Trading Treasuries (nominal and TIPS)

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Jaylat
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Re: Trading Treasuries (nominal and TIPS)

Post by Jaylat »

Kevin M wrote: Sun Aug 14, 2022 6:03 pm
Doc wrote: Sun Aug 14, 2022 5:04 pm I don't think a positive real return is possible in todays market without taking on a lot of default risk.

About the only thinking that one can do is to stay short term and wait.

My difference from the short term TIPS advocates is there is little if anything to gain with the FED raising the Federal funds rate some 50 to 75 bps every FOMC meeting. If the FED succeeds in lowering the inflation rate which we all want, you get little benefit if any from short TIPS over short nominals. My vote is go for the liquidity with nominals. I haven't heard anything form the (very) short TIPS advocates.
I spoke with my money on Friday, and bought more of the 4/15/2023 TIPS.
Me too. I went for the 1/15/2024 TIPS. I'm taking my cues from this article:

https://tipswatch.com/2022/08/07/is-the ... t-so-much/

TL;DR things may very well hit the fan over the next year or two.

"A reduction of 1% after an increase of 282% over a stretch of 11 years. This is what the Federal Reserve does when it implements quantitative tightening, at least so far into this inflationary crisis."


We have a LONG way to go!
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BlueEars
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

Good article on QT. Thanks Jaylat.

Maybe QT will give me a better deal on TIPS. When QT happened in 2018-2019 it looks like Tbills were falling. 5yr TIPS declined then. Maybe with Tbills rising and QT happening in coming months TIPS will rise in yield?
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

Kevin M wrote: Sun Aug 14, 2022 6:03 pm I spoke with my money on Friday, and bought more of the 4/15/2023 TIPS. I paid 100.200 for a yield of +0.32% (-0.47% SA).
Kevin,

Still slowwwwly wrapping my arms around this. What made you choose this time to go with more of the 4/15/23 versus 7/15/23 TIPS this purchase? I like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.

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

Post by jeffyscott »

bpg1234 wrote: Mon Aug 15, 2022 9:51 amI like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.
Not Kevin, but let me butt in regarding that aspect :)

You're looking at accrued principle of 1183 vs. 1262, for this difference to matter the 1183 would need to fall to <1000. In order for that to happen there would need to be about 15.5% deflation or more between now and the maturity date of the chosen TIPS. We also already know that CPI will go to 296.276 (Oct 1 ref. CPI. It is 294.10923 today, so a 15.5% decline from that Oct. 1 reference value would mean 248.52, which makes the necessary decline actually about 16%.

Do you really think there is any chance of seeing 16% deflation over this 6-9 month period?
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

bpg1234 wrote: Mon Aug 15, 2022 9:51 am
Kevin M wrote: Sun Aug 14, 2022 6:03 pm I spoke with my money on Friday, and bought more of the 4/15/2023 TIPS. I paid 100.200 for a yield of +0.32% (-0.47% SA).
Kevin,

Still slowwwwly wrapping my arms around this. What made you choose this time to go with more of the 4/15/23 versus 7/15/23 TIPS this purchase? I like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.

Thanks,
bpg
The main reason is that I had less of the 4/15/23. After the purchase I now have 50 each of the 1/15/23 and 4/15/23, and I already had 70 of the 7/15/23. The index ratio (aka inflation factor, aka accrued principal) had nothing to do with my decision.

Interestingly, the seasonally-adjusted yield curve was flat between the 1/15/23 and 4/15/23, and normally I wouldn't buy something with no incremental SA yield for extending maturity, but honestly, I didn't even look at that for that purchase.

What I'm still trying to wrap my head around is possibly having a lower nominal return even though the real yield is higher. For my Friday purchase (settlement 8/15, today) the yield was 0.32% (SA -0.47%), and the principal amount (excluding accrued interest) was 11,864.54. For my previous purchase on 8/8/22 (settlement), yield was -0.12% (SA -0.87%), and the principal amount was 11,863.95. So even though my real yield was 44 basis points higher (SA 40 bps higher) for the most recent purchase, I paid slightly more, and apparently I could earn a lower nominal return. I haven't run the numbers yet to see if it's like the 1/15/22, for which the nominal return appears to depend on inflation (if my calculations are correct).

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: Mon Aug 15, 2022 1:08 pmWhat I'm still trying to wrap my head around is possibly having a lower nominal return even though the real yield is higher. For my Friday purchase (settlement 8/15, today) the yield was 0.32% (SA -0.47%), and the principal amount (excluding accrued interest) was 11,864.54. For my previous purchase on 8/8/22 (settlement), yield was -0.12% (SA -0.87%), and the principal amount was 11,863.95. So even though my real yield was 44 basis points higher (SA 40 bps higher) for the most recent purchase, I paid slightly more, and apparently I could earn a lower nominal return. I haven't run the numbers yet to see if it's like the 1/15/22, for which the nominal return appears to depend on inflation (if my calculations are correct).

Kevin
Yes, it seems impossible that the price you paid could be higher and yet the YTM has increased by 0.44%? :confused

Is this somehow affected by the CPI release on 8/10? They're not doing something like calculating real YTM from 10/1 now and it was from 9/1 prior to that release?
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Mon Aug 15, 2022 1:28 pm
Kevin M wrote: Mon Aug 15, 2022 1:08 pmWhat I'm still trying to wrap my head around is possibly having a lower nominal return even though the real yield is higher. For my Friday purchase (settlement 8/15, today) the yield was 0.32% (SA -0.47%), and the principal amount (excluding accrued interest) was 11,864.54. For my previous purchase on 8/8/22 (settlement), yield was -0.12% (SA -0.87%), and the principal amount was 11,863.95. So even though my real yield was 44 basis points higher (SA 40 bps higher) for the most recent purchase, I paid slightly more, and apparently I could earn a lower nominal return. I haven't run the numbers yet to see if it's like the 1/15/22, for which the nominal return appears to depend on inflation (if my calculations are correct).

Kevin
Yes, it seems impossible that the price you paid could be higher and yet the YTM has increased by 0.44%? :confused

Is this somehow affected by the CPI release on 8/10? They're not doing something like calculating real YTM from 10/1 now and it was from 9/1 prior to that release?
I don't think so. I calculate the real yields for all TIPS myself based on the settlement date, and they agree with the quoted yields.

The breakeven inflation rate (BEI) calculations do use the latest reference CPI for the "#Cruncher" versions of BEI, so now using 10/1/22.

So far we've had my calculations for the 1/15/2023 showing that the nominal return could be higher or lower depending on inflation, and #Cruncher's calculations for a different maturity showing that the nominal return will be higher if the purchase amount was lower. I am hoping to gain more certainty about this, either through additional calculations of my own, or perhaps #Cruncher will replicate my calculations with one of his nifty spreadsheets showing the nominal returns for different inflation rates (or just find out that I made a calculation error).

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 »

Yikes Kevin! You are pretty much the smartest guy in the room here, and even you don't totally understand what you are buying. I appreciate you trying to honestly tackle these uncertainties, and being transparent about the puzzles. I am also trying to figure this out, and how to build a secure little bond ladder without succumbing to the temptation of trying to time the market. I do feel nominal treasuries are clear cut; you pay the price and you know what they will mature at. TIPS appear to me to be much more complicated. I try and hang on to the fact that I am buying a real yield, but the mathematical intricacies are daunting.

Respectfully,
billyt
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

EDIT: Corrected maturity dates from 2022 to 2023.

I mentioned that on Friday the SA TIPS yield curve was essentially flat between 1/15/23 and 4/15/23. Today it is inverted, with the 1/15/23 SA yield higher at -0.15% than the 4/15/23 SA yield at -0.24%:

Image

The 4/15/23 yield is 24 bps higher than my Friday purchase, and SA yield is 23 bps higher.

The 1/15/23 yield is 74 bps higher at 0.82% than my last purchase on 08/11/2022 (settlement) at 0.08%, and the SA yield at -0.15% is 69 bps higher than the 8/11 SA yield of -0.84%.

The 7/15/23 yield is only 18 bps higher than my last purchase, and SA yield is 17 bps higher.

Note that the current yields are for large quantities, while my trade yields are for the quantity I bought (usually 10), so the actual yields I get would be a bit lower. Yields have come down as I've been writing this; currently the large/small-qty spread is about 8 bps for 1/15/23, 5 bps for 4/15/23, and about 2 bps for the 7/15/23. So, the 7/15/23 is the better deal for small quantity.

Kevin
Last edited by Kevin M on Mon Aug 15, 2022 2:32 pm, edited 1 time in total.
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FactualFran
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Re: Trading Treasuries (nominal and TIPS)

Post by FactualFran »

bpg1234 wrote: Fri Aug 12, 2022 9:43 am The inflation factor today is slightly higher (1.13863 vs 1.13783 yesterday) which I attribute to the increased price? From an understanding perspective, would a purchase today at the higher overall price $11,315.43 but .376 real yield been better versus yesterday's with the reduced purchase price of $11,307.51 but lower real yield of .351?
Which is better depends on which you consider more important: the dollar amount received from a given set of cash flows or what the calculated yield is. What follows is a different way to express what #Cruncher wrote. The same issue of TIPS bought on either 08-11 or 08-12 will have the same future cash flows. In general, it is better to pay less for the same future cash flows. An exception is when the settlement dates for the buys differ and during the intervening days there would be an addition cash flow that at least makes up for the price difference.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Mon Aug 15, 2022 1:49 pm Yikes Kevin! You are pretty much the smartest guy in the room here, and even you don't totally understand what you are buying. I appreciate you trying to honestly tackle these uncertainties, and being transparent about the puzzles. I am also trying to figure this out, and how to build a secure little bond ladder without succumbing to the temptation of trying to time the market. I do feel nominal treasuries are clear cut; you pay the price and you know what they will mature at. TIPS appear to me to be much more complicated. I try and hang on to the fact that I am buying a real yield, but the mathematical intricacies are daunting.

Respectfully,
billyt
One of the reasons I post is to learn as well as to share what I've learned. I've learned some things since I started this thread, and I hope to learn more. Actually buying TIPS has opened up some new areas of uncertainty for me, the latest one being the puzzle of possibly lower nominal returns with higher real yields.

With respect to nominals vs. TIPS certainty of return, my standard line has been that nominals have a relatively certain nominal return, but an uncertain real return, and TIPS have a certain real return, but an uncertain nominal return. That understanding has not changed, but I hadn't previously understood that the nominal return can be lower even if the real yield is higher, although I had already come to understand that the seasonal adjustment factors in the nominal expected return.

Kevin
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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

So if I bought 10 of the 1/15/23 now, yield is 0.70% and total price would be 12,718.83 including 1.39 of accrued interest. I paid 12,723.50 for last purchase with 1.17 of accrued interest with yield of 0.08%. So I would be paying about $5 less even though yield is more than 60 bps higher.

I just bought 10. The price went down slightly, so I paid 12,717.81.

Kevin
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Mon Aug 15, 2022 2:28 pm So if I bought 10 of the 1/15/23 now, yield is 0.70% and total price would be 12,718.83 including 1.39 of accrued interest. I paid 12,723.50 for last purchase with 1.17 of accrued interest with yield of 0.08%. So I would be paying about $5 less even though yield is more than 60 bps higher.

I just bought 10. The price went down slightly, so I paid 12,717.81.

Kevin
What were the unadjusted prices, it was 99.73 when I looked. Was the unadjusted price with the 0.08% a bit over 100 (assuming it was recently purchased). Basing this on an online YTM calculator, which gives a YTM of about 0.08 at 100.02 and 0.77 at 99.73.
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

Kevin M wrote: Mon Aug 15, 2022 2:13 pm
billyt wrote: Mon Aug 15, 2022 1:49 pm Yikes Kevin! You are pretty much the smartest guy in the room here, and even you don't totally understand what you are buying. I appreciate you trying to honestly tackle these uncertainties, and being transparent about the puzzles. I am also trying to figure this out, and how to build a secure little bond ladder without succumbing to the temptation of trying to time the market. I do feel nominal treasuries are clear cut; you pay the price and you know what they will mature at. TIPS appear to me to be much more complicated. I try and hang on to the fact that I am buying a real yield, but the mathematical intricacies are daunting.

Respectfully,
billyt
One of the reasons I post is to learn as well as to share what I've learned. I've learned some things since I started this thread, and I hope to learn more. Actually buying TIPS has opened up some new areas of uncertainty for me, the latest one being the puzzle of possibly lower nominal returns with higher real yields.

With respect to nominals vs. TIPS certainty of return, my standard line has been that nominals have a relatively certain nominal return, but an uncertain real return, and TIPS have a certain real return, but an uncertain nominal return. That understanding has not changed, but I hadn't previously understood that the nominal return can be lower even if the real yield is higher, although I had already come to understand that the seasonal adjustment factors in the nominal expected return.

Kevin
Suppose we put the very short term FI aside and focus on longer out like at least 3 or 5 years. That is, long enough out that known inflation numbers in past months do not become a big part of the picture. Then isn't the only thing you care about real returns, reinvestment risk, and maybe liquidity should you need to sell before maturity?
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

jeffyscott wrote: Mon Aug 15, 2022 12:06 pm
bpg1234 wrote: Mon Aug 15, 2022 9:51 amI like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.
Not Kevin, but let me butt in regarding that aspect :)

You're looking at accrued principle of 1183 vs. 1262, for this difference to matter the 1183 would need to fall to <1000. In order for that to happen there would need to be about 15.5% deflation or more between now and the maturity date of the chosen TIPS. We also already know that CPI will go to 296.276 (Oct 1 ref. CPI. It is 294.10923 today, so a 15.5% decline from that Oct. 1 reference value would mean 248.52, which makes the necessary decline actually about 16%.

Do you really think there is any chance of seeing 16% deflation over this 6-9 month period?
No I don't see a chance of 16% deflation over the next 6-9 months but my question is more of what factor(s) did Kevin or anyone use to choose the one TIPS maturity over the other. I reference the lower Inflation factor as one that some have used while others say highest real yield, etc.

I still do question with secondary TIPS where we are paying for accrued inflation in the purchase price whether buying one versus the other would result in less potential principal loss despite how small of an amount it could be over the remaining term until maturity.

As I understand (correct me if wrong) when buying a TIPS at an opening auction there is little risk of potential loss of principal since little inflation adjustment at the point included in the purchase price. So if there is deflation after purchasing then the value at maturity won't go under the face value of the TIPS (e.g. $10K for a 5 year $10K TIPS bought at auction).

When buying a TIPS on the secondary market one is committing to pay for the inflation that was already included to that point hence the higher purchase price. If deflation does indeed occur from that point forward then there is potential loss of some of the actual purchase price (e.g. say one pays $12.5K for $10K TIPS face value and say potentially due to deflation over some of the remaining term of the TIPS to maturity only gets back $11.5K).

As such, if one doesn't want to wait to build a TIPS ladder by buying only at opening auctions then what criteria does one use with secondary TIPS when purchasing them to minimize the potential for principal paid losses?

bpg
billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Sure, I am reasonably comfortable filling in rungs in my bond ladder focusing only on the real returns. It is a liability matching ladder for 7 years of spending, so I am ignoring reinvestment risk and liquidity. Bond allocation beyond the 7 year horizon remains in intermediate term bond funds. I understand the conceptual difference between nominal treasuries and TIPS. I am totally comfortable with buying TIPS at auction. I am trying to learn more about buying TIPS on the secondary market, and what constitutes a 'good deal'. Also want to be able to track the progress of my purchases in my spreadsheet and understand what is happening at purchase and over time. In this regard, buying secondary TIPS seems a lot more complicated.

billyt
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

bpg1234 wrote: Mon Aug 15, 2022 3:12 pm
jeffyscott wrote: Mon Aug 15, 2022 12:06 pm
bpg1234 wrote: Mon Aug 15, 2022 9:51 amI like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.
Not Kevin, but let me butt in regarding that aspect :)

You're looking at accrued principle of 1183 vs. 1262, for this difference to matter the 1183 would need to fall to <1000. In order for that to happen there would need to be about 15.5% deflation or more between now and the maturity date of the chosen TIPS. We also already know that CPI will go to 296.276 (Oct 1 ref. CPI. It is 294.10923 today, so a 15.5% decline from that Oct. 1 reference value would mean 248.52, which makes the necessary decline actually about 16%.

Do you really think there is any chance of seeing 16% deflation over this 6-9 month period?
No I don't see a chance of 16% deflation over the next 6-9 months but my question is more of what factor(s) did Kevin or anyone use to choose the one TIPS maturity over the other. I reference the lower Inflation factor as one that some have used while others say highest real yield, etc.

I still do question with secondary TIPS where we are paying for accrued inflation in the purchase price whether buying one versus the other would result in less potential principal loss despite how small of an amount it could be over the remaining term until maturity.
Yes, but in order for there to be any difference the deflation would need to be enough to bring one of the TIPS down to less that 1000 in accrued principle. Looking out about 5 years, the lowest accrued principle is 1042 for April 2027. Deflation of 4% over 5 years seems like a thing that's unlikely, but at least could be in the realm of reality. So I don't think it is never something that one might consider.
As I understand (correct me if wrong) when buying a TIPS at an opening auction there is little risk of potential loss of principal since little inflation adjustment at the point included in the purchase price. So if there is deflation after purchasing then the value at maturity won't go under the face value of the TIPS (e.g. $10K for a 5 year $10K TIPS bought at auction).

When buying a TIPS on the secondary market one is committing to pay for the inflation that was already included to that point hence the higher purchase price. If deflation does indeed occur from that point forward then there is potential loss of some of the actual purchase price (e.g. say one pays $12.5K for $10K TIPS face value and say potentially due to deflation over some of the remaining term of the TIPS to maturity only gets back $11.5K).
That's correct, but as I think you understand, it has to be net deflation over the entire term to matter. My understanding is that you could have deflation take the principle value below that initial $10K at any time, other than the day it matures. So if you have 10% deflation in year 1, your principle value becomes $9000. If there is then 3% inflation per year for the next 4, your final value is $10,129.57 and it would not have made any difference if you had, instead, bought a TIPS with accrued principle of 1250 (so 8 bonds at $1250 each, rather than 10 at $1000 each).

I guess I am relying on the Fed being powerful enough to ensure that persistent deflation is just not going to happen. And then there's also much more likelihood that fiscal policy would also be deployed to fight deflation (while it is almost never used to fight inflation), tax cutting and/or increasing spending is always easier/more popular than raising taxes and/or cutting spending.
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Re: Trading Treasuries (nominal and TIPS)

Post by #Cruncher »

jeffyscott wrote: Sun Aug 14, 2022 8:38 am
#Cruncher wrote: Sun Aug 14, 2022 7:38 am The right-hand column below shows my calculated YTM for this TIPS for each workday from August 12 to September 30 assuming it is priced to keep the nominal 3.2% return and 122.5646 nominal value at maturity calculated in cell B8. ...
So if someone is looking at this TIPS tomorrow and the reported real YTM is 0.39%, should they be thinking as if they are actually buying at a real YTM of about 0.54%, since that is what we know the real yield would become as of Sept. 30, if nothing else that would influence TIPS yields/prices were to change over that time period? (underline added)
No, there is nothing special about the yield on 9/30. The YTM on 8/15 is what it is. The table in my post you reference is simply showing that, if the nominal return and the projected nominal redemption value remain the same, the real YTM will change over the period. Note that I'm not saying "nothing else" changes. On the contrary, it is the change in the index ratios that causes the effect I'm illustrating.
Kevin M wrote: Sun Aug 14, 2022 4:57 pmThe issue I have is that it's not intuitive to me that a higher real yield could result in a lower nominal return. How would you explain this to someone without crunching the numbers?
I'm afraid I can't explain it without crunching some numbers, Kevin. :? But let's try a fairly simple example: Assume that the Jan 15 2023 TIPS your post references has yields-to-maturity (YTM) of -0.74% and -0.66% on 8/8 and 8/9 settlement dates respectively. So the YTM increases 0.08% points in one day. The unadjusted prices can be computed from the yields. And then the total costs (aka adjusted prices) of the purchases these dates (assuming a 0% coupon) will equal the unadjusted price X the index ratio on each day.

Code: Select all

Row             Col A      Col B      Col C     Col D   Formula in Col B => Col C
  2           Matures  1/15/2023
  3           Settles  8/08/2022  8/09/2022
  4  Days to maturity        160        159            =$B2-B3
  5               YTM     -0.74%     -0.66%    Change
  6   Unadusted price   100.3261   100.2889   -0.037%  =100/(1+B5)^(B4/365)
  7       Index ratio    1.27025    1.27082   +0.045%
  8    Adjusted price   127.4393   127.4491   +0.008%  =B6*B7
Row 8 shows that the total cost increased slightly even though the YTM rose. If the expected nominal proceeds at maturity remain the same, the nominal return must therefore be lower. Column D shows this happens because the increase in the index ratio exceeds the decrease in the unadjusted price.
#Cruncher wrote: Sun Aug 14, 2022 7:38 am... increasing index ratios during August will have a significant effect on the yield of this TIPS even though it doesn't mature until April 15, 2025. (The effect will be greater for TIPS that mature sooner.) (underline added)
To show this, I modified the table in the previous post to show the TIPS maturing Jan 15 2023 discussed above. The effect is indeed greater. Instead of the YTM increasing from +0.35% on 8/12 to +0.63% on 9/1 for the April 2025 maturity, it now increases from -0.42% to +1.50%!

Code: Select all

  1               Settles  8/08/2022
  2               Matures  1/15/2023
  3     Yield to maturity     (0.74%)
  4      Unadjusted price   100.3261   =100/(1+B3)^((B2-B1)/365)
  5  Idx ratio settlement    1.27025   =VLOOKUP(B1,$A$11:$C$46,3,FALSE)
  6        Adjusted price   127.4393   =B4*B5
  7        Nominal return      2.70% 
  8  Nominal mature value   128.9363   =B6*(1+B7)^((B2-B1)/365)
Row                 Col A      Col B     Col C     Col D   Col E
  9                         Adjusted     Index     Unadj         
 10               Settles      Price     Ratio     Price    YTM

Code: Select all

 29           Mon 8/08/22   127.4393   1.27025  100.3261  (0.74%)
 30           Tue 8/09/22   127.4486   1.27082  100.2884  (0.66%)
 31           Wed 8/10/22   127.4579   1.27138  100.2516  (0.58%)
 32           Thu 8/11/22   127.4672   1.27194  100.2148  (0.50%)
 33           Fri 8/12/22   127.4765   1.27250  100.1780  (0.42%) <===
 
 34           Mon 8/15/22   127.5044   1.27418  100.0678  (0.16%)
 35           Tue 8/16/22   127.5137   1.27474  100.0311  (0.07%)
 36           Wed 8/17/22   127.5230   1.27530   99.9945   0.01% 
 37           Thu 8/18/22   127.5323   1.27587   99.9571   0.10% 
 38           Fri 8/19/22   127.5416   1.27643   99.9206   0.19%
 
 39           Mon 8/22/22   127.5695   1.27811   99.8111   0.47% 
 40           Tue 8/23/22   127.5789   1.27867   99.7747   0.57% 
 41           Wed 8/24/22   127.5882   1.27923   99.7383   0.67% 
 42           Thu 8/25/22   127.5975   1.27979   99.7019   0.76% 
 43           Fri 8/26/22   127.6068   1.28035   99.6656   0.86%
 
 44           Mon 8/29/22   127.6347   1.28204   99.5560   1.18% 
 45           Tue 8/30/22   127.6441   1.28260   99.5198   1.28% 
 46           Wed 8/31/22   127.6534   1.28316   99.4836   1.39% 
 47           Thu 9/01/22   127.6627   1.28372   99.4475   1.50%  <===
 
 48           Fri 9/02/22   127.6720   1.28372   99.4547   1.49% 
 49           Mon 9/05/22   127.7000   1.28370   99.4781   1.46% 
 50           Tue 9/06/22   127.7093   1.28370   99.4853   1.45% 
 51           Wed 9/07/22   127.7186   1.28369   99.4934   1.44% 
 52           Thu 9/08/22   127.7279   1.28369   99.5006   1.43% 
 53           Fri 9/09/22   127.7373   1.28368   99.5087   1.41%
 
 54           Mon 9/12/22   127.7652   1.28367   99.5312   1.38% 
 55           Tue 9/13/22   127.7746   1.28366   99.5393   1.37% 
 56           Wed 9/14/22   127.7839   1.28365   99.5473   1.36% 
 57           Thu 9/15/22   127.7932   1.28365   99.5546   1.34% 
 58           Fri 9/16/22   127.8025   1.28364   99.5626   1.33%
 
 59           Mon 9/19/22   127.8305   1.28363   99.5852   1.29% 
 60           Tue 9/20/22   127.8399   1.28362   99.5932   1.28% 
 61           Wed 9/21/22   127.8492   1.28362   99.6005   1.27% 
 62           Thu 9/22/22   127.8585   1.28361   99.6086   1.25% 
 63           Fri 9/23/22   127.8679   1.28361   99.6158   1.24%
 
 64           Mon 9/26/22   127.8959   1.28359   99.6392   1.20% 
 65           Tue 9/27/22   127.9052   1.28359   99.6465   1.18% 
 66           Wed 9/28/22   127.9145   1.28358   99.6545   1.17% 
 67           Thu 9/29/22   127.9239   1.28358   99.6618   1.15% 
 68           Fri 9/30/22   127.9332   1.28357   99.6698   1.13%
(Index ratios are copied from this web page.)
Last edited by #Cruncher on Mon Aug 15, 2022 4:27 pm, edited 1 time in total.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Mon Aug 15, 2022 2:50 pm
Kevin M wrote: Mon Aug 15, 2022 2:28 pm So if I bought 10 of the 1/15/23 now, yield is 0.70% and total price would be 12,718.83 including 1.39 of accrued interest. I paid 12,723.50 for last purchase with 1.17 of accrued interest with yield of 0.08%. So I would be paying about $5 less even though yield is more than 60 bps higher.

I just bought 10. The price went down slightly, so I paid 12,717.81.

Kevin
What were the unadjusted prices, it was 99.73 when I looked. Was the unadjusted price with the 0.08% a bit over 100 (assuming it was recently purchased). Basing this on an online YTM calculator, which gives a YTM of about 0.08 at 100.02 and 0.77 at 99.73.
Yep, 100.02 for the 0.08%, and 99.76 for the one I just bought at 0.71% (the large/small-qty spread was about 9 bps).
If I make a calculation error, #Cruncher probably will let me know.
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Let me try to get at this thing from a different perspective.

The nominal yield curve is basically flat at 3% from 26 weeks out to 10 years.

This tells me that the market is not predicting any inflation over that period unless in the unlikely event that real yields are going down over ten years.

We also know that the Fed is rising interest rates to combat inflation.

These two thing seem to be consistent with each other.

Based on this I conclude we might as well stay short term and since I am not worried about short term inflation why not stay in T-bills not TIPS at least until the Fed stops playing around with the yield curve.

( I'm addressing new money only. With a flat yield curve I see little to be gained by increasing durations whether using nominal or real securites.)

New investment in T-Bills or TIPS from 26 to 52 weeks maturity seems like a good idea for now. And when these issues mature I can address the new yield curve at that time. I can't loose very much even if the Fed is completely unsuccessful in its rate increase objective.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Mon Aug 15, 2022 4:22 pm
jeffyscott wrote: Mon Aug 15, 2022 2:50 pm
Kevin M wrote: Mon Aug 15, 2022 2:28 pm So if I bought 10 of the 1/15/23 now, yield is 0.70% and total price would be 12,718.83 including 1.39 of accrued interest. I paid 12,723.50 for last purchase with 1.17 of accrued interest with yield of 0.08%. So I would be paying about $5 less even though yield is more than 60 bps higher.

I just bought 10. The price went down slightly, so I paid 12,717.81.

Kevin
What were the unadjusted prices, it was 99.73 when I looked. Was the unadjusted price with the 0.08% a bit over 100 (assuming it was recently purchased). Basing this on an online YTM calculator, which gives a YTM of about 0.08 at 100.02 and 0.77 at 99.73.
Yep, 100.02 for the 0.08%, and 99.76 for the one I just bought at 0.71% (the large/small-qty spread was about 9 bps).
Okay, I think that this is starting to make some sense to me, conceptually. The high recent inflation (June) is determining the TIPS inflation adjustments, so the longer you delay buying, the less of that you will get. I think that what you are really buying is a nominal that matures on Oct. 1 and a contract to buy a TIPS on that date, at a price equal to the value of the matured nominal. Or we could look at it as a nominal that converts to an inflation indexed security on Oct. 1.

I am thinking that it is the real YTM from the last known index ratio date that is what should actually be used, if you are going to buy based on real YTM. A risky thought, given #cruncher's comment that "there is nothing special about the yield on 9/30" :D . But the inflation adjusted principle value for Oct. 1 is known, daily TIPS prices should reflect that already known value, as well as expectations for inflation that will determine the change in value from that date to maturity.
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

jeffyscott wrote: Mon Aug 15, 2022 3:57 pm That's correct, but as I think you understand, it has to be net deflation over the entire term to matter. My understanding is that you could have deflation take the principle value below that initial $10K at any time, other than the day it matures. So if you have 10% deflation in year 1, your principle value becomes $9000. If there is then 3% inflation per year for the next 4, your final value is $10,129.57 and it would not have made any difference if you had, instead, bought a TIPS with accrued principle of 1250 (so 8 bonds at $1250 each, rather than 10 at $1000 each).
Thanks jeffyscott. I guess maybe I don't understand "it has to be the net deflation over the entire term to matter". If I purchased 10 of the 1/15/23 TIPS like Kevin did on the secondary market with the yield 0.70% and total price being 12,718.83 including 1.39 of accrued interest, if there is net deflation from now until this TIPS matures in January 2023 wouldn't I receive less than my purchase price of $12,718.83?

Looking at the 4/15/2025 I recently purchased on the secondary market that cost $22,537.75 couldn't I lose some of the $2,537.75 (not the $20K face value of the TIPS) due to net deflation over the remaining term of this TIPS until maturity? So to clarify my understanding, if inflation/deflation goes up and down over the remaining term but ends up slightly positive with inflation then the price would not be lower than my initial purchase price?

bpg
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

bpg1234 wrote: Mon Aug 15, 2022 6:26 pm
jeffyscott wrote: Mon Aug 15, 2022 3:57 pm That's correct, but as I think you understand, it has to be net deflation over the entire term to matter. My understanding is that you could have deflation take the principle value below that initial $10K at any time, other than the day it matures. So if you have 10% deflation in year 1, your principle value becomes $9000. If there is then 3% inflation per year for the next 4, your final value is $10,129.57 and it would not have made any difference if you had, instead, bought a TIPS with accrued principle of 1250 (so 8 bonds at $1250 each, rather than 10 at $1000 each).
Thanks jeffyscott. I guess maybe I don't understand "it has to be the net deflation over the entire term to matter". If I purchased 10 of the 1/15/23 TIPS like Kevin did on the secondary market with the yield 0.70% and total price being 12,718.83 including 1.39 of accrued interest, if there is net deflation from now until this TIPS matures in January 2023 wouldn't I receive less than my purchase price of $12,718.83?

Looking at the 4/15/2025 I recently purchased on the secondary market that cost $22,537.75 couldn't I lose some of the $2,537.75 (not the $20K face value of the TIPS) due to net deflation over the remaining term of this TIPS until maturity? So to clarify my understanding, if inflation/deflation goes up and down over the remaining term but ends up slightly positive with inflation then the price would not be lower than my initial purchase price?

bpg
Yes to all of your questions.

I just meant that it's only the reference CPI on the date of maturity that would determine the value at maturity. The path to get there doesn't matter for determining that value at maturity. If the reference CPI is lower on the day it matures than it was on the date of purchase, then the nominal value of the TIPS accrued principal will be less than it was on the date of purchase (but if it's less than 1000, you still get 1000). At least that's my understanding of how it works.

So when you buy a new issue, it's generally going to be close to 1000 at issuance (now that we have positive real yields). If the reference CPI 5 years later is lower than it was on the day it was issued, your accrued principal value will be less than 1000, but you'll get 1000 anyway.

There's also coupon payments along the way. So those would factor into determining your nominal total returns too.
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Re: Trading Treasuries (nominal and TIPS)

Post by Lyrrad »

Kevin M wrote: Tue Jun 21, 2022 6:03 pm
Dyloot wrote: Tue Jun 21, 2022 5:54 pm Thank you! I did not see the 119-day bill on the schedule so I assumed it was the 13-week.

Thanks for doing this thread. It’s been great.
You're welcome!

I see no 119-day issues on the tentative auction schedule, but I see a number of them having been auctioned (53 in the last year).

Kevin
As a followup to this, these 4 month bills will become permanent in October.

From August 3, 2022:
https://home.treasury.gov/news/press-releases/jy0908
Quarterly Refunding Statement of Assistant Secretary for Financial Markets Josh Frost wrote:As announced at the May quarterly refunding, Treasury plans to transition the 4-month (i.e.,17-week) CMB to benchmark status. During this transition, Treasury will continue to issue the 4-month CMB at a regular weekly cadence. Treasury anticipates that the first benchmark 4-month bill auction will be announced on October 18, 2022 and auctioned on October 19, 2022. As noted previously, Treasury intends to maintain the Tuesday settlement and maturity cycle for the 4-month benchmark bill.

So, it appears the new weekly schedule will be:

4, 8 week: auction Thursday, settle Tuesday
17 week: auction Wednesday, settle Tuesday
13, 26 week: auction Monday, settle Thursday

Hopefully, this means that one will be able to easily set up 4 month ladders at Treasury Direct and other brokers in a couple months.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

#Cruncher wrote: Mon Aug 15, 2022 4:08 pm
jeffyscott wrote: Sun Aug 14, 2022 8:38 am
#Cruncher wrote: Sun Aug 14, 2022 7:38 am The right-hand column below shows my calculated YTM for this TIPS for each workday from August 12 to September 30 assuming it is priced to keep the nominal 3.2% return and 122.5646 nominal value at maturity calculated in cell B8. ...
So if someone is looking at this TIPS tomorrow and the reported real YTM is 0.39%, should they be thinking as if they are actually buying at a real YTM of about 0.54%, since that is what we know the real yield would become as of Sept. 30, if nothing else that would influence TIPS yields/prices were to change over that time period? (underline added)
No, there is nothing special about the yield on 9/30. The YTM on 8/15 is what it is. The table in my post you reference is simply showing that, if the nominal return and the projected nominal redemption value remain the same, the real YTM will change over the period. Note that I'm not saying "nothing else" changes. On the contrary, it is the change in the index ratios that causes the effect I'm illustrating.
Sure, but those TIPS index ratio increases are known through Oct. 1, that's not a change.

What is special about 9/30 (or really, Oct. 1) is that the index ratios from there forward are not known. It's only at that point that it really becomes an inflation indexed bond.

I-bonds are similar in a way, in that you get a known nominal return for the first 6 months. I have bought I-bonds for this known nominal return over the past 2 years. If I-bonds were marketable, that initial 6 month nominal return would affect the price. With TIPS there's only about 1-2 months of known index ratio changes affecting the price at any time, instead of 6 months.
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

jeffyscott wrote: Mon Aug 15, 2022 12:06 pm
bpg1234 wrote: Mon Aug 15, 2022 9:51 amI like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.
You're looking at accrued principle of 1183 vs. 1262, for this difference to matter the 1183 would need to fall to <1000. In order for that to happen there would need to be about 15.5% deflation or more between now and the maturity date of the chosen TIPS. We also already know that CPI will go to 296.276 (Oct 1 ref. CPI. It is 294.10923 today, so a 15.5% decline from that Oct. 1 reference value would mean 248.52, which makes the necessary decline actually about 16%.

Do you really think there is any chance of seeing 16% deflation over this 6-9 month period?
jeffyscott,
In reviewing the numbers you provided in your quoted response for the 4/15/2023 versus 7/15/2023 TIPS how did you arrive at "accrued principle of 1183 vs. 1262"?
Thanks in advance,
bpg
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

bpg1234 wrote: Tue Aug 16, 2022 9:01 am
jeffyscott wrote: Mon Aug 15, 2022 12:06 pm
bpg1234 wrote: Mon Aug 15, 2022 9:51 amI like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.
You're looking at accrued principle of 1183 vs. 1262, for this difference to matter the 1183 would need to fall to <1000. In order for that to happen there would need to be about 15.5% deflation or more between now and the maturity date of the chosen TIPS. We also already know that CPI will go to 296.276 (Oct 1 ref. CPI. It is 294.10923 today, so a 15.5% decline from that Oct. 1 reference value would mean 248.52, which makes the necessary decline actually about 16%.

Do you really think there is any chance of seeing 16% deflation over this 6-9 month period?
jeffyscott,
In reviewing the numbers you provided in your quoted response for the 4/15/2023 versus 7/15/2023 TIPS how did you arrive at "accrued principle of 1183 vs. 1262"?
Thanks in advance,
bpg
Here: https://www.wsj.com/market-data/bonds/tips (they each accrued another dollar or two, since yesterday)
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Tue Aug 16, 2022 10:12 am
bpg1234 wrote: Tue Aug 16, 2022 9:01 am
jeffyscott wrote: Mon Aug 15, 2022 12:06 pm
bpg1234 wrote: Mon Aug 15, 2022 9:51 amI like the Inflation Factor of the 4/15 TIPS being lower than the 7/15 but you have often dismissed this.
You're looking at accrued principle of 1183 vs. 1262, for this difference to matter the 1183 would need to fall to <1000. In order for that to happen there would need to be about 15.5% deflation or more between now and the maturity date of the chosen TIPS. We also already know that CPI will go to 296.276 (Oct 1 ref. CPI. It is 294.10923 today, so a 15.5% decline from that Oct. 1 reference value would mean 248.52, which makes the necessary decline actually about 16%.

Do you really think there is any chance of seeing 16% deflation over this 6-9 month period?
jeffyscott,
In reviewing the numbers you provided in your quoted response for the 4/15/2023 versus 7/15/2023 TIPS how did you arrive at "accrued principle of 1183 vs. 1262"?
Thanks in advance,
bpg
Here: https://www.wsj.com/market-data/bonds/tips (they each accrued another dollar or two, since yesterday)
I think it bears repeating that accrued principal shown by WSJ is determined by multiplying the index ratio (aka inflation factor) by 1,000.

For example, the index ratio for the 4/15/23 purchased yesterday (settlement today) was 1.18458, which I think would be shown by WSJ as 1,185 of accrued principal (they actually show 1184, so maybe truncating instead of rounding?). Similarly, IR for the 7/15/23 was 1.26436, which would be shown by WSJ as 1,264 of accrued principal (confirmed). So WSJ is multiplying IR by 1,000 to get accrued principal per $1,000 face value (1 bond).

Index ratios are shown by Fidelity in the bond search results. They also can be found on the eyebonds.info website. They also can be calculated by dividing the settlement reference CPI by the dated date CPI for each TIPS. The dated date can be found on the bond details page for each TIPS; they also are available on the eyebonds.info website.

When you buy a TIPS, the amount you pay is the index ratio times unadjusted price plus accrued interest.

Kevin
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 »

#Cruncher wrote: Mon Aug 15, 2022 4:08 pm
Kevin M wrote: Sun Aug 14, 2022 4:57 pmThe issue I have is that it's not intuitive to me that a higher real yield could result in a lower nominal return. How would you explain this to someone without crunching the numbers?
I'm afraid I can't explain it without crunching some numbers, Kevin. :? But let's try a fairly simple example: Assume that the Jan 15 2023 TIPS your post references has yields-to-maturity (YTM) of -0.74% and -0.66% on 8/8 and 8/9 settlement dates respectively. So the YTM increases 0.08% points in one day. The unadjusted prices can be computed from the yields. And then the total costs (aka adjusted prices) of the purchases these dates (assuming a 0% coupon) will equal the unadjusted price X the index ratio on each day.

Code: Select all

Row             Col A      Col B      Col C     Col D   Formula in Col B => Col C
  2           Matures  1/15/2023
  3           Settles  8/08/2022  8/09/2022
  4  Days to maturity        160        159            =$B2-B3
  5               YTM     -0.74%     -0.66%    Change
  6   Unadusted price   100.3261   100.2889   -0.037%  =100/(1+B5)^(B4/365)
  7       Index ratio    1.27025    1.27082   +0.045%
  8    Adjusted price   127.4393   127.4491   +0.008%  =B6*B7
Row 8 shows that the total cost increased slightly even though the YTM rose. If the expected nominal proceeds at maturity remain the same, the nominal return must therefore be lower. Column D shows this happens because the increase in the index ratio exceeds the decrease in the unadjusted price.
Yes, I observed something similar in this post.

So from a purely technical perspective, we can show that the nominal return can be lower up to the last know ref CPI date even though the real yield is higher. But I still think people will be puzzled by this, especially for the shorter-term TIPS, since as you showed, the real return can be significantly higher simply because of the increase in index ratio, but the nominal return could still be lower up to the date of the last know ref CPI.

We've seen comments on the forum about TIPS never having been tested in a high inflation environment. We are seeing that test now, and at least personally I am learning things about TIPS that I never knew, and that I have never seen written about. Has anyone ever seen a discussion of how real yield can be higher but nominal return lower than a previous purchase, other than due to seasonality? I haven't.

But rather than just go to the last ref CPI date, I'd like to see scenario analyses that extend to maturity, like I did for the 1/15/23 TIPS, in which the nominal return for the higher real yield purchase could be higher or lower than for the lower real yield purchase depending on inflation. Still hoping that you (#Cruncher) will follow up with that.

It now appears to me that perhaps I shouldn't buy additional TIPS just because the real yield is higher, if that has been my policy, but also should be looking at the adjusted amount I am paying. In other words, if I want to buy only if the expected return is higher, perhaps I need to look at more than just the real yield.

Kevin
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 »

#Cruncher wrote: Mon Aug 15, 2022 4:08 pm
#Cruncher wrote: Sun Aug 14, 2022 7:38 am... increasing index ratios during August will have a significant effect on the yield of this TIPS even though it doesn't mature until April 15, 2025. (The effect will be greater for TIPS that mature sooner.) (underline added)
To show this, I modified the table in the previous post to show the TIPS maturing Jan 15 2023 discussed above. The effect is indeed greater. Instead of the YTM increasing from +0.35% on 8/12 to +0.63% on 9/1 for the April 2025 maturity, it now increases from -0.42% to +1.50%!

Code: Select all

  1               Settles  8/08/2022
  2               Matures  1/15/2023
  3     Yield to maturity     (0.74%)
  4      Unadjusted price   100.3261   =100/(1+B3)^((B2-B1)/365)
  5  Idx ratio settlement    1.27025   =VLOOKUP(B1,$A$11:$C$46,3,FALSE)
  6        Adjusted price   127.4393   =B4*B5
  7        Nominal return      2.70% 
  8  Nominal mature value   128.9363   =B6*(1+B7)^((B2-B1)/365)
Row                 Col A      Col B     Col C     Col D   Col E
  9                         Adjusted     Index     Unadj         
 10               Settles      Price     Ratio     Price    YTM

Code: Select all

 29           Mon 8/08/22   127.4393   1.27025  100.3261  (0.74%)
 30           Tue 8/09/22   127.4486   1.27082  100.2884  (0.66%)
 31           Wed 8/10/22   127.4579   1.27138  100.2516  (0.58%)
 32           Thu 8/11/22   127.4672   1.27194  100.2148  (0.50%)
 33           Fri 8/12/22   127.4765   1.27250  100.1780  (0.42%) <===
 
 34           Mon 8/15/22   127.5044   1.27418  100.0678  (0.16%)
 35           Tue 8/16/22   127.5137   1.27474  100.0311  (0.07%)
 36           Wed 8/17/22   127.5230   1.27530   99.9945   0.01% 
 37           Thu 8/18/22   127.5323   1.27587   99.9571   0.10% 
 38           Fri 8/19/22   127.5416   1.27643   99.9206   0.19%
 
 39           Mon 8/22/22   127.5695   1.27811   99.8111   0.47% 
 40           Tue 8/23/22   127.5789   1.27867   99.7747   0.57% 
 41           Wed 8/24/22   127.5882   1.27923   99.7383   0.67% 
 42           Thu 8/25/22   127.5975   1.27979   99.7019   0.76% 
 43           Fri 8/26/22   127.6068   1.28035   99.6656   0.86%
 
 44           Mon 8/29/22   127.6347   1.28204   99.5560   1.18% 
 45           Tue 8/30/22   127.6441   1.28260   99.5198   1.28% 
 46           Wed 8/31/22   127.6534   1.28316   99.4836   1.39% 
 47           Thu 9/01/22   127.6627   1.28372   99.4475   1.50%  <===
 
 48           Fri 9/02/22   127.6720   1.28372   99.4547   1.49% 
 49           Mon 9/05/22   127.7000   1.28370   99.4781   1.46% 
 50           Tue 9/06/22   127.7093   1.28370   99.4853   1.45% 
 51           Wed 9/07/22   127.7186   1.28369   99.4934   1.44% 
 52           Thu 9/08/22   127.7279   1.28369   99.5006   1.43% 
 53           Fri 9/09/22   127.7373   1.28368   99.5087   1.41%
 
 54           Mon 9/12/22   127.7652   1.28367   99.5312   1.38% 
 55           Tue 9/13/22   127.7746   1.28366   99.5393   1.37% 
 56           Wed 9/14/22   127.7839   1.28365   99.5473   1.36% 
 57           Thu 9/15/22   127.7932   1.28365   99.5546   1.34% 
 58           Fri 9/16/22   127.8025   1.28364   99.5626   1.33%
 
 59           Mon 9/19/22   127.8305   1.28363   99.5852   1.29% 
 60           Tue 9/20/22   127.8399   1.28362   99.5932   1.28% 
 61           Wed 9/21/22   127.8492   1.28362   99.6005   1.27% 
 62           Thu 9/22/22   127.8585   1.28361   99.6086   1.25% 
 63           Fri 9/23/22   127.8679   1.28361   99.6158   1.24%
 
 64           Mon 9/26/22   127.8959   1.28359   99.6392   1.20% 
 65           Tue 9/27/22   127.9052   1.28359   99.6465   1.18% 
 66           Wed 9/28/22   127.9145   1.28358   99.6545   1.17% 
 67           Thu 9/29/22   127.9239   1.28358   99.6618   1.15% 
 68           Fri 9/30/22   127.9332   1.28357   99.6698   1.13%
(Index ratios are copied from this web page.)
As you say, #Cruncher, this assumes a constant nominal expected return. As a reality check, the ask yield now for the 1/15/23 TIPS is 0.96% (it's changing as I write this, but this was it a few minutes ago), while the yield under the stated conditions would be 0.01% (8/17 settlement).

If I bought this at the smaller quantity yield of 0.93%, total amount would be $12,712.47 including 1.43 of accrued interest. For my purchase yesterday at 0.71% ask, my total was 12,717.81 including 1.39 of accrued interest. So even though the real yield is 22 basis points higher, I would be paying only 0.04% less today. Based on just the real yield change, I would buy another 10, but based on the total amount paid, not so sure.

Changes today vs. yesterday: price change = -0.09%, IR change = +0.04%, adjusted amount change = -0.04%.

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

Post by silvergga »

Looking at some 1 year treasuries. How come E*Trade shows a 3.11 YTW? It says (dis) Discount Yield.

Same issue in Fidelity doesn't show a different YTW vs YTM.

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Kevin M
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

silvergga wrote: Tue Aug 16, 2022 1:03 pm Looking at some 1 year treasuries. How come E*Trade shows a 3.11 YTW? It says (dis) Discount Yield.

Same issue in Fidelity doesn't show a different YTW vs YTM.

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YTW is same as YTM For Treasuries because they are not callable.
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

^ It appears that, for bills, they are using the YTW column to show the yield as a discount rate.

Treasury shows yesterday's discount rate for the 1 year as 3.11% and they have this as equivalent to 3.23% as a "coupon equivalent", so basically the same as E-trade shows currently:
https://home.treasury.gov/resource-cent ... nth=202208

I don't see how that serves any purpose, I would ignore it and just look at the YTM column.
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

So the real yields for the 1/23, 4/23 and 7/23 TIPS are all up today so which one is the best/smartest buy if looking to add a $10-$20K (TBD) 2023 rung to a 5 year TIPS ladder? My TIPS ladder is just to help maintain my purchasing power of some of my fixed income and not to meet any specific liabilities during the 5 year term.

bpg
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Tue Aug 16, 2022 1:39 pm ^ It appears that, for bills, they are using the YTW column to show the yield as a discount rate.

Treasury shows yesterday's discount rate for the 1 year as 3.11% and they have this as equivalent to 3.23% as a "coupon equivalent", so basically the same as E-trade shows currently:
https://home.treasury.gov/resource-cent ... nth=202208

I don't see how that serves any purpose, I would ignore it and just look at the YTM column.
Agreed. Fidelity doesn't do this, and I don't think Vanguard or Schwab do either.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

bpg1234 wrote: Tue Aug 16, 2022 2:37 pm So the real yields for the 1/23, 4/23 and 7/23 TIPS are all up today so which one is the best/smartest buy if looking to add a $10-$20K (TBD) 2023 rung to a 5 year TIPS ladder? My TIPS ladder is just to help maintain my purchasing power of some of my fixed income and not to meet any specific liabilities during the 5 year term.

bpg
I would buy either the 1/15/23 or 7/15/23, depending on what term you prefer. Shorter maturity = less price risk, more reinvestment risk, and vice versa. The 4/15/23 seasonally adjusted yield is again below that of the 1/15/23.
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Re: Trading Treasuries (nominal and TIPS)

Post by bpg1234 »

Kevin M wrote: Tue Aug 16, 2022 2:42 pm
bpg1234 wrote: Tue Aug 16, 2022 2:37 pm So the real yields for the 1/23, 4/23 and 7/23 TIPS are all up today so which one is the best/smartest buy if looking to add a $10-$20K (TBD) 2023 rung to a 5 year TIPS ladder? My TIPS ladder is just to help maintain my purchasing power of some of my fixed income and not to meet any specific liabilities during the 5 year term.

bpg
I would buy either the 1/15/23 or 7/15/23, depending on what term you prefer. Shorter maturity = less price risk, more reinvestment risk, and vice versa. The 4/15/23 seasonally adjusted yield is again below that of the 1/15/23.
Thanks Kevin for all of your assistance. You are a treasure to the forum (perhaps I should have said "Treasury" in light of this thread lol).

I also would like to give a shout out to jeffyscott as he too often steps in to help answer some of the many questions I ask of you.

Thanks again to both of you,
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Re: Trading Treasuries (nominal and TIPS)

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Kevin M wrote: Tue Aug 16, 2022 2:42 pm
bpg1234 wrote: Tue Aug 16, 2022 2:37 pm So the real yields for the 1/23, 4/23 and 7/23 TIPS are all up today so which one is the best/smartest buy if looking to add a $10-$20K (TBD) 2023 rung to a 5 year TIPS ladder? My TIPS ladder is just to help maintain my purchasing power of some of my fixed income and not to meet any specific liabilities during the 5 year term.

bpg
I would buy either the 1/15/23 or 7/15/23, depending on what term you prefer. Shorter maturity = less price risk, more reinvestment risk, and vice versa. The 4/15/23 seasonally adjusted yield is again below that of the 1/15/23.
At one point today I got these quotes;
TIPS 1/15/23 1.035%
Tbill 1/19/23 2.928%

I really have not followed the seasonal adjustment calculations for short term TIPS. How do you decide that the TIPS are better in this case?

I am just trying to wrap my head around this and not being critical at all.
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Re: Trading Treasuries (nominal and TIPS)

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BlueEars wrote: Tue Aug 16, 2022 4:07 pm I really have not followed the seasonal adjustment calculations for short term TIPS. How do you decide that the TIPS are better in this case?
You guys are overthinking this thing. TIPS protect against unexpected inflation. When we are looking at ~26 weeks the pros have a very good inflation estimate. The nominals and TIPS are going to have the same return except for the insurance cost in the TIPS which is going to be small over such a short time frame I would think.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

BlueEars wrote: Tue Aug 16, 2022 4:07 pm
Kevin M wrote: Tue Aug 16, 2022 2:42 pm
bpg1234 wrote: Tue Aug 16, 2022 2:37 pm So the real yields for the 1/23, 4/23 and 7/23 TIPS are all up today so which one is the best/smartest buy if looking to add a $10-$20K (TBD) 2023 rung to a 5 year TIPS ladder? My TIPS ladder is just to help maintain my purchasing power of some of my fixed income and not to meet any specific liabilities during the 5 year term.

bpg
I would buy either the 1/15/23 or 7/15/23, depending on what term you prefer. Shorter maturity = less price risk, more reinvestment risk, and vice versa. The 4/15/23 seasonally adjusted yield is again below that of the 1/15/23.
At one point today I got these quotes;
TIPS 1/15/23 1.035%
Tbill 1/19/23 2.928%

I really have not followed the seasonal adjustment calculations for short term TIPS. How do you decide that the TIPS are better in this case?

I am just trying to wrap my head around this and not being critical at all.
It depends what you mean by "better". Since you are comparing to a nominal Treasury, the breakeven inflation rate (BEI) may be of interest to you. Here are the breakeven inflation rates (BEI) calculated four different ways for the next three maturity dates, the first being the 1/15/23:

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First, looking at Std BEI, which is the conventional way BEI is calculated, by subtracting the TIPS yield (0.96% for the 1/15/23) from the nominal yield (2.79%) = 1.84%. So, the TIPS should earn more if inflation is higher than 1.84%, and the nominal should earn more if inflation is less than that.

Next, if we use the TIPS seasonally adjusted yield (SA = -0.02%) instead of the ask yield for the conventional BEI calculation, the Std SA BEI is 2.82%. My view is that this higher BEI factors in the expected nominal return in the real yield.

Next, since we actually know the inflation adjustments to Oct 1 2022, we can calculate the breakeven inflation rates from 10/1/22 to 1/15/23, both with and without the seasonal adjustments. This give us BEI = 0.88% and SA BEI = 2.40%.

Although I can calculate these different BEIs, it's difficult for me to explain in words what the seasonally adjusted ones mean.

At any rate, I don't have a strong opinion on future inflation rates, so my plan has been to move toward half each in TIPS and nominal investments of similar maturity. As they mature, we will find out how it plays out.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

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Thanks Kevin (and Doc).
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Tue Aug 16, 2022 5:54 pm
. So, the TIPS should earn more if inflation is higher than 1.84%, and the nominal should earn more if inflation is less than that.
You are ignoring the insurance factor to cover the risk that inflation is higher than expected. :D

And I have no idea of what the cost of that insurance is. Do you?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Tue Aug 16, 2022 7:02 pm
Kevin M wrote: Tue Aug 16, 2022 5:54 pm
. So, the TIPS should earn more if inflation is higher than 1.84%, and the nominal should earn more if inflation is less than that.
You are ignoring the insurance factor to cover the risk that inflation is higher than expected. :D

And I have no idea of what the cost of that insurance is. Do you?
There are two premiums that work in opposite directions, and neither is observable, so no one really knows what they are.

There is an unexpected inflation yield premium that theoretically increases the nominal yield, which tends to increase the BEI. There is an illiquidity yield premium which theoretically increases the TIPS yield, which tends to decrease BEI. Since no one knows what these premiums are, I assume they cancel each other out as a first approximation.

Even though these premiums are not observable, there are models that estimate them. For at least one of the models I've looked at, the (il)liquidity premium seems to dominate the unexpected inflation premium. If one believes this, then the conventional BEI could be understating the actual BEI.

But we see a broad range of BEIs depending on how one calculates it, and I think this probably dominates the impact of any premiums embedded in the TIPS and nominal yields. Do we factor in seasonal adjustments (the experts seem to think so)? Do we account for the inflation adjustments that we already know for reference CPI dates up to Oct 1?

Now, these premiums are only relevant with respect to how well the BEI represents the bond market's view of expected inflation. They are not relevant in determining whether the nominal or TIPS will have a higher return, as that simply depends on whether or not inflation is higher or lower than the BEI, regardless of how well the BEI represents the market's estimate of future inflation. This is really all that matters in answering your question, but I thought it would be useful to review the TIPS and nominal yield premiums, and how they affect the BEI with respect to how well it represents the market's view of expected inflation.

Kevin
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Re: Buying at Vanguard on secondary market: detailed walkthrough

Post by sperry8 »

Kevin M wrote: Fri Jun 10, 2022 2:13 pm I have an inherited IRA at Vanguard from which I must take an RMD this year. I decided to buy quantity 20 of a Treasury that matures in December to fund the RMD (and more). I'll share the process as I do it.

First, I select from the dropdown Buy/Sell:

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This takes me to the Quick search screen. I select the Treasuries tab, then enter my search criteria. Note that I changed the default sort to Maturity, ascending. Note that I am using the classic Treasury order interface, not the simplified interface that also is available.

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This takes me to the search results:

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I don't want to go out further than 12/15, and I like the 12/8 yield, followed by 12/15. But, both have min qty larger than I want to buy, which is 20. So I click the Show more links to look at other quotes.

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Smallest qty for the 12/8 is 100, so I can't buy that. So I go with the 12/15 with min qty 1. I click Buy to the left of the ask quote with min qty 1.

This takes me to a preview screen.

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I click Buy at the top right. This takes me to the order entry screen. I enter quantity 20, then click CALCULATE one or two times to get through one or two warnings.

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This shows me the yield and other values of interest. I click CONTINUE, which takes me to the order details screen:

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I click SUBMIT, and am taken to order details again, but this time I see the order status Open at the bottom left. I click on the Order status link near the top of the screen (not shown in screenshot), and see the order details screen again, but this time with order status Open shown:

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I click the order status link near the top of the screen (not shown in screenshot), and see this:

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Note that I got a slightly higher yield than was entered in the limit order.

I click the Order no. link and see this:

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Kevin
Excellent post... thanks for showing me how to buy on the secondary market at VG. Is it a similar process to buy the direct auction via VG?
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Tue Aug 16, 2022 7:18 pm There is an unexpected inflation yield premium that theoretically increases the nominal yield, which tends to increase the BEI. There is an illiquidity yield premium which theoretically increases the TIPS yield, which tends to decrease BEI. Since no one knows what these premiums are, I assume they cancel each other out as a first approximation.
Thanks Kevin.

I was aware of the illiquidity issues of intermediate TIPS during stock market crashes but hadn't considered that this translated into an illiquidity yield premium in normal times.

Since I don't have a liability matching portfolio I don't need inflation protection so I don't need
TIPS, either short or longer term so I don't care about the illiquidity. Nevertheless the concept is interesting.
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Re: Buying at Vanguard on secondary market: detailed walkthrough

Post by jeffyscott »

sperry8 wrote: Wed Aug 17, 2022 9:30 am Excellent post... thanks for showing me how to buy on the secondary market at VG. Is it a similar process to buy the direct auction via VG?
To start, just choose "auction" instead of "secondary" (which is on Kevin's second screenshot):

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Re: Buying at Vanguard on secondary market: detailed walkthrough

Post by Kevin M »

jeffyscott wrote: Wed Aug 17, 2022 9:59 am
sperry8 wrote: Wed Aug 17, 2022 9:30 am Excellent post... thanks for showing me how to buy on the secondary market at VG. Is it a similar process to buy the direct auction via VG?
To start, just choose "auction" instead of "secondary" (which is on Kevin's second screenshot):

Image
There is a link in the original post (OP) to a blog post that covers buying at auction.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Doc wrote: Wed Aug 17, 2022 9:43 am
Kevin M wrote: Tue Aug 16, 2022 7:18 pm There is an unexpected inflation yield premium that theoretically increases the nominal yield, which tends to increase the BEI. There is an illiquidity yield premium which theoretically increases the TIPS yield, which tends to decrease BEI. Since no one knows what these premiums are, I assume they cancel each other out as a first approximation.
Thanks Kevin.

I was aware of the illiquidity issues of intermediate TIPS during stock market crashes but hadn't considered that this translated into an illiquidity yield premium in normal times.

Since I don't have a liability matching portfolio I don't need inflation protection so I don't need
TIPS, either short or longer term so I don't care about the illiquidity. Nevertheless the concept is interesting.
Yes, the two premiums have been understood for quite some time, and there are a number of academic papers on them.

I don't have a liability matching portfolio either, but I still appreciate having some inflation protection.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

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
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Re: Trading Treasuries (nominal and TIPS)

Post by squirrel1963 »

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
I have some excess cash from house sale which I haven't decided what to do with yet, so I backed up the proverbial truck and also bought the same 1/15/23 TIP at $99.62 price at Schwab to buy myself some time.

Incidentally, I also just opened an account at IBKR. IBKR doesn't seem to love TIPS. I was unable to enter the order using "client portal" (their Web interface) as it only showed the quote but no "submit buy order" button. Then I downloaded TWS (Trader Workstation), submitted order, but never went thru. It also charges $6 for an order of $5K face value. Wonder if anyone else tried to buy TIPS at IBKR ?

Edit: I was able to actually buy the TIP on IBKR at $99.74 including markups. IBKR is not particularly user friendly when it comes to trading TIPS, the preview order doesn't even show you the unadjusted vs adjusted price, only shows the latter.
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