billyt wrote: ↑Tue Sep 20, 2022 3:19 pm
Yes, the small yield differences between adjacent TIPS are not meaningful, and one should ignore them, as you have argued so eloquently. I think we agree! Where we part company is you seem to think you can find meaningful differences in the 'adjusted' yields.
Yes, one way to factor in seasonality is just to visualize the yield trend line through the maturities with the closest mm/dd in the maturity date; at least that would work now--we shall see how well it works in January, since the SA adjustment for 1/15 maturities will be 0 then. Or as you say, basically ignore the weird deviations in the quoted yields. That means one would find the 7/15/27 TIPS as desirable as the 4/15/27, assuming one is comfortable with a flat yield curve in this range.
Another way is to do the seasonal adjustments and view the seasonally adjusted yield curve, which will be similar to the trend line drawn as indicated above (as of now). Personally, this gives me more confidence in buying the maturities where the quoted yields are depressed due to seasonality, and not favoring maturities where the quoted yields are inflated due to seasonality.
But, many people have posted they buy the TIPS with the highest quoted yield for a particular year. That's not necessarily a mistake, but they likely will be favoring certain maturities over others due to seasonality, whereas I would not. I have bought a lot of 1/15, 4/15, 7/15, and a few 10/15 mm/dd maturity TIPS in recent months; I considered the SA yields in making my purchase decisions, but I could also have ignored yields altogether, and possibly ended up with the same holdings.
One could also just buy Jan TIPS in Jan, Feb TIPS in Feb, Apr TIPS in Apr, and Oct TIPS in Oct, since then the SA and quoted yields will be the same or very close.
Oh, and the adjustments aren't necessarily small for very short-term TIPS, which I understand you and many may not be interested in, but some may be (Vanguard short-term TIPS fund held more 1/15/23 TIPS than any other issue as of 8/31/22). For the 1/15/23 the seasonal adjustment is -138 basis points, for the 4/15/23 it's -100 basis points. It's quite a bit lower, but still meaningful I think, for 1/15/24 at -33 bps, 4/15/24 at -36 bps. We are close to October, so the 10/15/24 adjustment is the smallest for 2024 at -3 bps; the 7/15/24 adjustment is -7 bps.
Now, there could be some events that have occurred since the last CPI release, earlier this month, that institutional TIPS traders are factoring into their purchase decisions, and that could be part of the very large negative SA adjustments for Jan and Apr 2023 TIPS. This is acknowledged in the Canty paper I've referenced.
I think the bigger concern for these TIPS (which I own) is deflation over the next few months, as we have had in the last 2 months, which could mean negative inflation adjustments from now until maturity; deflation will be required to get the headline YoY inflation number down in the next few months to where markets are happy. Yes, if you bought the 1/15/23 TIPS today at 3.18%, you will earn that real yield through maturity, but I personally will be happier with my nominal fixed income holdings maturing in January if that's the case.
For 2025 maturities, the larger seasonal adjustments are in the -20 bps ballpark, for 2026 in the -15 bps ballpark, and for 2027 in the -10 bps ballpark--decreasing in magnitude with maturity as expected. If one thinks that 10 bps is insignificant (in the ballpark of the expense ratio of a fund), then one can probably ignore the entire topic if buying maturities of 5 years or greater, which I think we also can agree on.
Kevin
If I make a calculation error, #Cruncher probably will let me know.