Now that long TIPS yields are 60 bp off their highs I will…
Re: If long TIPS hit a real yield above 2.0% I will…
I’m a newish retiree age 65. I get confused re regular bond funds, and feel clueless about TIPS and tip funds. I don’t want to hijack this thread, so posed my questions in a separate post, but so far no traction. If anyone feels like doing a fixed income portfolio review and helping me understand if I should be considering long TIPS, I’d appreciate it
viewtopic.php?t=387076
viewtopic.php?t=387076
Age 66, life turned upside down 3/2/19, thanking God for what I've learned from this group. AA 40/60 for now, possibly changing at age 70.
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Re: If long TIPS hit a real yield above 2.0% I will…
Just bought the 2046 maturity at a 1.985% yield. That was for as little as $1K par. If you buy $50K par, the yield is 1.99%. So close to 2%!
Re: If long TIPS hit a real yield above 2.0% I will…
^Right. I see the 2045 at 2.017 for min 50, and 2.011 for min 10. We are there!
If I make a calculation error, #Cruncher probably will let me know.
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Re: If long TIPS hit a real yield above 2.0% I will…
For those buying individual TIPS who are still in accumulation phase, what are you doing with the interest payouts? Reinvesting?
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Re: If long TIPS hit a real yield above 2.0% I will…
LTPZ looking attractive here IMO
Re: If long TIPS hit a real yield above 2.0% I will…
Yes, I reinvest into my bond funds until I purchase a new TIPS.CletusCaddy wrote: ↑Fri Sep 30, 2022 2:22 pm For those buying individual TIPS who are still in accumulation phase, what are you doing with the interest payouts? Reinvesting?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: If long TIPS hit a real yield above 2.0% I will…
Thanks to #Cruncher and Kevin M for nailing down the facts, and to vineviz for the reminder that risk-free (return of capital) does not mean free (of volatility risk).
As Kevin’s updates have shown, long TIPS continue to be achingly volatile, with the 2045s closing at a yield of 1.99% today (wsj.com). Under these circumstances, my response to the query in the OP is: “start legging in once the yield gets close to 2.0%. Don’t wait for that bell to ring. Then buy more if the price drops further. Buy more and more, the farther and the more steeply the price drops."*
*I’m constitutionally incapable of buying stuff that has gone up. I like to buy on sale, preferable fire sale and “everything must go” clearances. 2022 is shaping up to be a year of opportunity …
It’s impossible to pick the bottom (of TIPS prices). Today could be the peak yield for all we know; or the yield could climb past 2.50% and keep going (pity the poor British Gilt trader earlier this week, who “knew” yields couldn’t kick up 50 bp in a day).
I can stomach the volatility, because the funds in question are just a piece of a retirement portfolio where distributions won’t be required (by law) or needed (by us) for years to come. I can also stomach the volatility around a yield of 2.0% because there’s no historical reason to believe a nominal (long) bond investment has an expected long term real return above 2.0%; for a total bond fund, that would probably be 1.50%. And last, all I am doing personally is redistributing the fixed income portion of my portfolio, including that embedded in the W duo, from shorter durations to longer durations and from nominal to inflation-protected.
Nothing that will get me inducted into the “Market Timer of the Month” club.
As Kevin’s updates have shown, long TIPS continue to be achingly volatile, with the 2045s closing at a yield of 1.99% today (wsj.com). Under these circumstances, my response to the query in the OP is: “start legging in once the yield gets close to 2.0%. Don’t wait for that bell to ring. Then buy more if the price drops further. Buy more and more, the farther and the more steeply the price drops."*
*I’m constitutionally incapable of buying stuff that has gone up. I like to buy on sale, preferable fire sale and “everything must go” clearances. 2022 is shaping up to be a year of opportunity …
It’s impossible to pick the bottom (of TIPS prices). Today could be the peak yield for all we know; or the yield could climb past 2.50% and keep going (pity the poor British Gilt trader earlier this week, who “knew” yields couldn’t kick up 50 bp in a day).
I can stomach the volatility, because the funds in question are just a piece of a retirement portfolio where distributions won’t be required (by law) or needed (by us) for years to come. I can also stomach the volatility around a yield of 2.0% because there’s no historical reason to believe a nominal (long) bond investment has an expected long term real return above 2.0%; for a total bond fund, that would probably be 1.50%. And last, all I am doing personally is redistributing the fixed income portion of my portfolio, including that embedded in the W duo, from shorter durations to longer durations and from nominal to inflation-protected.
Nothing that will get me inducted into the “Market Timer of the Month” club.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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Re: If long TIPS hit a real yield above 2.0% I will…
Any decisional framework for someone who would have to sell heavily depressed bond funds in order to afford these TIPS?
My fixed income allocation (roughly 10 years of expenses, ~$500k) is split 50/50 between BND (in tax-deferred) and VWIUX (in taxable). I have been in this allocation for 5+ years, so have fully suffered the -15%-20% decline in NAV, which has been brutally painful. I do not depend on this fixed income unless I were to lose my W2 income, so I know if I wait long enough the NAV will go back up, and in the meantime I get an attractive yield.
Still, I'm wondering if I should be considering rebalancing some of this in 10y TIPS.
The rest of my portfolio (~$2.5M) is all in VTI/VXUS, if it matters.
My fixed income allocation (roughly 10 years of expenses, ~$500k) is split 50/50 between BND (in tax-deferred) and VWIUX (in taxable). I have been in this allocation for 5+ years, so have fully suffered the -15%-20% decline in NAV, which has been brutally painful. I do not depend on this fixed income unless I were to lose my W2 income, so I know if I wait long enough the NAV will go back up, and in the meantime I get an attractive yield.
Still, I'm wondering if I should be considering rebalancing some of this in 10y TIPS.
The rest of my portfolio (~$2.5M) is all in VTI/VXUS, if it matters.
Last edited by deanmoriarty on Fri Sep 30, 2022 4:22 pm, edited 1 time in total.
Re: If long TIPS hit a real yield above 2.0% I will…
vineviz wrote: ↑Fri Sep 30, 2022 2:30 pmYes, I reinvest into my bond funds until I purchase a new TIPS.CletusCaddy wrote: ↑Fri Sep 30, 2022 2:22 pm For those buying individual TIPS who are still in accumulation phase, what are you doing with the interest payouts? Reinvesting?
I thought you were more of an advocate for using TIPS funds in place of any individual TIPS for any application whether it’s a rolling ladder or duration matching.
So I am surprised to hear you admit to owning individual TIPS.
What am I missing?
Re: If long TIPS hit a real yield above 2.0% I will…
This seems like a case of sunk cost fallacy.deanmoriarty wrote: ↑Fri Sep 30, 2022 4:20 pm Any decisional framework for someone who would have to sell heavily depressed bond funds in order to afford these TIPS?
My fixed income allocation (roughly 10 years of expenses, ~$500k) is split 50/50 between BND (in tax-deferred) and VWIUX (in taxable). I have been in this allocation for 5+ years, so have fully suffered the -15%-20% decline in NAV, which has been brutally painful. I do not depend on this fixed income unless I were to lose my W2 income, so I know if I wait long enough the NAV will go back up, and in the meantime I get an attractive yield.
Still, I'm wondering if I should be considering rebalancing some of this in 10y TIPS.
The rest of my portfolio (~$2.5M) is all in VTI/VXUS, if it matters.
The fact that you suffered a 20% decline in currently owned bonds should have no impact on decision to use TIPs vs. Nominal bonds.
You now have a certain amount invested in FI, the question is given that fact, does it make sense to own some TIPs or should you own only nominal bonds going forward.
My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.
I look at the asymmetric nature of the risk associated with the two.
1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.
2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
In scenario 1, the superior performance of TIPs can make a real difference in maintaining purchasing power In secanrio 2, the superior performance of nominals just adds a little more to growing portfolio.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: If long TIPS hit a real yield above 2.0% I will…
Thanks for your considerations, appreciated. I actually do not have easy access in my 401k to individual TIPS or TIPS funds, so I would have to buy them in taxable (Backdoor Roth IRA is all in stocks and will stay that way). My marginal tax rate is 40.8%, and I am fairly confident it is going to be in that ballpark for at least the next few years (I might early retire if several stars aligned), so this makes the calculation a bit more complicated. VWIUX has a SEC yield (listed on vanguard.com) of 3.28%, meaning a ~5.8% tax-equivalent yield for my case...marcopolo wrote: ↑Fri Sep 30, 2022 4:30 pm This seems like a case of sunk cost fallacy.
The fact that you suffered a 20% decline in currently owned bonds should have no impact on decision to use TIPs vs. Nominal bonds.
You now have a certain amount invested in FI, the question is given that fact, does it make sense to own some TIPs or should you own only nominal bonds going forward.
My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.
I look at the asymmetric nature of the risk associated with the two.
1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.
2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
In scenario 1, the superior performance of TIPs can make a real difference in maintaining purchasing power In secanrio 2, the superior performance of nominals just adds a little more to growing portfolio.
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Re: If long TIPS hit a real yield above 2.0% I will…
This is exactly my scenario and dilemma too, but I bonds instead of TIPS. That is, money I earmarked for I Bonds come January has been in total bond, which of course is down about 16% now. Like deanmoriarty, I have my desired dollar allocation in FI, so I'd rather not simply increase it by buying I bonds. So I'm faced with either selling my total bond at a 16% loss to buy the I bonds, or exceeding my FI allocation goal by simply adding I bonds. Yes, the loss has happened, so I guess I just have to consider whether the return on total bond going forward would exceed I bonds, and exceed it enough to forego inching toward my desired 50/50 split (which I'm already not at because of the limits on I bonds).marcopolo wrote: ↑Fri Sep 30, 2022 4:30 pmThis seems like a case of sunk cost fallacy.deanmoriarty wrote: ↑Fri Sep 30, 2022 4:20 pm Any decisional framework for someone who would have to sell heavily depressed bond funds in order to afford these TIPS?
My fixed income allocation (roughly 10 years of expenses, ~$500k) is split 50/50 between BND (in tax-deferred) and VWIUX (in taxable). I have been in this allocation for 5+ years, so have fully suffered the -15%-20% decline in NAV, which has been brutally painful. I do not depend on this fixed income unless I were to lose my W2 income, so I know if I wait long enough the NAV will go back up, and in the meantime I get an attractive yield.
Still, I'm wondering if I should be considering rebalancing some of this in 10y TIPS.
The rest of my portfolio (~$2.5M) is all in VTI/VXUS, if it matters.
The fact that you suffered a 20% decline in currently owned bonds should have no impact on decision to use TIPs vs. Nominal bonds.
You now have a certain amount invested in FI, the question is given that fact, does it make sense to own some TIPs or should you own only nominal bonds going forward.
My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.
I look at the asymmetric nature of the risk associated with the two.
1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.
2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
In scenario 1, the superior performance of TIPs can make a real difference in maintaining purchasing power In secanrio 2, the superior performance of nominals just adds a little more to growing portfolio.
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
Re: If long TIPS hit a real yield above 2.0% I will…
So, if I buy the individual TIPS now and "lock in" a positive real yield of, say, 1.5%, and actual (not expected or estimated) inflation were 2% for the duration of my holding period, does that mean I would be paid a constant 3.5% over the term? Also, I am not thinking of funding spending needs (expenses or purchases etc.) with the individual TIPS investment. So, I am thinking of buying TIPS that mature in the longer term, say, 10, 15 or 20 years. (My wife and I are ages 71 and 75).vineviz wrote: ↑Thu Sep 29, 2022 11:14 amIf you want to "lock in" the yields in a one-step maneuver then individual TIPS are the best choice. Just buy a ladder of these with maturities roughly corresponding to expected future spending needs and you're basically done.Prudence wrote: ↑Thu Sep 29, 2022 11:07 amTo lock in the real yield and get the inflation protection do I need to buy the bonds and not the tips fund?Escapevelocity wrote: ↑Mon Sep 19, 2022 4:34 pmThis thread was made to talk about the unique opportunity with juicy yields on TIPS not nominal treasuries. The OP was trying to address how to leverage a potential 2% real yield on TIPS if and when that opportunity arises. The magic of locking in a long term position on TIPS at a 2% or similar real yield is that you never have to worry about losing purchasing power on your return.AnnetteLouisan wrote: ↑Mon Sep 19, 2022 4:29 pm Yes is there some magic moment when a bell will ring and we will know it’s the ideal moment to buy medium or long term treasuries? Is it when the Fed says, “ok we’re done raising rates?” Will they actually say that? Or do we just have to intuit the right moment?
I’ve bought I bonds, 4 week auto rolling t-bills and 12 week auto rolling treasuries but I want to buy some 18 or 36 monthers or whatever is optimal.
You'll get some "lock in" benefit from a TIPS fund as well, and the longer the average duration the more "locked in" you are. Unfortunately there's just one long-term TIPS fund available, PIMCO 15+ Year US TIPS ETF (LTPZ), so investors with long investment horizons won't have many choices.
Re: If long TIPS hit a real yield above 2.0% I will…
Owning TIPs in taxable is not ideal, especially at your tax rates. So, that is indeed a consideration.deanmoriarty wrote: ↑Fri Sep 30, 2022 4:36 pmThanks for your considerations, appreciated. I actually do not have easy access in my 401k to individual TIPS or TIPS funds, so I would have to buy them in taxable (Backdoor Roth IRA is all in stocks and will stay that way). My marginal tax rate is 40.8%, and I am fairly confident it is going to be in that ballpark for at least the next few years (I might early retire if several stars aligned), so this makes the calculation a bit more complicated. VWIUX has a SEC yield (listed on vanguard.com) of 3.28%, meaning a ~5.8% tax-equivalent yield for my case...marcopolo wrote: ↑Fri Sep 30, 2022 4:30 pm This seems like a case of sunk cost fallacy.
The fact that you suffered a 20% decline in currently owned bonds should have no impact on decision to use TIPs vs. Nominal bonds.
You now have a certain amount invested in FI, the question is given that fact, does it make sense to own some TIPs or should you own only nominal bonds going forward.
My personal take is to have about 50% of my fixed income allocation in TIPs. I think the argument for 100% TIPs is also a reasonable one.
I look at the asymmetric nature of the risk associated with the two.
1) TIPs do better when there is unexpectedly high inflation. This is when historically portfolio have struggled to meet retirees needs.
2) Nominal do better when inflation is lower than expected. Historically, portfolios do rather well in this scenario.
In scenario 1, the superior performance of TIPs can make a real difference in maintaining purchasing power In secanrio 2, the superior performance of nominals just adds a little more to growing portfolio.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Re: If long TIPS hit a real yield above 2.0% I will…
Is this US Treasury site a good site to get real rates, or should I go directly to the brokerage bond trading and get quotes?
https://home.treasury.gov/resource-cent ... nth=202209
It's interesting how much the real rates have been changing this month.
https://home.treasury.gov/resource-cent ... nth=202209
It's interesting how much the real rates have been changing this month.
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Re: If long TIPS hit a real yield above 2.0% I will…
The individual TIPS trading screen at your brokerage should give you the full view. Real yields listed under “YTM”2pedals wrote: ↑Fri Sep 30, 2022 6:53 pm Is this US Treasury site a good site to get real rates, or should I go directly to the brokerage bond trading and get quotes?
https://home.treasury.gov/resource-cent ... nth=202209
It's interesting how much the real rates have been changing this month.
Re: If long TIPS hit a real yield above 2.0% I will…
Broker quotes are more relevant if you are actually buying TIPS. For example, the 20-year CMT real rate today is 1.68%, but the 2/15/42 closing ask yield today was 1.952%, and the 2/15/43 was 1.998%.2pedals wrote: ↑Fri Sep 30, 2022 6:53 pm Is this US Treasury site a good site to get real rates, or should I go directly to the brokerage bond trading and get quotes?
https://home.treasury.gov/resource-cent ... nth=202209
It's interesting how much the real rates have been changing this month.
The Treasury CMT yields are hypothetical par yields, which assumes coupon rate = yield. The coupon rate of the 2042 is 0.750% (not 1.68%) and for the 2043 it's 0.625%.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Re: If long TIPS hit a real yield above 2.0% I will…
Thanks CletusCaddy and Kevin
Re: If long TIPS hit a real yield above 2.0% I will…
I suspect the discrepancy has a different origin. The bottom of the Treasury's page says "Starting 12/01/2008, the TIPS yield curve began using the most recently auctioned TIPS as knot points rather than all securities" and there are no recently issued TIPS maturing near 20 years from now so this might exclude the most relevant quotes from consideration. The 5, 10, and 30 year yields match closely.Kevin M wrote: ↑Fri Sep 30, 2022 7:15 pmBroker quotes are more relevant if you are actually buying TIPS. For example, the 20-year CMT real rate today is 1.68%, but the 2/15/42 closing ask yield today was 1.952%, and the 2/15/43 was 1.998%.2pedals wrote: ↑Fri Sep 30, 2022 6:53 pm Is this US Treasury site a good site to get real rates, or should I go directly to the brokerage bond trading and get quotes?
https://home.treasury.gov/resource-cent ... nth=202209
It's interesting how much the real rates have been changing this month.
The Treasury CMT yields are hypothetical par yields, which assumes coupon rate = yield. The coupon rate of the 2042 is 0.750% (not 1.68%) and for the 2043 it's 0.625%.
Kevin
Re: If long TIPS hit a real yield above 2.0% I will…
No, you would not get a 3.5% coupon payment each year. Instead, the principal value would be adjusted by 2% each year, and your coupon would be 1.5% of that adjusted principal. And at maturity, you get the adjusted principal back. Here is a highly simplified example of how that would play out for a 10 year TIPS with 1.5% coupon at 2% inflation:
Code: Select all
0 -10,000.00
1 153.00
2 156.06
3 159.18
4 162.36
5 165.61
6 168.92
7 172.30
8 175.75
9 179.26
10 12,372.79
However, if you hold the TIPS in taxable, you would be taxed each year on both the coupon payments and the increase in principal, even though the latter is not paid out until maturity.
.
Re: If long TIPS hit a real yield above 2.0% I will…
Is it possible to buy TIPs that mature in 1 year or less, perhaps on the secondary market?
Re: If long TIPS hit a real yield above 2.0% I will…
What is LMP?Who among us is able to trade all eggs for a satisfactory LMP
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The most important thing you should know about me is that I am not an expert.
Re: If long TIPS hit a real yield above 2.0% I will…
Liability Matching Portfolio
Re: If long TIPS hit a real yield above 2.0% I will…
What is BEI?TIPS like Jan and April 2023, but the 10 year BEI is 2.38%, at 5 years it's 3.62%.
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The most important thing you should know about me is that I am not an expert.
Re: If long TIPS hit a real yield above 2.0% I will…
If inflation is higher than the nominal bond yield, does that mean the real yield is negative?
VTI 61% VEA 26% VWO 13%
Re: If long TIPS hit a real yield above 2.0% I will…
BEI is break even inflation.
If inflation is higher than the yield of a nominal bond that bonds real yield is negative.
Please be aware that CPI has gone down for the last 2 months, so nominal yields are currently all positive.
If inflation is higher than the yield of a nominal bond that bonds real yield is negative.
Please be aware that CPI has gone down for the last 2 months, so nominal yields are currently all positive.
Re: If long TIPS hit a real yield above 2.0% I will…
We don't know what the future CPI rate will be. We know the recent past bond yield was negative for both nominal bonds and TIPS.
When you compare the current rates, you're looking at the markets future expectation, and the expectation should be relatively on par with each other. TIPS will guarantee you the CPI rate + whatever fixed additional rate they offer, and it's expected that the market will be pricing nominal bonds to the same level such that there isn't necessarily an advantage to either one. If the market turns out to be wrong about future inflation, depending on if it underestimated or overestimated future inflation will decide if it later turns out TIPS or nominal bonds had a higher yield.
If you have a specific risk preference, or wish to guarantee a fixed amount of nominal dollars or CPI adjusted dollars may be a valid reason to pick one or the other rather than looking at it as a bet the market is wrong with the pricing between TIPS or nominal bonds. If you really wanted to make the "bet" specificly that one or the other was priced wrong, you'd take a leveraged short position in one and go long the other to earn the spread.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: If long TIPS hit a real yield above 2.0% I will…
So only the bond yield is known, all future CPI is unknown and can only he speculated on. TIPS perform better when the CPI is higher than speculated and nominal when CPI is lower than expected and if the speculation is perfect than TIPS perform just as well as nominal bonds?JoMoney wrote: ↑Sat Oct 01, 2022 8:44 amWe don't know what the future CPI rate will be. We know the recent past bond yield was negative for both nominal bonds and TIPS.
When you compare the current rates, you're looking at the markets future expectation, and the expectation should be relatively on par with each other. TIPS will guarantee you the CPI rate + whatever fixed additional rate they offer, and it's expected that the market will be pricing nominal bonds to the same level such that there isn't necessarily an advantage to either one. If the market turns out to be wrong about future inflation, depending on if it underestimated or overestimated future inflation will decide if it later turns out TIPS or nominal bonds had a higher yield.
If you have a specific risk preference, or wish to guarantee a fixed amount of nominal dollars or CPI adjusted dollars may be a valid reason to pick one or the other rather than looking at it as a bet the market is wrong with the pricing between TIPS or nominal bonds. If you really wanted to make the "bet" specificly that one or the other was priced wrong, you'd take a leveraged short position in one and go long the other to earn the spread.
Because that makes it seem like TIPS and nominal bond allocation should go hand in hand, like a 50% split. So any value you lose on one is counteracted by the other
VTI 61% VEA 26% VWO 13%
Re: If long TIPS hit a real yield above 2.0% I will…
Yes, and many people advocate just what you're suggesting. Others have different preferences or liabilities that may be better suited to being matched to one or the other, and since the long-term expectation is the same for either it also shouldn't make much difference to a long-term investor if they're all-in on TIPS, all-in on nominal bonds, are all-in on a 50/50 mix (of similar maturities/duration.) Some periods will end with a result of one being better than the other, but over another the result can swing the other way.Trance wrote: ↑Sat Oct 01, 2022 8:52 amSo only the bond yield is known, all future CPI is unknown and can only he speculated on. TIPS perform better when the CPI is higher than speculated and nominal when CPI is lower than expected and if the speculation is perfect than TIPS perform just as well as nominal bonds?JoMoney wrote: ↑Sat Oct 01, 2022 8:44 amWe don't know what the future CPI rate will be. We know the recent past bond yield was negative for both nominal bonds and TIPS.
When you compare the current rates, you're looking at the markets future expectation, and the expectation should be relatively on par with each other. TIPS will guarantee you the CPI rate + whatever fixed additional rate they offer, and it's expected that the market will be pricing nominal bonds to the same level such that there isn't necessarily an advantage to either one. If the market turns out to be wrong about future inflation, depending on if it underestimated or overestimated future inflation will decide if it later turns out TIPS or nominal bonds had a higher yield.
If you have a specific risk preference, or wish to guarantee a fixed amount of nominal dollars or CPI adjusted dollars may be a valid reason to pick one or the other rather than looking at it as a bet the market is wrong with the pricing between TIPS or nominal bonds. If you really wanted to make the "bet" specificly that one or the other was priced wrong, you'd take a leveraged short position in one and go long the other to earn the spread.
Because that makes it seem like TIPS and nominal bond allocation should go hand in hand, like a 50% split. So any value you lose on one is counteracted by the other
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: If long TIPS hit a real yield above 2.0% I will…
Perfect, thank you.ruud wrote: ↑Fri Sep 30, 2022 8:18 pmNo, you would not get a 3.5% coupon payment each year. Instead, the principal value would be adjusted by 2% each year, and your coupon would be 1.5% of that adjusted principal. And at maturity, you get the adjusted principal back. Here is a highly simplified example of how that would play out for a 10 year TIPS with 1.5% coupon at 2% inflation:(The final payment is 12,189.94 principal and 182.85 coupon. This example ignores the fact that TIPS (like all Trearuries) pay out twice a year, not once a year).Code: Select all
0 -10,000.00 1 153.00 2 156.06 3 159.18 4 162.36 5 165.61 6 168.92 7 172.30 8 175.75 9 179.26 10 12,372.79
However, if you hold the TIPS in taxable, you would be taxed each year on both the coupon payments and the increase in principal, even though the latter is not paid out until maturity.
Re: If long TIPS hit a real yield above 2.0% I will…
Ruud is correct. But I've expanded on his example to also show the cash flow of a nominal bond with a 3.53% coupon [1] that would break even [2] with the TIPS if inflation did indeed run at a constant 2%. Cells C21 & D21 at the bottom of the table show that before taxes both bonds would have the same internal rate of return (IRR). But what may not be expected is that they would also have the same IRR after taxes if both were held in a normal taxable account. This is shown in cells G21 & H21.ruud wrote: ↑Fri Sep 30, 2022 8:18 pmNo, you would not get a 3.5% coupon payment each year. Instead, the principal value would be adjusted by 2% each year, and your coupon would be 1.5% of that adjusted principal. And at maturity, you get the adjusted principal back. Here is a highly simplified example of how that would play out for a 10 year TIPS with 1.5% coupon at 2% inflation:
...
However, if you hold the TIPS in taxable, you would be taxed each year on both the coupon payments and the increase in principal, even though the latter is not paid out until maturity.
Code: Select all
1 Col A Col B Col C Col D Col E Col F Col G Col H
2 Amount 10,000
3 Years 10
4 Tax rate 10%
5 Inflation 2%
6 TIPS coupon 1.50%
7 Nom coupon 3.53% [1]
TIPS --Pretax Cash Flow-- ---- Taxes ---- -After Tax Cash Flow-
8 Year Principal TIPS Nominal TIPS Nominal TIPS Nominal
Code: Select all
9 0 10,000.00 -10,000.00 -10,000.00 -10,000.00 -10,000.00
10 1 10,200.00 153.00 353.00 -35.30 -35.30 117.70 317.70
11 2 10,404.00 156.06 353.00 -36.01 -35.30 120.05 317.70 [3]
12 3 10,612.08 159.18 353.00 -36.73 -35.30 122.46 317.70
13 4 10,824.32 162.36 353.00 -37.46 -35.30 124.90 317.70
14 5 11,040.81 165.61 353.00 -38.21 -35.30 127.40 317.70
15 6 11,261.62 168.92 353.00 -38.97 -35.30 129.95 317.70
16 7 11,486.86 172.30 353.00 -39.75 -35.30 132.55 317.70
17 8 11,716.59 175.75 353.00 -40.55 -35.30 135.20 317.70
18 9 11,950.93 179.26 353.00 -41.36 -35.30 137.90 317.70
19 10 12,189.94 12,372.79 10,353.00 -42.19 -35.30 12,330.61 10,317.70
20 Sum 3,865.25 3,530.00 -386.53 -353.00 3,478.73 3,177.00
21 IRR 3.530% 3.530% 3.177% 3.177% [4]
- Breakeven nominal rate of 3.53% = (1 + 1.5%) * (1 + 2%) - 1.
- Assuming both bonds are purchased at par so their yield-to-maturity equals their coupons.
- Sample calculation of 10% tax for second year:
TIPS: -36.01 = -10% * (156.06 + 10404 - 10200)
Nominal: -35.30 = -10% * 353.00 - Internal rate of return after 10% taxes:
TIPS: 3.177% = IRR(G9:G19)
Nominal: 3.177% = IRR(H9:H19)
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Re: If long TIPS hit a real yield above 2.0% I will…
Let me extend the logic of this thread.
At what TIPS real yield would it make sense for young accumulators to actively shift allocation from equities to TIPS?
Ilmanen recently forecast global equities at 4% real return. If TIPS yield 3% real, doesn’t the risk-reward trade off demand that we all start building huge TIPS allocations?
Only wrinkle would be tax rates on distributions for people investing in taxable.
At what TIPS real yield would it make sense for young accumulators to actively shift allocation from equities to TIPS?
Ilmanen recently forecast global equities at 4% real return. If TIPS yield 3% real, doesn’t the risk-reward trade off demand that we all start building huge TIPS allocations?
Only wrinkle would be tax rates on distributions for people investing in taxable.
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Re: If long TIPS hit a real yield above 2.0% I will…
Only if you believe Ilmanen can predict stock returns.CletusCaddy wrote: ↑Sat Oct 01, 2022 1:02 pm Ilmanen recently forecast global equities at 4% real return. If TIPS yield 3% real, doesn’t the risk-reward trade off demand that we all start building huge TIPS allocations?
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Re: If long TIPS hit a real yield above 2.0% I will…
Only using him as representative of the professional consensus. Here is vanguard saying the same thing:Mountain Doc wrote: ↑Sat Oct 01, 2022 1:12 pmOnly if you believe Ilmanen can predict stock returns.CletusCaddy wrote: ↑Sat Oct 01, 2022 1:02 pm Ilmanen recently forecast global equities at 4% real return. If TIPS yield 3% real, doesn’t the risk-reward trade off demand that we all start building huge TIPS allocations?
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Re: If long TIPS hit a real yield above 2.0% I will…
I don't believe anyone's forecast. I highly doubt the equity risk premium is only 1%. As you say, very few investors would bother with stocks for an ERP of 1%. Investors would shift all their money to bonds, which would depress stock prices, which would increase the ERP to something sensibleCletusCaddy wrote: ↑Sat Oct 01, 2022 1:15 pmOnly using him as representative of the professional consensus. Here is vanguard saying the same thing:Mountain Doc wrote: ↑Sat Oct 01, 2022 1:12 pmOnly if you believe Ilmanen can predict stock returns.CletusCaddy wrote: ↑Sat Oct 01, 2022 1:02 pm Ilmanen recently forecast global equities at 4% real return. If TIPS yield 3% real, doesn’t the risk-reward trade off demand that we all start building huge TIPS allocations?
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Re: If long TIPS hit a real yield above 2.0% I will…
Ruud and #Cruncher - thank you both very much. Having only purchased individual treasury bills myself, your clear demonstration of coupon payments, principal adjustment, and return of principal for TIPS vs nominal bonds was very helpful to me!#Cruncher wrote: ↑Sat Oct 01, 2022 10:09 amRuud is correct. But I've expanded on his example to also show the cash flow of a nominal bond with a 3.53% couponruud wrote: ↑Fri Sep 30, 2022 8:18 pmNo, you would not get a 3.5% coupon payment each year. Instead, the principal value would be adjusted by 2% each year, and your coupon would be 1.5% of that adjusted principal. And at maturity, you get the adjusted principal back. Here is a highly simplified example of how that would play out for a 10 year TIPS with 1.5% coupon at 2% inflation:
...
However, if you hold the TIPS in taxable, you would be taxed each year on both the coupon payments and the increase in principal, even though the latter is not paid out until maturity.
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Re: If long TIPS hit a real yield above 2.0% I will…
I was playing around with the TIPS ladder spreadsheet, and as of now a $1M ladder will you get you about $40,690 (real) annual income for 30 years.
For comparison, I wanted to see what a $1M SPIA will do, since those payout ratios are increasing as well. A 65 year-old couple would get $63,720 (nominal) annual income for life.
For comparison, I wanted to see what a $1M SPIA will do, since those payout ratios are increasing as well. A 65 year-old couple would get $63,720 (nominal) annual income for life.
- The SPIA gets you more real income in the early years of retirement, and eliminates the longevity risk, but you have inflation risk
- The TIPS ladder gets you a consistent real income for 30 years, but come with longevity risk.
“The greatest shortcoming of the human race is our inability to understand the exponential function.” - Albert Allen Bartlett
Re: If long TIPS hit a real yield above 2.0% I will…
If TIPS hit a 2% real yield, I'll do nothing.
Re: If long TIPS hit a real yield above 2.0% I will…
Starting at age 65 with a $63,720 annual payment, and using a 2% inflation/depreciation rate, they would have to live to just under age 88 before the $63,720 had reduced to the same purchasing power of the $40,690... and if they had been putting aside the excess SPIA payment above a starting $40,690 +2% adjusted each year, and lived to age 88, they'd have put aside almost $250k (not including any interest on that) to fund 2% cola adjustments to age 113Stormbringer wrote: ↑Sun Oct 02, 2022 11:35 am I was playing around with the TIPS ladder spreadsheet, and as of now a $1M ladder will you get you about $40,690 (real) annual income for 30 years.
For comparison, I wanted to see what a $1M SPIA will do, since those payout ratios are increasing as well. A 65 year-old couple would get $63,720 (nominal) annual income for life.
- The SPIA gets you more real income in the early years of retirement, and eliminates the longevity risk, but you have inflation risk
- The TIPS ladder gets you a consistent real income for 30 years, but come with longevity risk.
At a 3% depreciation/inflation rate they'd have to live to just under age 80 before parity, and if putting aside excess to a 3% COLA adjustment they'd have enough to fund adjustments through age 97 (not including any interest on the excess SPIA payment set aside)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: If long TIPS hit a real yield above 2.0% I will…
I would add SPIAs increase liquidity risk. The sequence of inflation risk really comes into play with vanilla SPIAs; using a x% average inflation rate to compare vs TIPs doesn't really tell the whole story.Stormbringer wrote: ↑Sun Oct 02, 2022 11:35 am I was playing around with the TIPS ladder spreadsheet, and as of now a $1M ladder will you get you about $40,690 (real) annual income for 30 years.
For comparison, I wanted to see what a $1M SPIA will do, since those payout ratios are increasing as well. A 65 year-old couple would get $63,720 (nominal) annual income for life.
- The SPIA gets you more real income in the early years of retirement, and eliminates the longevity risk, but you have inflation risk
- The TIPS ladder gets you a consistent real income for 30 years, but come with longevity risk.
That's why actuarialists have all the fun!
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Re: If long TIPS hit a real yield above 2.0% I will…
How would a 30 year Tip with a 2% yield compare to an ibond with a 2% fixed rate?
Re: If long TIPS hit a real yield above 2.0% I will…
You could buy a lot more of the TIPS, but it would be better to hold in a tax-advantaged account. The I bond interest can be deferred until maturity (it's held in a taxable account).
The inflation adjustments work a bit differently, but over 30 years they should come out pretty close before taxes.
If I make a calculation error, #Cruncher probably will let me know.
Re: If long TIPS hit a real yield above 2.0% I will…
... as long as you hold to maturity. If you have to sell the 30yr TIPS prior to maturity the return will vary based on the current market/interest rates, one could lose money or possibly earn a premium above the rate it was issued at depending on the current rate and time left to maturity. The Series I Savings Bond doesn't have to be sold to a "market" but can be redeemed for the principal + all the accrued interest to that date (minus a small penalty if held less than 5 years.)Kevin M wrote: ↑Sun Oct 02, 2022 4:03 pmYou could buy a lot more of the TIPS, but it would be better to hold in a tax-advantaged account. The I bond interest can be deferred until maturity (it's held in a taxable account).
The inflation adjustments work a bit differently, but over 30 years they should come out pretty close before taxes.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: If long TIPS hit a real yield above 2.0% I will…
I agree, a nice way to advance the thread. I’ll answer for myself and hope others will engage.CletusCaddy wrote: ↑Sat Oct 01, 2022 1:02 pm Let me extend the logic of this thread.
At what TIPS real yield would it make sense for young accumulators to actively shift allocation from equities to TIPS?
Ilmanen recently forecast global equities at 4% real return. If TIPS yield 3% real, doesn’t the risk-reward trade off demand that we all start building huge TIPS allocations?
Only wrinkle would be tax rates on distributions for people investing in taxable.
First, I don’t think we’ll see 3.0% on the long TIPS. Runs counter to the long term Schmelzing trend of declining safe real interest rates. Even if we do, it will be gone in the blink of an eye, like October 2008. That’s in contrast to the 2.0% threshold, which should not be so brief, and allows for careful consideration.
Next, by the time TIPS did get to 3.0%, I’d have converted all my fixed income to TIPS, as I bought more and more at 2.25%, 2.50%, 2.75% …
And that makes your question pertinent, since equities would be all I’d have left.
Personally, I’d be unlikely to sell much in the way of equities. It is true what you say about risk-adjusted return, but by that point I’d only care about return, period. With social security, TIAA annuity, and all these long TIPS I’ll have bought, the remaining equities are true surplus.
Real equity returns run 6%+ in the lucky nations annualized, 4%+ for the world ex-USA with disasters included. After 100 years a dollar invested at 6% turns into about $256; a dollar at 3% turns into about $16 (rule of 72, I left the calculator in its holster).
Last, there is a confound: any development that pushed TIPS yields to 3.0% would probably also make stocks a screaming buy—kind of like late 2008.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: If long TIPS hit a real yield above 2.0% I will…
andJust bought the 2046 maturity at a 1.985% yield. That was for as little as $1K par. If you buy $50K par, the yield is 1.99%. So close to 2%!
Looking at what I can buy at Vanguard, I don't see any for sale today at anywhere near those rates, and all the TIPS require a $50K or more minimum purchase.Right. I see the 2045 at 2.017 for min 50, and 2.011 for min 10. We are there!
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Re: If long TIPS hit a real yield above 2.0% I will…
If you click "Show more", you'll see more choices with minimum requirements.tc101 wrote: ↑Mon Oct 03, 2022 10:23 amandJust bought the 2046 maturity at a 1.985% yield. That was for as little as $1K par. If you buy $50K par, the yield is 1.99%. So close to 2%!
Looking at what I can buy at Vanguard, I don't see any for sale today at anywhere near those rates, and all the TIPS require a $50K or more minimum purchase.Right. I see the 2045 at 2.017 for min 50, and 2.011 for min 10. We are there!
Re: If long TIPS hit a real yield above 2.0% I will…
Vanguard only predicts 10 year stock returns, the young investor will be investing for more than 10 years. How are you going to determine the risk reward tradeoff beyond 10 years?CletusCaddy wrote: ↑Sat Oct 01, 2022 1:15 pmOnly using him as representative of the professional consensus. Here is vanguard saying the same thing:Mountain Doc wrote: ↑Sat Oct 01, 2022 1:12 pmOnly if you believe Ilmanen can predict stock returns.CletusCaddy wrote: ↑Sat Oct 01, 2022 1:02 pm Ilmanen recently forecast global equities at 4% real return. If TIPS yield 3% real, doesn’t the risk-reward trade off demand that we all start building huge TIPS allocations?
https://advisors.vanguard.com/insights/ ... ctober2022
Re: If long TIPS hit a real yield above 2.0% I will…
Thanks for making this crucial point.
It is basically inconceivable that the expected 10-year return of stocks would ever routinely be less than the real yield of 10-year TIPS.
This would require investors being willing to pay a huge premium in order to own a MORE risky assets, something we've maybe only experienced in our worst stock bubbles (e.g. 1929 and 1999).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: If long TIPS hit a real yield above 2.0% I will…
Thanks for the info on "show more". I now understand that.
I am still confused about this:
I am still confused about this:
Where do you see that yield. It is not YTM, at least today there is nothing with a YTM close to that.Just bought the 2046 maturity at a 1.985% yield.
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The most important thing you should know about me is that I am not an expert.