silvergga wrote: Fri Aug 19, 2022 2:35 pm
Kevin M wrote: Thu Aug 18, 2022 12:54 pm Let's start with what we know. For a TIPS bought today, settlement is tomorrow, 8/19/22, and the reference CPI for that date is 294.62729. We know the ref CPI for 10/1/22 is 296.27600. So, we know that the inflation adjustment will be 0.56% (=296.276/294.62729-1) to Oct 1. TIPS yield from quotes pulled from Fidelity today is 1.16%.

So, if there is net deflation of more than 0.56%, there will be a loss in nominal terms (but not in purchasing power). The real return will be 1.16% unless there is enough inflation to bring the adjusted price below 100 (highly unlikely IMO).

I think by "inflation were steady from here" you mean 0% change in reference CPI (no inflation or deflation). If there is no change in CPI from 10/1/22 to 1/15/23, the nominal return would be 0.56% and the real return would be 1.16% for TIPS bought at that yield today.

If CPI change from 10/1/22 to 1/15/23 is more than -0.56%, the nominal return will be positive (and the real return will be 1.16%).

Kevin
Sorry, I am still trying to wrap my head around TIPs vs nominal treasuries.

Say we buy the 1/15/2023 TIPs and ~1/15/23 maturing nominal Treasury today 8/19/2022. "if there is net deflation of more than 0.56% between 10/1/22 to 1/15/23" - the net nominal return for the TIPs bond will be a loss when it matures on 1/15?

Whereas the nominal Treasury would have returned ~3% annualized (current YTD for ~6 month maturing nominal Treasuries as of 8/19/2022)?

I think my head is stuck at the TIPs returning 0% while the nominal Treasury returning 3%, if there is a net 0.56% deflation.

Is my understanding wrong?
First, a forum member as PM'd me with an alternative calculation that indicates that the breakeven CPI change for nominal loss is closer to -1% than to -0.56%. I haven't had a chance to review those calculations in detail yet, but whatever the number is, the point is the same.

Why is your head stuck at a nominal loss for the TIPS and a positive nominal return for the nominal Treasury? How is that harder to understand than a real loss on a nominal Treasury and a real gain for a TIPS of same maturity?

Kevin
I also get about 1% deflation from today for zero nominal return, but from Oct. 1, it would be about 1.5%% in non-seasonally adjusted (and not annualized) deflation, to achieve a zero nominal return.

For this to happen the adjusted principle would have to equal what was actually paid. So if it was about $1265 to buy one TIPS with $1276 in adjusted principle, the adjusted principle would have to fall to $1265 (or maybe $1264 to account for the small coupon). The adjusted principle will be about 1283 on Oct. 1. A decline of 1% would make it about $1270 (but -1% from the 1276 value for today, would make it about 1263), and -1.5% from 1283 (Oct. 1 accrued principle) would make it about $1264 and result in about 0 nominal return, if I have calculated correctly.
Thanks. Do you see the error in my calculations?
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Kevin M wrote: Fri Aug 19, 2022 6:18 pm Thanks. Do you see the error in my calculations?
I think I found it. My calculations assumed a purchase at par (100), not at the discounted price (< 100). The market discount accrual adds to the return, which is why my number is low. I'll redo my calculations factoring this in, and report back, assuming this is the error.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Fri Aug 19, 2022 6:25 pm
Kevin M wrote: Fri Aug 19, 2022 6:18 pm Thanks. Do you see the error in my calculations?
I think I found it. My calculations assumed a purchase at par (100), not at the discounted price (< 100). The market discount accrual adds to the return, which is why my number is low. I'll redo my calculations factoring this in, and report back, assuming this is the error.
Right, you had assumed -0.56% to offset the +0.56%, but the price is about 1% below par, so that has to be offset also.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

jeffyscott wrote: Fri Aug 19, 2022 4:01 pm
protagonist wrote: Fri Aug 19, 2022 3:19 pm Forgive me if I missed a previous post explaining this....but why is the yield on the 1/15/23 TIPS so high?
If it can be purchased at (an inflation adjusted) price of less than 100, I would think fear of deflation would not be a factor since one cannot lose principal upon maturity.
Is it that short term inflation expectations are so low that investors expect to be able to do better with other investments than 1.613% real?
While it is not safe from deflation, the under 100 price is the unadjusted price. Each $1000 bond has about $1276 in accrued principle and is only guaranteed to pay at least $1000 at maturity.

But it does seem that low non-seasonally adjusted inflation (or deflation) is expected. WSJ shows a price of 99.13, so I think that means that today you would have paid $1264.90 (plus a few cents of accrued interest) for about $1276 in accrued principle had you paid that price. We already know that the reference CPI goes up by about 0.56% from now to Oct. 1. That means that the 1276 in accrued principle will grow to about $1283. If net future inflation is 0%, meaning the reference CPI for Jan. 15, 2023 is the same as it is for Oct. 1, then that TIPS will pay out at about $1283, plus a coupon of about 80 cents. So you get around $1284 from your ~$1265 investment, that's about 1.5% for about a 5 month investment, or around 3.6% annualized.

If all those figures and calculations are correct, that easily beats the nominal treasury rate of about 3.15% for that term. So it does look like the expectation is for there to be little net change to CPI over the next few months.
Thanks.
Break even points are irrelevant to me. I just want to be assured of keeping up with, and even better, beating inflation, and best, beating it by a good margin. Whether or not I would have done better or worse with nominal treasuries doesn't matter. :D
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

protagonist wrote: Fri Aug 19, 2022 7:35 pm
jeffyscott wrote: Fri Aug 19, 2022 4:01 pm
protagonist wrote: Fri Aug 19, 2022 3:19 pm Forgive me if I missed a previous post explaining this....but why is the yield on the 1/15/23 TIPS so high?
If it can be purchased at (an inflation adjusted) price of less than 100, I would think fear of deflation would not be a factor since one cannot lose principal upon maturity.
Is it that that investors expect to be able to do better with other investments than 1.613% real?
While it is not safe from deflation, the under 100 price is the unadjusted price. Each $1000 bond has about $1276 in accrued principle and is only guaranteed to pay at least $1000 at maturity.

But it does seem that low non-seasonally adjusted inflation (or deflation) is expected. WSJ shows a price of 99.13, so I think that means that today you would have paid $1264.90 (plus a few cents of accrued interest) for about $1276 in accrued principle had you paid that price. We already know that the reference CPI goes up by about 0.56% from now to Oct. 1. That means that the 1276 in accrued principle will grow to about $1283. If net future inflation is 0%, meaning the reference CPI for Jan. 15, 2023 is the same as it is for Oct. 1, then that TIPS will pay out at about $1283, plus a coupon of about 80 cents. So you get around $1284 from your ~$1265 investment, that's about 1.5% for about a 5 month investment, or around 3.6% annualized.

If all those figures and calculations are correct, that easily beats the nominal treasury rate of about 3.15% for that term. So it does look like the expectation is for there to be little net change to CPI over the next few months.
Thanks.
Break even points are irrelevant to me. I just want to be assured of keeping up with, and even better, beating inflation, and best, beating it by a good margin. Whether or not I would have done better or worse with nominal treasuries doesn't matter. :D
Sure, that was just confirming how low the short term (non-seasonally adjusted) inflation expectations, that you asked about, are. Of course, given that the seasonally adjusted yield for that TIPS is about 1% below the quoted yield, the seasonally adjusted inflation figures will be above the non-seasonally adjusted during the season in question :mrgreen: .
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

I recalculated the CPI change that would be required for a 0% nominal return for the 1/15/23 TIPS with 8/19/22 settlement, and got exactly what the member who PM'd me got. Here are the results:

Image

So, CPI change of -1.02% from 10/1/22 to 1/15/23 results in 0% nominal return, and from 8/19/22 to 1/15/23 it's -0.47%, both not annualized.
  • I calculate the index ratios (IRs) for settlement and last know ref CPI date using the rep CPI for those dates and the dated date for the TIPS.
  • I set the total amount at maturity = total amount at settlement.
  • Subtracting the interest at maturity from the total amount at maturity gives me adjusted price at maturity.
  • Index ratio at maturity is adjusted price at maturity divided by 100.
  • Ref CPI at maturity is index ratio at maturity times dated date ref CPI.
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Re: Trading Treasuries (nominal and TIPS)

Post by protagonist »

jeffyscott wrote: Fri Aug 19, 2022 8:01 pm
protagonist wrote: Fri Aug 19, 2022 7:35 pm
jeffyscott wrote: Fri Aug 19, 2022 4:01 pm
protagonist wrote: Fri Aug 19, 2022 3:19 pm Forgive me if I missed a previous post explaining this....but why is the yield on the 1/15/23 TIPS so high?
If it can be purchased at (an inflation adjusted) price of less than 100, I would think fear of deflation would not be a factor since one cannot lose principal upon maturity.
Is it that that investors expect to be able to do better with other investments than 1.613% real?
While it is not safe from deflation, the under 100 price is the unadjusted price. Each $1000 bond has about $1276 in accrued principle and is only guaranteed to pay at least $1000 at maturity.

But it does seem that low non-seasonally adjusted inflation (or deflation) is expected. WSJ shows a price of 99.13, so I think that means that today you would have paid $1264.90 (plus a few cents of accrued interest) for about $1276 in accrued principle had you paid that price. We already know that the reference CPI goes up by about 0.56% from now to Oct. 1. That means that the 1276 in accrued principle will grow to about $1283. If net future inflation is 0%, meaning the reference CPI for Jan. 15, 2023 is the same as it is for Oct. 1, then that TIPS will pay out at about $1283, plus a coupon of about 80 cents. So you get around $1284 from your ~$1265 investment, that's about 1.5% for about a 5 month investment, or around 3.6% annualized.

If all those figures and calculations are correct, that easily beats the nominal treasury rate of about 3.15% for that term. So it does look like the expectation is for there to be little net change to CPI over the next few months.
Thanks.
Break even points are irrelevant to me. I just want to be assured of keeping up with, and even better, beating inflation, and best, beating it by a good margin. Whether or not I would have done better or worse with nominal treasuries doesn't matter. :D
Sure, that was just confirming how low the short term (non-seasonally adjusted) inflation expectations, that you asked about, are. Of course, given that the seasonally adjusted yield for that TIPS is about 1% below the quoted yield, the seasonally adjusted inflation figures will be above the non-seasonally adjusted during the season in question :mrgreen: .
Yes, and you explained it very well. Thanks.
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

Kevin M wrote: Fri Aug 19, 2022 9:06 pmI recalculated the CPI change that would be required for a 0% nominal return for the 1/15/23 TIPS with 8/19/22 settlement, and got exactly what the member who PM'd me got. Here are the results:
...
So, CPI change of -1.02% from 10/1/22 to 1/15/23 results in 0% nominal return, and from 8/19/22 to 1/15/23 it's -0.47%, both not annualized.
The calculation is straight forward when the TIPS matures within six months. I redid your calculation, Kevin, confirming the -1.02% and -0.47% results. I also added the case of a 1.13% gain to match the return of the 1.5% coupon nominal Treasury also maturing 1/15/2023 with a 2.794% asked yield according to today's WSJ Treasury Quotes. [1] To produce that gain, the Reference CPI would have to rise 0.1% from the latest known value (296.276 on 10/1/2022) by the 1/15/2023 maturity.

Code: Select all

Row                    Col A      Col B   Col C   Formula in Column B
 30               Settlement  8/19/2022
 31                 Maturity  1/15/2023
 32                   Coupon     0.125%
 33                    Price    99.5830
 34       Ref CPI settlement  294.62729
 35       Last known Ref CPI  296.27600
 36   Unadj accrued interest     0.0119          =100*(B32/2)*COUPDAYBS(B30,B31,2,1)/COUPDAYS(B30,B31,2,1) [2]
 37    Total unadjusted cost    99.5949          =B33+B36
 38      Unadjusted proceeds   100.0625          =100*(1+B32/2)
 39      Target nominal gain      0.00%  +1.13%
 40  Required Ref CPI change     -0.47%  +0.66%  =$B37*(1+B39)/$B38-1
 41    Vs last known Ref CPI     -1.02%  +0.10%  =$B34*(1+B40)/$B35-1
  1. 1.13% = (2.794% / 2) * (149 / 184)
    where 149 is the number of days from settlement on 8/19/22 to maturity on 1/15/23 and 184 is the number of days in the 7/15/22 to 1/15/23 interest period.
  2. Accrued interest calculated with Excel COUPDAYBS and COUPDAYS functions.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

#Cruncher wrote: Sat Aug 20, 2022 12:54 amI redid your calculation, Kevin, confirming the -1.02% and -0.47% results.
And, in case anyone is wondering, the difference between my estimated -1.5% and the -1.02% is that I used the WSJ price quote of 99.13, instead of Kevin's actual 99.58 price. That would account for a difference of about 0.45%, so my estimate of -1.5% would become about -1.05% at the higher price (the remaining difference is likely due to rounding by me and using the WSJ accrued principle, which are in whole dollars only).
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

jeffyscott wrote: Sat Aug 20, 2022 7:29 am
#Cruncher wrote: Sat Aug 20, 2022 12:54 amI redid your calculation, Kevin, confirming the -1.02% and -0.47% results.
And, in case anyone is wondering, the difference between my estimated -1.5% and the -1.02% is that I used the WSJ price quote of 99.13, instead of Kevin's actual 99.58 price. That would account for a difference of about 0.45%, so my estimate of -1.5% would become about -1.05% at the higher price (the remaining difference is likely due to rounding by me and using the WSJ accrued principle, which are in whole dollars only).
I was reminded by PM that WSJ quotes are in 32nds :oops: , so the 99.13 actually means 99-13/32 or about 99.41 in the terms that normal humans use.
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

jeffyscott wrote: Sat Aug 20, 2022 8:25 am
jeffyscott wrote: Sat Aug 20, 2022 7:29 am
#Cruncher wrote: Sat Aug 20, 2022 12:54 amI redid your calculation, Kevin, confirming the -1.02% and -0.47% results.
And, in case anyone is wondering, the difference between my estimated -1.5% and the -1.02% is that I used the WSJ price quote of 99.13, instead of Kevin's actual 99.58 price. That would account for a difference of about 0.45%, so my estimate of -1.5% would become about -1.05% at the higher price (the remaining difference is likely due to rounding by me and using the WSJ accrued principle, which are in whole dollars only).
I was reminded by PM that WSJ quotes are in 32nds :oops: , so the 99.13 actually means 99-13/32 or about 99.41 in the terms that normal humans use.
Uhhhh, how quaint. That solves a calculation mystery for me, too. I should have read the fine print. Seems like stock prices moved from fractions back in 2000. Yet frations still persist here. Weird.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

MisterMister wrote: Sat Aug 20, 2022 9:10 am
jeffyscott wrote: Sat Aug 20, 2022 8:25 am I was reminded by PM that WSJ quotes are in 32nds :oops: , so the 99.13 actually means 99-13/32 or about 99.41 in the terms that normal humans use.
Uhhhh, how quaint. That solves a calculation mystery for me, too. I should have read the fine print. Seems like stock prices moved from fractions back in 2000. Yet frations still persist here. Weird.
And on the "notes and bonds" quotes page, they don't even bother with any fine print.

If they want to persist with the archaic quotes, then they should show them as fractions, rather than say: oh, that dot you see in the middle of these particular numbers is not a decimal point....

There's also no consistency, the bills page has decimal quotes, bonds/notes and TIPS have fractional quotes that look like decimal, and fractions are shown as fractions for price changes on another page:

Image
https://www.wsj.com/market-data/bonds
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Conceptual question: As a TIPS gets closer and closer to maturity, the potential future inflation adjustment becomes less and less, and its yield should approach that of a comparable nominal treasury. As a TIPS gets close to maturity, will its yield tend to climb and its price tend to fall?

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Sun Aug 21, 2022 8:00 am Conceptual question: As a TIPS gets closer and closer to maturity, the potential future inflation adjustment becomes less and less, and its yield should approach that of a comparable nominal treasury. As a TIPS gets close to maturity, will its yield tend to climb and its price tend to fall?

billyt
The first sentence is the right idea, but not exactly right. Once the index ratio at maturity is known, the TIPS will be priced to generate about the same nominal return as a nominal Treasury maturing on the same date. The real yield will adjust to whatever makes this happen.

For example, the 7/15/22 ref CPI required the 8/1/22 ref CPI to calculate the index ratio, and that ref CPI was based on May inflation (8-3=5). May CPI was released on 6/10/22, so the maturity value of the TIPS was known more than a month before maturity, which is when the full nominal pricing would have kicked in.

I believe it was in this thread that we did some calculations to explore this. Using historical date, the price of the 7/15/22 TIPS was 100.031 on 7/11/22, resulting in a real yield of -2.70%. Using the same source, the price for the 1.75% Treasury maturing 7/15/22 was 99.96875, resulting in a yield of 4.54%.

To generalize, the nominal return becomes more important as a TIPS approaches maturity, and this is why the seasonal adjustments are more important for shorter-term TIPS.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

OK, that makes sense. What are the error bars on those seasonally adjusted yield estimates? When we see small wiggles in the SA yield curve are those differences significant?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Sun Aug 21, 2022 2:30 pm OK, that makes sense. What are the error bars on those seasonally adjusted yield estimates? When we see small wiggles in the SA yield curve are those differences significant?
Although the seasonality is fairly similar from year to year, it's not exactly the same. So, for example, I was using the 2021 seasonal adjustments when the 7/15/22 matured. In theory, the seasonally adjusted yield equals the quoted yield on the mm/dd of the TIPS maturity (i.e., the seasonal price adjustment factor = 1.0000), but it did not when applying the 2021 SA adjustment, so there was a slight difference in the SA and quoted yields. This certainly is one source of error. Since then, I'm using the 2022 SA values when available, which as of now is TIPS with mm/dd through 07/15, and am only using 2021 for 10/15 TIPS.

There also some simplifying assumptions in the approach. For example, the formulas I use assume annual coupon payments and ignore accrued interest, and these introduce small errors.

Beyond that, I highly recommend that you carefully read the Paul Canty paper to understand it better. Here is an excerpt that might help.
Whenever the maturity of an ILB is not a whole number of
years after its settlement date, seasonality becomes an issue.
For example, if a bond settles in April and matures some years
later in September, the indexation period includes an extra six
months of inflation from January to June (due to the three-
month lag). Inflation in this period is typically much higher
than from July to December, which means that the overall
breakeven inflation rate should be higher than the same bond
with a whole number of years left to maturity. This article
focuses on quantifying this effect
Note that this mentions higher inflation in the first half of the year, which jeffyscott has pointed out in a number of posts.

Regarding the wiggle in the SA yield curve, there are wiggles in any yield curve based on actual quotes due to liquidity, cash flows, coupon rates, duration, etc. For TIPS, there may be additional inflation components that are known but not yet available in the latest reference CPI. For example, there may be declines in recent food and energy prices that exceed what would be expected due to seasonality, and this may be factored into the pricing as well.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
BBBob
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Re: Trading Treasuries (nominal and TIPS)

Post by BBBob »

I am so lost in the weeds at this! I started just looking for the best YTM's, but notice it goes down as maturity dates gets later. Don't understand why.

Then the recent unexpected decline in inflation rates ( I think) calls deflation's effect on the principal into play, especially where the Fed seems determined to reduce inflation. It seems like I am paying $12,500 or so for a face value of $10,000 (generating a fear of loss of capital as its value declines towards $10,000).

Throw in "seasonal effect", and the TIPS funds' seemingly unimpressive returns, and I long for a raise on the annual cap for i-bond purchases. (I understand THOSE!)

Bottom line: Does a novice just throw caution to the wind and go for max YTM? on shorter term TIPS (e.g., < 2 yrs)?
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Re: Trading Treasuries (nominal and TIPS)

Post by Arby »

Is it correct that if using the Fidelity platform, if the yield and maturity of a CD and Treasury are the same, one should buy the Treasury because if you need to sell you will most probably get a better price selling the Treasury?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Arby wrote: Mon Aug 22, 2022 1:17 am Is it correct that if using the Fidelity platform, if the yield and maturity of a CD and Treasury are the same, one should buy the Treasury because if you need to sell you will most probably get a better price selling the Treasury?
Yes.
If I make a calculation error, #Cruncher probably will let me know.
billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Hi Kevin: I am trying to decide if those small differences in SA yield should be considered for my buying decisions.
1) There is seasonality in the CPI inflation data which lead to differences in the real yields of short term TIPS.
2) One can attempt to correct or normalize those real yields, which requires predicting future seasonal variations, which is an inexact science.
3) The residual; the SA yields, have some small differences.

Are those small differences statistically significant or not?

Thanks,
billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

BBBob wrote: Sun Aug 21, 2022 10:27 pm I am so lost in the weeds at this! I started just looking for the best YTM's, but notice it goes down as maturity dates gets later. Don't understand why.

Then the recent unexpected decline in inflation rates ( I think) calls deflation's effect on the principal into play, especially where the Fed seems determined to reduce inflation. It seems like I am paying $12,500 or so for a face value of $10,000 (generating a fear of loss of capital as its value declines towards $10,000).

Throw in "seasonal effect", and the TIPS funds' seemingly unimpressive returns, and I long for a raise on the annual cap for i-bond purchases. (I understand THOSE!)

Bottom line: Does a novice just throw caution to the wind and go for max YTM? on shorter term TIPS (e.g., < 2 yrs)?
I didn't think the decline in inflation was unexpected, but in any case, what is your purpose in buying such short term TIPS?

If you want a guaranteed positive real return, TIPS provide that. If you want a guaranteed positive nominal return, then buy nominals.

If you want to buy TIPS that will not lose nominal value under deflation, then you can buy at auction or buy a recent issue to minimize that.

All bond returns have been poor lately, but TIPS are well ahead of nominals, even if the returns are, nevertheless, "unimpressive".
bpg1234
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

jeffyscott wrote: Mon Aug 22, 2022 7:01 am
BBBob wrote: Sun Aug 21, 2022 10:27 pm I am so lost in the weeds at this! I started just looking for the best YTM's, but notice it goes down as maturity dates gets later. Don't understand why.

Then the recent unexpected decline in inflation rates ( I think) calls deflation's effect on the principal into play, especially where the Fed seems determined to reduce inflation. It seems like I am paying $12,500 or so for a face value of $10,000 (generating a fear of loss of capital as its value declines towards $10,000).

Throw in "seasonal effect", and the TIPS funds' seemingly unimpressive returns, and I long for a raise on the annual cap for i-bond purchases. (I understand THOSE!)

Bottom line: Does a novice just throw caution to the wind and go for max YTM? on shorter term TIPS (e.g., < 2 yrs)?
I didn't think the decline in inflation was unexpected, but in any case, what is your purpose in buying such short term TIPS?

If you want a guaranteed positive real return, TIPS provide that. If you want a guaranteed positive nominal return, then buy nominals.

If you want to buy TIPS that will not lose nominal value under deflation, then you can buy at auction or buy a recent issue to minimize that.

All bond returns have been poor lately, but TIPS are well ahead of nominals, even if the returns are, nevertheless, "unimpressive".
So disregarding accrued interest, if I would have bought $10K face value of the 7/15/2023 TIPS on 8/16/2022 with:

YTM of .288
Price of $100.09
Inflation Factor 1.26491
Principal $12,659.84

VERSUS buying 7/15/2023 TIPS today 8/22/2023 as I write this with:

YTM of .533
Price of $99.859375
Inflation Factor 1.26825
Principal $12,664.67

Please correct me if my thought process is incorrect: I'd be better off with the 7/15/2023 TIPS purchase today since I'd get a .245 higher real yield (difference in YTMs) than the 8/16/2023 TIPS date. If though we have net deflation from now until maturity either purchase date could still lose principal but a purchase today would be better since purchased with a higher real yield.

As for my final resulting principal value at maturity that I receive (yes could be lower than starting purchase price of 8/16/2023 or 8/22/2023 with net deflation), but wouldn't today's purchase with the .245 higher real YTM still result in a higher principal amount received at that time than the 8/16/2023 or no?

Thanks,
bpg
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

bpg1234 wrote: Mon Aug 22, 2022 9:26 am
jeffyscott wrote: Mon Aug 22, 2022 7:01 am
BBBob wrote: Sun Aug 21, 2022 10:27 pm I am so lost in the weeds at this! I started just looking for the best YTM's, but notice it goes down as maturity dates gets later. Don't understand why.

Then the recent unexpected decline in inflation rates ( I think) calls deflation's effect on the principal into play, especially where the Fed seems determined to reduce inflation. It seems like I am paying $12,500 or so for a face value of $10,000 (generating a fear of loss of capital as its value declines towards $10,000).

Throw in "seasonal effect", and the TIPS funds' seemingly unimpressive returns, and I long for a raise on the annual cap for i-bond purchases. (I understand THOSE!)

Bottom line: Does a novice just throw caution to the wind and go for max YTM? on shorter term TIPS (e.g., < 2 yrs)?
I didn't think the decline in inflation was unexpected, but in any case, what is your purpose in buying such short term TIPS?

If you want a guaranteed positive real return, TIPS provide that. If you want a guaranteed positive nominal return, then buy nominals.

If you want to buy TIPS that will not lose nominal value under deflation, then you can buy at auction or buy a recent issue to minimize that.

All bond returns have been poor lately, but TIPS are well ahead of nominals, even if the returns are, nevertheless, "unimpressive".
So disregarding accrued interest, if I would have bought $10K face value of the 7/15/2023 TIPS on 8/16/2022 with:

YTM of .288
Price of $100.09
Inflation Factor 1.26491
Principal $12,659.84

VERSUS buying 7/15/2023 TIPS today 8/22/2023 as I write this with:

YTM of .533
Price of $99.859375
Inflation Factor 1.26825
Principal $12,664.67

Please correct me if my thought process is incorrect: I'd be better off with the 7/15/2023 TIPS purchase today since I'd get a .245 higher real yield (difference in YTMs) than the 8/16/2023 TIPS date. If though we have net deflation from now until maturity either purchase date could still lose principal but a purchase today would be better since purchased with a higher real yield.
At maturity, you would get the same amount regardless of the time you bought. So paying less means a greater gain, neglecting whatever small amount you would have earned on the uninvested cash in-between. There was a whole series of recent posts here, that you participated in and I think actually precipitated, about this very issue. :confused

viewtopic.php?p=6823517#p6823517

To me these very short term TIPS become a sort of hybrid between a nominal and an inflation-indexed. In 2-3 weeks, we will know the reference CPI for Nov. 1, 2 months after that we'll know it for Jan. 1 and then a month later will know what i't going to be on Jan. 15. At that point this TIPS will essentially be a nominal.

But, and this is just my hypothesis, I don't think there's a bright line, the market participants gradually know more and more about where it's going to land and it gradually becomes more of a nominal than a TIPS.
bpg1234
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

jeffyscott wrote: Mon Aug 22, 2022 9:49 am
bpg1234 wrote: Mon Aug 22, 2022 9:26 am
jeffyscott wrote: Mon Aug 22, 2022 7:01 am
BBBob wrote: Sun Aug 21, 2022 10:27 pm I am so lost in the weeds at this! I started just looking for the best YTM's, but notice it goes down as maturity dates gets later. Don't understand why.

Then the recent unexpected decline in inflation rates ( I think) calls deflation's effect on the principal into play, especially where the Fed seems determined to reduce inflation. It seems like I am paying $12,500 or so for a face value of $10,000 (generating a fear of loss of capital as its value declines towards $10,000).

Throw in "seasonal effect", and the TIPS funds' seemingly unimpressive returns, and I long for a raise on the annual cap for i-bond purchases. (I understand THOSE!)

Bottom line: Does a novice just throw caution to the wind and go for max YTM? on shorter term TIPS (e.g., < 2 yrs)?
I didn't think the decline in inflation was unexpected, but in any case, what is your purpose in buying such short term TIPS?

If you want a guaranteed positive real return, TIPS provide that. If you want a guaranteed positive nominal return, then buy nominals.

If you want to buy TIPS that will not lose nominal value under deflation, then you can buy at auction or buy a recent issue to minimize that.

All bond returns have been poor lately, but TIPS are well ahead of nominals, even if the returns are, nevertheless, "unimpressive".
So disregarding accrued interest, if I would have bought $10K face value of the 7/15/2023 TIPS on 8/16/2022 with:

YTM of .288
Price of $100.09
Inflation Factor 1.26491
Principal $12,659.84

VERSUS buying 7/15/2023 TIPS today 8/22/2023 as I write this with:

YTM of .533
Price of $99.859375
Inflation Factor 1.26825
Principal $12,664.67

Please correct me if my thought process is incorrect: I'd be better off with the 7/15/2023 TIPS purchase today since I'd get a .245 higher real yield (difference in YTMs) than the 8/16/2023 TIPS date. If though we have net deflation from now until maturity either purchase date could still lose principal but a purchase today would be better since purchased with a higher real yield.
At maturity, you would get the same amount regardless of the time you bought. So paying less means a greater gain, neglecting whatever small amount you would have earned on the uninvested cash in-between. There was a whole series of recent posts here, that you participated in and I think actually precipitated, about this very issue. :confused

viewtopic.php?p=6823517#p6823517

To me these very short term TIPS become a sort of hybrid between a nominal and an inflation-indexed. In 2-3 weeks, we will know the reference CPI for Nov. 1, 2 months after that we'll know it for Jan. 1 and then a month later will know what i't going to be on Jan. 15. At that point this TIPS will essentially be a nominal.

But, and this is just my hypothesis, I don't think there's a bright line, the market participants gradually know more and more about where it's going to land and it gradually becomes more of a nominal than a TIPS.
Yes I asked a question as to date I really have been just looking for the highest TIPS real YTM with little regard to actual purchase price and under the impression that I would end up with more total principal with a higher real YTM at end so still wrapping my head around all of this with real versus nominal, etc.

So obviously I'm still confused then about looking and waiting for higher real yield YTM for existing TIPS as in the end the principal amount I get back is what I'm actually spending. What's the benefit in higher real YTMs for existing TIPS if when I buy them I'm paying more?
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

bpg1234 wrote: Mon Aug 22, 2022 10:22 am
jeffyscott wrote: Mon Aug 22, 2022 9:49 am
bpg1234 wrote: Mon Aug 22, 2022 9:26 am
jeffyscott wrote: Mon Aug 22, 2022 7:01 am
BBBob wrote: Sun Aug 21, 2022 10:27 pm I am so lost in the weeds at this! I started just looking for the best YTM's, but notice it goes down as maturity dates gets later. Don't understand why.

Then the recent unexpected decline in inflation rates ( I think) calls deflation's effect on the principal into play, especially where the Fed seems determined to reduce inflation. It seems like I am paying $12,500 or so for a face value of $10,000 (generating a fear of loss of capital as its value declines towards $10,000).

Throw in "seasonal effect", and the TIPS funds' seemingly unimpressive returns, and I long for a raise on the annual cap for i-bond purchases. (I understand THOSE!)

Bottom line: Does a novice just throw caution to the wind and go for max YTM? on shorter term TIPS (e.g., < 2 yrs)?
I didn't think the decline in inflation was unexpected, but in any case, what is your purpose in buying such short term TIPS?

If you want a guaranteed positive real return, TIPS provide that. If you want a guaranteed positive nominal return, then buy nominals.

If you want to buy TIPS that will not lose nominal value under deflation, then you can buy at auction or buy a recent issue to minimize that.

All bond returns have been poor lately, but TIPS are well ahead of nominals, even if the returns are, nevertheless, "unimpressive".
So disregarding accrued interest, if I would have bought $10K face value of the 7/15/2023 TIPS on 8/16/2022 with:

YTM of .288
Price of $100.09
Inflation Factor 1.26491
Principal $12,659.84

VERSUS buying 7/15/2023 TIPS today 8/22/2023 as I write this with:

YTM of .533
Price of $99.859375
Inflation Factor 1.26825
Principal $12,664.67

Please correct me if my thought process is incorrect: I'd be better off with the 7/15/2023 TIPS purchase today since I'd get a .245 higher real yield (difference in YTMs) than the 8/16/2023 TIPS date. If though we have net deflation from now until maturity either purchase date could still lose principal but a purchase today would be better since purchased with a higher real yield.
At maturity, you would get the same amount regardless of the time you bought. So paying less means a greater gain, neglecting whatever small amount you would have earned on the uninvested cash in-between. There was a whole series of recent posts here, that you participated in and I think actually precipitated, about this very issue. :confused

viewtopic.php?p=6823517#p6823517

To me these very short term TIPS become a sort of hybrid between a nominal and an inflation-indexed. In 2-3 weeks, we will know the reference CPI for Nov. 1, 2 months after that we'll know it for Jan. 1 and then a month later will know what i't going to be on Jan. 15. At that point this TIPS will essentially be a nominal.

But, and this is just my hypothesis, I don't think there's a bright line, the market participants gradually know more and more about where it's going to land and it gradually becomes more of a nominal than a TIPS.
Yes I asked a question as to date I really have been just looking for the highest TIPS real YTM with little regard to actual purchase price and under the impression that I would end up with more total principal with a higher real YTM at end so still wrapping my head around all of this with real versus nominal, etc.

So obviously I'm still confused then about looking and waiting for higher real yield YTM for existing TIPS as in the end the principal amount I get back is what I'm actually spending. What's the benefit in higher real YTMs for existing TIPS if when I buy them I'm paying more?
This weird anomaly with current real yields on a 5 month TIPS is not much of an issue, I think, with TIPS that have longer (like several years) to run? That Jan. TIPS is only "protecting" you from about 3 months of potential unexpected inflation, what's the actual purpose in buying such short term inflation protection, anyway? What are you going to do with the money on January 15?

I've not tried to figure out how to deal with this, since I really have no interest in TIPS that are maturing in just a few months. But I think the logical way to analyse these would be to determine what the known nominal return is to Oct. 1. Then determine what your real yield would be from Oct. 1 based on the known reference CPI on that date. And then make your decision based on that. I have no idea how to actually do that, though...

The other option is to just assume that this market is efficient and simply decide if you'd rather have 3 months of protection from unexpected inflation or not.
billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Lets remember that TIPS are adjusted for actual inflation, expected or not. It's anyone's guess what the next few months will bring in terms of inflation/deflation. I would focus on when you need the money; that will determine the maturity. Then decide if you want a guaranteed real yield or guaranteed nominal yield. Trying to beat the fixed income market will surely lead to disappointment, unless you just enjoy playing the game. A lot of these "in the weeds" details amount to arguing about how many angels can dance on the head of a pin. Real or nominal, the yield is the yield is the yield, and it is set by the market.
Kookaburra
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Re: Trading Treasuries (nominal and TIPS)

Post by Kookaburra »

I have a question about selling Treasuries on the secondary market.

I bought a Treasury bill (zero coupon). I understand that the purchase price is discounted relative to the face value ($100) and that if I hold to maturity I get the face value. I also understand that if I sell before maturity, the value will likely differ based on changes in interest rates.

What I don't understand is whether the price is slowly moving towards the face value each day, in the absence of interest rate changes. Maybe the best way to elaborate my question is with this hypothetical example:

Let's assume interest rates hold perfectly constant from the date I purchase the Tbill until the day I sell it (before maturity). Let's say I pay $98 for a $100 face value. If I sell the bond on the secondary market sometime after purchase, would I:

(a) Only get the $98 price back (ignoring bid/ask spreads)
(b) Get a price above $98 and closer to $100, with the rise in price proprtional to the amount of time I held it?
(c) Get the $98 price back some accrued interest?
(d) Other? (please elaborate)

Thank you
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