Now that long TIPS yields are 60 bp off their highs I will…

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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

NiceUnparticularMan wrote: Tue May 23, 2023 11:48 am
seajay wrote: Tue May 23, 2023 11:29 am but if they were I suspect that there'd have been some mechanism to reduce/eliminate that 'cost' to the Treasury.
TIPS in the US remain a small fraction of all outstanding Treasurys, and of course federal fiscal and monetary authority is not limited in nominal terms. So there is very little reason to believe the Treasury would ever be forced to reduce real TIPS rates for "cost" reasons.

In fact, particularly not in circumstances of unexpectedly high inflation where the "cost" to the Treasury of its much large outstanding nominal obligations would have gone way into negative real territory as a result. Not that such "costs" actually makes sense for a country with its own currency, but the Treasury could just direct a small portion of that "windfall" on nominal Treasurys to TIPS holders (who of course are not getting anything more in real terms than promised anyway), and "pocket" the rest.
The Treasury has made some statement that TIPS are a net positive ROI for the Treasury, although I don't exactly understand why.

It may have to do with being able to get away with paying less yield on nominals as a "safety buffer" for inflation protection, because people who really want inflation protection can just buy TIPS instead of seeking an extra margin of safety in nominal yield.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by seajay »

NiceUnparticularMan wrote: Tue May 23, 2023 12:17 pm By the way, this is also relevant:
Before the Bretton Woods agreement ended in 1971, most central banks used gold as their reserve asset. Today, central banks may still hold gold in reserve, but this has been supplanted by reserves of tradable foreign currencies.
Although the gold held in the reserves of the large central banks has a large book value, they don't actually do anything with it.
Last year saw central banks buying over 1000 tonnes tons more gold. Around twice as much as the prior year - that was around similar levels as years since 2010. i.e. the financial crisis highlighted the inter-dependence of multiple foreign currencies risks such that central banks reverted to gold being preferred for its no counter-party risk qualities. As part of that it was raised from tier 3 to tier 1 asset.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

watchnerd wrote: Tue May 23, 2023 12:34 pm
NiceUnparticularMan wrote: Tue May 23, 2023 11:48 am
seajay wrote: Tue May 23, 2023 11:29 am but if they were I suspect that there'd have been some mechanism to reduce/eliminate that 'cost' to the Treasury.
TIPS in the US remain a small fraction of all outstanding Treasurys, and of course federal fiscal and monetary authority is not limited in nominal terms. So there is very little reason to believe the Treasury would ever be forced to reduce real TIPS rates for "cost" reasons.

In fact, particularly not in circumstances of unexpectedly high inflation where the "cost" to the Treasury of its much large outstanding nominal obligations would have gone way into negative real territory as a result. Not that such "costs" actually makes sense for a country with its own currency, but the Treasury could just direct a small portion of that "windfall" on nominal Treasurys to TIPS holders (who of course are not getting anything more in real terms than promised anyway), and "pocket" the rest.
The Treasury has made some statement that TIPS are a net positive ROI for the Treasury, although I don't exactly understand why.

It may have to do with being able to get away with paying less yield on nominals as a "safety buffer" for inflation protection, because people who really want inflation protection can just buy TIPS instead of seeking an extra margin of safety in nominal yield.
That was definitely part of the original pitch for TIPS (that they would have higher prices and therefore lower interest rates as a result of the inflation protection).

Empirically, this has turned out to be such a small factor as to be negligible for personal investment purposes, but I guess at the scale the Treasury operates, every bps can count . . . .
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Re: Now that long TIPS again yield more than 1.70% I will…

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seajay wrote: Tue May 23, 2023 12:38 pm
NiceUnparticularMan wrote: Tue May 23, 2023 12:17 pm By the way, this is also relevant:
Before the Bretton Woods agreement ended in 1971, most central banks used gold as their reserve asset. Today, central banks may still hold gold in reserve, but this has been supplanted by reserves of tradable foreign currencies.
Although the gold held in the reserves of the large central banks has a large book value, they don't actually do anything with it.
Last year saw central banks buying over 1000 tonnes tons more gold. Around twice as much as the prior year - that was around similar levels as years since 2010. i.e. the financial crisis highlighted the inter-dependence of multiple foreign currencies risks such that central banks reverted to gold being preferred for its no counter-party risk qualities. As part of that it was raised from tier 3 to tier 1 asset.
Question:

Do you actually hold 1/3 of your net worth in gold?
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

NiceUnparticularMan wrote: Tue May 23, 2023 12:40 pm
watchnerd wrote: Tue May 23, 2023 12:34 pm
NiceUnparticularMan wrote: Tue May 23, 2023 11:48 am
seajay wrote: Tue May 23, 2023 11:29 am but if they were I suspect that there'd have been some mechanism to reduce/eliminate that 'cost' to the Treasury.
TIPS in the US remain a small fraction of all outstanding Treasurys, and of course federal fiscal and monetary authority is not limited in nominal terms. So there is very little reason to believe the Treasury would ever be forced to reduce real TIPS rates for "cost" reasons.

In fact, particularly not in circumstances of unexpectedly high inflation where the "cost" to the Treasury of its much large outstanding nominal obligations would have gone way into negative real territory as a result. Not that such "costs" actually makes sense for a country with its own currency, but the Treasury could just direct a small portion of that "windfall" on nominal Treasurys to TIPS holders (who of course are not getting anything more in real terms than promised anyway), and "pocket" the rest.
The Treasury has made some statement that TIPS are a net positive ROI for the Treasury, although I don't exactly understand why.

It may have to do with being able to get away with paying less yield on nominals as a "safety buffer" for inflation protection, because people who really want inflation protection can just buy TIPS instead of seeking an extra margin of safety in nominal yield.
That was definitely part of the original pitch for TIPS (that they would have higher prices and therefore lower interest rates as a result of the inflation protection).

Empirically, this has turned out to be such a small factor as to be negligible for personal investment purposes, but I guess at the scale the Treasury operates, every bps can count . . . .
I seem to recall a statement that it saved them $60B.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

Lee_WSP wrote: Mon May 22, 2023 4:41 pm I thought we've had discussions where we mathematically showed that a rolling bond ladder is pretty much very similar to owning a bond fund, except at the end when you decumulate by letting them all mature.
Many times. There are discussions of it in one or more Wiki articles too.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

seajay wrote: Tue May 23, 2023 12:38 pm Last year saw central banks buying over 1000 tonnes tons more gold.
Sure, some central banks in emerging markets managing really weak currencies actually actively buy and sell gold. In 2022, to which you were referring, that was led by Turkey, followed by China, Egypt, Qatar, Iraq, India, the UAE, Kyrgystan, Tajikistan . . .

https://www.visualcapitalist.com/charte ... ld-demand/

As they say, as Tajikistan goes, so goes the world.

Anyway, this use by these particular central banks of gold as a reserve asset neither makes gold a currency rather than a commodity, nor has anything to do with the large central banks just sitting on gold that is actually irrelevant to them. Indeed, there is a list at that link of the top 10 cumulative buyers from 1999 through 2021, and the large central banks in developed countries are nowhere on the list, nor is the IMF, because they already have way, way more gold than they could conceivably ever use.

So sure, if you think modeling your personal portfolio off the reserve assets of the central bank of Tajikistan is a great idea, buy more gold!

For the rest of us, overweighting gold these days continues to have no actual justification that holds up to the slightest bit of real scrutiny.
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Re: Now that long TIPS again yield more than 1.70% I will…

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Jaylat wrote: Mon May 22, 2023 4:37 pm
Drew31 wrote: Mon May 22, 2023 4:23 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm The major risk they face is the potential for a long-term underperformance of their bond portfolio. Buying LTT, and even LT TIPS, exposes the investor to this risk. Keeping a significant portion in STT or ST bonds mitigates this risk somewhat, depending on the shape of the yield curve.

That’s why I’m a Bill Bernstein fan as well.
Bolded the section where you lost me. Forget LTT, but for LT TIPS, what is the risk exactly here of underperforming? If you have a better example to explain go for it, but I'm thinking if investor has 20 years to retirement, then can buy a LT Tip with real yield of 1.5% or buy STT. What I read, is you mean the LT Tip would underperform the STT?
Consider this scenario: Interest rates go up and stay up, but inflation is down. In that case you would be locked into a low fixed return on your LT TIPS, while the market is paying high interest rates on new ST Treasuries and nominal bonds. So your bond portfolio would underperform the market substantially.

It might be unlikely, but here are two scenarios where this might happen: (1) interest rates are raised and have to stay high to successfully combat inflation, or (2) investors see the US as riskier than before (default risk) and so require much higher rates to buy Treasuries of any duration.
The fundamental characteristic of risk in investing is uncertainty. If you match holding period and unit of account in assets and liabilities, there is no (at least much less) uncertainty about the return you'll earn if you hold to maturity, as well as the ability to match the long term liability.

A known low return is not risky, it's just a low known return.

Term risk includes price risk and reinvestment risk. If you roll short term issues over a long term holding period, you have reinvestment risk, but no price risk for the term of the short term periods. If you hold a single issue long term, you have price risk but no reinvestment risk.

Normally I think of price risk as the uncertainty of the price between settlement and maturity. This includes the possibility that you could have earned lower returns over the holding period compared to rolling short term issues if you were able to reinvest the maturing short term issues at yields that were higher enough to earn more than the single long term holding.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

2pedals wrote: Mon May 22, 2023 11:47 pm
watchnerd wrote: Mon May 22, 2023 11:03 pm
2pedals wrote: Mon May 22, 2023 10:19 pm I am not sure I understand the desire to purchase long-term bonds, nominal or inflation-protected bonds. I would rather place my risk in stocks for longer-term investments. I can see short and intermediate bonds. I suppose if you have more than enough in equity and/or risk-adverse.
In our case, we're at like 40x, so reducing our risk by taking some of that and putting it into inflation-protected assets with positive real return to act as a bridge to SS (until age 67, currently age 53) via an LMP ladder of non-rolling TIPS seemed prudent.

Why take more risk than we need to?
We are probably similar in terms of number*X, I like the social bridge approach since it helps me sleep well at night. I have set up a bridge for that myself using 2 TIPs funds. My targeted average duration is only 4 years though, since I am 63. I do not see a need beyond that unless my spending increases dramatically or maybe if I become more risk-adverse but that decision will be made much later, at age 75, along with a possible purchase of an SPIA.
I'm also in the why take more risk than we need to camp. A TIPS ladder seems a good substitute for an inflation indexed annuity. Ours should cover basic expenses through age 95. It makes a lot more sense today then when real rates were zero or lower.

Stocks may well outperform over the next 20 or 30 year period, but it's far from guaranteed and we don't have all that many relevant and reliable independent data points.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

watchnerd wrote: Tue May 23, 2023 12:47 pm
NiceUnparticularMan wrote: Tue May 23, 2023 12:40 pm
watchnerd wrote: Tue May 23, 2023 12:34 pm
NiceUnparticularMan wrote: Tue May 23, 2023 11:48 am
seajay wrote: Tue May 23, 2023 11:29 am but if they were I suspect that there'd have been some mechanism to reduce/eliminate that 'cost' to the Treasury.
TIPS in the US remain a small fraction of all outstanding Treasurys, and of course federal fiscal and monetary authority is not limited in nominal terms. So there is very little reason to believe the Treasury would ever be forced to reduce real TIPS rates for "cost" reasons.

In fact, particularly not in circumstances of unexpectedly high inflation where the "cost" to the Treasury of its much large outstanding nominal obligations would have gone way into negative real territory as a result. Not that such "costs" actually makes sense for a country with its own currency, but the Treasury could just direct a small portion of that "windfall" on nominal Treasurys to TIPS holders (who of course are not getting anything more in real terms than promised anyway), and "pocket" the rest.
The Treasury has made some statement that TIPS are a net positive ROI for the Treasury, although I don't exactly understand why.

It may have to do with being able to get away with paying less yield on nominals as a "safety buffer" for inflation protection, because people who really want inflation protection can just buy TIPS instead of seeking an extra margin of safety in nominal yield.
That was definitely part of the original pitch for TIPS (that they would have higher prices and therefore lower interest rates as a result of the inflation protection).

Empirically, this has turned out to be such a small factor as to be negligible for personal investment purposes, but I guess at the scale the Treasury operates, every bps can count . . . .
I seem to recall a statement that it saved them $60B.
As I recall the outstanding value of TIPS circa end of 2019 was something like $1.5 trillion. That's probably too small for the denominator to begin with (if that included savings on TIPS since matured), but that implies a savings rate of under 4% (not annualized, cumulative).

So, yeah. Sounds big when stated that way, but in practical terms, not really noticeable by personal TIPS investors.
Last edited by NiceUnparticularMan on Tue May 23, 2023 1:03 pm, edited 1 time in total.
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Re: Now that long TIPS again yield more than 1.70% I will…

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watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
And yet the poster who was adamantly recommended this dominated the dialogue, and apparently was highly respected and widely applauded.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

Kevin M wrote: Tue May 23, 2023 1:02 pm
watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
And yet the poster who was adamantly recommended this dominated the dialogue, and apparently was highly respected and widely applauded.
See d). ;)

Some people just want to be told what to do and are willing to grant 'authority' to someone who gives seemingly 'easy' answers, rather than learn for themselves.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

McQ wrote: Mon May 22, 2023 5:09 pm Bought some more LTPZ at 59.25 today (2047 bond now yielding 1.75%).

I have no dog in the bonds / bond funds game; it's just that I can't easily buy TIPS in the brokerage account of the 401(k) account I am using (as I can do in my accounts at Vanguard). LTPZ is a convenience, to be revisited later.

With three purchases of LTPZ at 59 - 60 in the past few days, I guess I'm voting with my feet against the likelihood of long TIPS surging over 2.0% again on this cycle. Great if it happens; I'm still only nibbling, and could move up to bites and then gulps if rates did rise further.

Accumulating long TIPS at 1.70%+ nibble by nibble is in the spirit of "Let not the perfect be the enemy of the good." Holding off on purchases for most of the last six months was in the spirit of, "a real yield of 1.25% to 1.50% isn't good enough for me."
You're tempting me again (have been staying short term so far). Have some cash coming from a maturing IRA CD in a few days (matures tomorrow at a credit union, IRA transfer form already in their possession), so will reconsider then. I think the likelihood of me living 20 more years is not very high, but I like the idea of a barbell, capturing the higher yields at the longer end and at the shorter end.

Here is the TIPS yield curve based on ask quotes just pulled from Fido:

Image

Here are just the TIPS with maturities of 2040 and beyond:

Image

How is the fund yield 1.75% when the highest ask yield is 1.72%, and the average is 1.68%?

Kevin
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

dml130 wrote: Mon May 22, 2023 6:47 pm
McQ wrote: Mon May 22, 2023 5:09 pm Bought some more LTPZ at 59.25 today (2047 bond now yielding 1.75%).

I have no dog in the bonds / bond funds game; it's just that I can't easily buy TIPS in the brokerage account of the 401(k) account I am using (as I can do in my accounts at Vanguard). LTPZ is a convenience, to be revisited later.

With three purchases of LTPZ at 59 - 60 in the past few days, I guess I'm voting with my feet against the likelihood of long TIPS surging over 2.0% again on this cycle. Great if it happens; I'm still only nibbling, and could move up to bites and then gulps if rates did rise further.

Accumulating long TIPS at 1.70%+ nibble by nibble is in the spirit of "Let not the perfect be the enemy of the good." Holding off on purchases for most of the last six months was in the spirit of, "a real yield of 1.25% to 1.50% isn't good enough for me."
If you buy TIPS at a real yield of about 1.70% using LTPZ, wouldn't it actually be a real yield of about 1.50% (real yield minus expense ratio of the fund)?
It depends on which yield is quoted. If SEC yield, then no, as SEC is after the ER is subtracted. I average maturity, then yes, and that seems to make more sense given the yields I just posted.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

abc132 wrote: Mon May 22, 2023 7:15 pm
watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
So it's a good idea now that rates have risen?

Keep in mind we could see those +20-50% returns if rates need to drop significantly.

That is when I would consider buying TIPS.

I don't get the hate for LTT now. It seems like recency bias.
It should depend on what you're trying to accomplish.

If you want close to zero risk, then matching duration and unit of account to liabilities always is the lowest risk. That hasn't changed with higher yields.

Yields could go much higher, so you still could end up better rolling shorter term issues.

However, I've always been skeptical that nominal yields could go much below zero, so IMO, there is more downside price risk now that yields are higher.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Jaylat »

Kevin M wrote: Tue May 23, 2023 12:59 pm A known low return is not risky, it's just a low known return.
I don't want to get caught up in an off-topic debate, but I disagree with this statement. FYI I spent years as a senior investment officer for a multinational financial institution. Getting stuck in a low return investment is a huge risk, not only for the institution, but for the guy signing off on it.

It's also one of the largest risks for individuals saving for retirement. Getting a big portion of your portfolio trapped in, say, low coupon fixed rate LT treasuries is about as big a risk as it gets. That's why the "20% of assets in LT treasuries" thread was so destructive.

Again, I think we agree on 99% of things - this might just be semantics.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

Kevin M wrote: Tue May 23, 2023 1:21 pm
abc132 wrote: Mon May 22, 2023 7:15 pm
watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
So it's a good idea now that rates have risen?

Keep in mind we could see those +20-50% returns if rates need to drop significantly.

That is when I would consider buying TIPS.

I don't get the hate for LTT now. It seems like recency bias.
It should depend on what you're trying to accomplish.

If you want close to zero risk, then matching duration and unit of account to liabilities always is the lowest risk. That hasn't changed with higher yields.

Yields could go much higher, so you still could end up better rolling shorter term issues.

However, I've always been skeptical that nominal yields could go much below zero, so IMO, there is more downside price risk now that yields are higher.
By having TIPS vs a TIPS fund aren’t you mostly just hiding the risk vs experiencing risk. If you create a ladder at 1.0% real, and then rates go to 2.0%, you’ve experienced a real loss. Perhaps unroegnized. Perhaps you’ll never see it because you won’t track the day to day price of the TIPS, because there is no need to. But there is at least an opportunity loss. Seems to me if you had 3 funds, short, intermediate and long term TIPS, and each year you draw from the short term, and then rebalance steadily towards shorter term as you age, you will get to close to the same place, although you will see the portfolio value and fluctuations whenever you check, and will see modest gains or losses as you rebalance.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

Jaylat wrote: Tue May 23, 2023 1:25 pm It's also one of the largest risks for individuals saving for retirement. Getting a big portion of your portfolio trapped in, say, low coupon fixed rate LT treasuries is about as big a risk as it gets. That's why the "20% of assets in LT treasuries" thread was so destructive.
It may have been one of the most wealth-destroying threads in BH history, given the popularity the idea seemed to have.

Although I have no idea how many actually implemented it as opposed to just jaw-boned about it.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

JBTX wrote: Tue May 23, 2023 1:35 pm

By having TIPS vs a TIPS fund aren’t you mostly just hiding the risk vs experiencing risk. If you create a ladder at 1.0% real, and then rates go to 2.0%, you’ve experienced a real loss. Perhaps unroegnized. Perhaps you’ll never see it because you won’t track the day to day price of the TIPS, because there is no need to. But there is at least an opportunity loss. Seems to me if you had 3 funds, short, intermediate and long term TIPS, and each year you draw from the short term, and then rebalance steadily towards shorter term as you age, you will get to close to the same place, although you will see the portfolio value and fluctuations whenever you check, and will see modest gains or losses as you rebalance.
The flipside of this opportunity cost:

TIP yields could go negative real again.

And then your fund is buying a buying a bunch of negative real yield bonds.

Me, I'll take the guaranteed 1.44% 'sure thing' on 10 YR TIPS (presently) and forego the upside of 2.0% (in this example) in exchange for guaranteed of not going negative in the future.
Last edited by watchnerd on Tue May 23, 2023 1:48 pm, edited 1 time in total.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

Jaylat wrote: Tue May 23, 2023 1:25 pm FYI I spent years as a senior investment officer for a multinational financial institution. Getting stuck in a low return investment is a huge risk, not only for the institution, but for the guy signing off on it.
My two cents is this gets into thorny opportunity cost issues.

Like, if there was something else they could have done that would have worked out better with the benefit of hindsight, fair or not, that might be a problem for that deciding officer.

And for that matter, in a competitive landscape, it might be a problem if competitors did better with the benefit of hindsight, even if from some perspective we might just say they got lucky.

In the end, I still think you can think of it as making lower versus higher risk decisions. But higher risk decisions can pay off if you get lucky, and in a variety of contexts that can make a difference to how those decisions get evaluated retroactively.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

watchnerd wrote: Tue May 23, 2023 1:48 pm
JBTX wrote: Tue May 23, 2023 1:35 pm

By having TIPS vs a TIPS fund aren’t you mostly just hiding the risk vs experiencing risk. If you create a ladder at 1.0% real, and then rates go to 2.0%, you’ve experienced a real loss. Perhaps unroegnized. Perhaps you’ll never see it because you won’t track the day to day price of the TIPS, because there is no need to. But there is at least an opportunity loss. Seems to me if you had 3 funds, short, intermediate and long term TIPS, and each year you draw from the short term, and then rebalance steadily towards shorter term as you age, you will get to close to the same place, although you will see the portfolio value and fluctuations whenever you check, and will see modest gains or losses as you rebalance.
The flipside of this opportunity cost:

TIP yields could go negative real again.

And then your fund is buying a buying a bunch of negative real yield bonds.
I think JBTX is noting the truism that if you are managing multiple TIPS funds to simulate a fixed TIPS ladder with a steady outflow that will go down to zero after a defined finite period, if market real rates drop, then your funds collectively will be selling TIPS at higher prices to buy back more or less the same TIPS at those higher prices, so not really a material difference.

But you may be seeing the market liquidation value, aka total NAV, of your TIPS investment going up and down as the real yield curve moves around, which is in fact also happening to the an equivalent portfolio of individual TIPS, even if it isn't being reported.

That being said--if the worst thing that happens to me in retirement is I use some of my accumulated stocks to buy TIPS with like a 1.5% real rate, and then a while later I have the option to sell more of my stocks to buy even more TIPS at an even higher real rates? That does not sound like an objectively bad retirement scenario to me.

I just think it doesn't really matter if I do that with individual TIPS or simulate that with some TIPS funds.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

NiceUnparticularMan wrote: Tue May 23, 2023 1:59 pm
That being said--if the worst thing that happens to me in retirement is I use some of my accumulated stocks to buy TIPS with like a 1.5% real rate, and then a while later I have the option to sell more of my stocks to buy even more TIPS at an even higher real rates? That does not sound like an objectively bad retirement scenario to me.
Right.

'First world problems'.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by ckangas »

watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
Are retail investors buying LTTs the issue?

I know little in regards to bonds (I pay 95% of my attention to the equity side in boglehead fashion). But I would expect LTT to serve as a hedge when rates drop quickly, and as a liability when rates rise quickly. Or in other words, great for 1929 and 2008. Bad for the 1970s and 2022.

I would have assumed most forum members to at least be at that superficial level of understanding. And to either ladder their bonds, or to hold LTT as a hedge specifically for rates dropping suddenly...
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

ckangas wrote: Tue May 23, 2023 2:03 pm
watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
Are retail investors buying LTTs the issue?

I know little in regards to bonds (I pay 95% of my attention to the equity side in boglehead fashion). But I would expect LTT to serve as a hedge when rates drop quickly, and as a liability when rates rise quickly. Or in other words, great for 1929 and 2008. Bad for the 1970s and 2022.

I would have assumed most forum members to at least be at that superficial level of understanding. And to either ladder their bonds, or to hold LTT as a hedge specifically for rates dropping suddenly...
I don't understand the question.

Bogleheads are retail investors.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

ckangas wrote: Tue May 23, 2023 2:03 pm I would have assumed most forum members to at least be at that superficial level of understanding. And to either ladder their bonds, or to hold LTT as a hedge specifically for rates dropping suddenly...
Without getting into a whole thing . . . there was a sort of side argument about how if you held individual nominal bonds to maturity, or nominal bond funds for their duration, then the price drops associated with nominal market rate increases would not matter to you.

And that was true in nominal terms, and yet did nothing to address the issue that in real terms, if inflation was unexpectedly high over an extended period, you could have arbitrarily high real losses on nominal bonds/nominal bond funds that these techniques would not somehow undo.

So I think some people got an impression that LT nominals were a kind of free roll--they would pop if stocks dropped and then you could rebalance, but if not you could just hold to maturity/for duration and still do fine. And although they saw the real rates on TIPS were negative, they saw at least positive nominal rates on LT bonds, were pointed to some backtests of how LT nominal bonds had done recently, and felt assured it was all good.

So the idea you could experience large and unrecoverable real losses with LT nominal bonds, not least if bought at the same time comparable TIPS had negative real rates, and that this could alll happen at the same time stocks dropped . . . was at least underemphasized or quibbled with, to the point a lot of people simply did not see it as a significant risk.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by seajay »

watchnerd wrote: Tue May 23, 2023 12:43 pm
seajay wrote: Tue May 23, 2023 12:38 pm
NiceUnparticularMan wrote: Tue May 23, 2023 12:17 pm By the way, this is also relevant:
Before the Bretton Woods agreement ended in 1971, most central banks used gold as their reserve asset. Today, central banks may still hold gold in reserve, but this has been supplanted by reserves of tradable foreign currencies.
Although the gold held in the reserves of the large central banks has a large book value, they don't actually do anything with it.
Last year saw central banks buying over 1000 tonnes tons more gold. Around twice as much as the prior year - that was around similar levels as years since 2010. i.e. the financial crisis highlighted the inter-dependence of multiple foreign currencies risks such that central banks reverted to gold being preferred for its no counter-party risk qualities. As part of that it was raised from tier 3 to tier 1 asset.
Question:

Do you actually hold 1/3 of your net worth in gold?
I don't buy bonds. Treasurys to me is just lending to someone who has no need to borrow. Instead I prefer a extreme barbell of small cap value and gold balanced bells, that combines to a central bullet. I also dynamically adjust my 'bond' (barbell) weight rather than sticking to a fixed one-size-fits-all weighting to 'bonds'. For instance in 2009 all of 'bonds' sold (so no gold left). More recently around 25% weighting (so around 12% gold), at other times maybe 66% bonds (so 33% gold). Driven by Robert Lichello's AIM (of Dow/Gold ratio) amongst other relative valuation metrics. Long term back-runs of that indicate 25% average gold (50% 'bonds'). With high bond peaks at the likes of 1929, 1968, 1999 high 'bond' weightings, so at times potentially >33% gold.

House/home value used to be a relatively high weighting of total wealth when bought 10 years or so prior to retirement, but nowadays is a relatively small weighting (10 years or so after retirement).
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

seajay wrote: Tue May 23, 2023 2:48 pm
watchnerd wrote: Tue May 23, 2023 12:43 pm
seajay wrote: Tue May 23, 2023 12:38 pm
NiceUnparticularMan wrote: Tue May 23, 2023 12:17 pm By the way, this is also relevant:
Before the Bretton Woods agreement ended in 1971, most central banks used gold as their reserve asset. Today, central banks may still hold gold in reserve, but this has been supplanted by reserves of tradable foreign currencies.
Although the gold held in the reserves of the large central banks has a large book value, they don't actually do anything with it.
Last year saw central banks buying over 1000 tonnes tons more gold. Around twice as much as the prior year - that was around similar levels as years since 2010. i.e. the financial crisis highlighted the inter-dependence of multiple foreign currencies risks such that central banks reverted to gold being preferred for its no counter-party risk qualities. As part of that it was raised from tier 3 to tier 1 asset.
Question:

Do you actually hold 1/3 of your net worth in gold?
I don't buy bonds. Treasurys to me is just lending to someone who has no need to borrow. Instead I prefer a extreme barbell of small cap value and gold balanced bells, that combines to a central bullet. I also dynamically adjust my 'bond' (barbell) weight rather than sticking to a fixed one-size-fits-all weighting to 'bonds'. For instance in 2009 all of 'bonds' sold (so no gold left). More recently around 25% weighting (so around 12% gold), at other times maybe 66% bonds (so 33% gold). Driven by Robert Lichello's AIM (of Dow/Gold ratio) amongst other relative valuation metrics. Long term back-runs of that indicate 25% average gold (50% 'bonds'). With high bond peaks at the likes of 1929, 1968, 1999 high 'bond' weightings, so at times potentially >33% gold.

House/home value used to be a relatively high weighting of total wealth when bought 10 years or so prior to retirement, but nowadays is a relatively small weighting (10 years or so after retirement).
So what portion of your net worth is in gold presently?

Am I understanding that it's 12%?
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

watchnerd wrote: Tue May 23, 2023 1:48 pm
JBTX wrote: Tue May 23, 2023 1:35 pm

By having TIPS vs a TIPS fund aren’t you mostly just hiding the risk vs experiencing risk. If you create a ladder at 1.0% real, and then rates go to 2.0%, you’ve experienced a real loss. Perhaps unroegnized. Perhaps you’ll never see it because you won’t track the day to day price of the TIPS, because there is no need to. But there is at least an opportunity loss. Seems to me if you had 3 funds, short, intermediate and long term TIPS, and each year you draw from the short term, and then rebalance steadily towards shorter term as you age, you will get to close to the same place, although you will see the portfolio value and fluctuations whenever you check, and will see modest gains or losses as you rebalance.
The flipside of this opportunity cost:

TIP yields could go negative real again.

And then your fund is buying a buying a bunch of negative real yield bonds.

Me, I'll take the guaranteed 1.44% 'sure thing' on 10 YR TIPS (presently) and forego the upside of 2.0% (in this example) in exchange for guaranteed of not going negative in the future.
Over the long term it will likely go up and down. You’ll buy some high and low. Plus if rates drop your existing portfolio has an unrealized gain, and a TIPS fund will probably selling something at a gain prior to reinvesting at a lower rate. It just seems like it should mostly wash, the main difference is you have more visibility to your portfolios fluctuations. The FMV of a 30 year TIPS ladder will fluctuate quite a bit. You just want be tracking and seeing it.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

Jaylat wrote: Tue May 23, 2023 1:25 pm
Kevin M wrote: Tue May 23, 2023 12:59 pm A known low return is not risky, it's just a low known return.
I don't want to get caught up in an off-topic debate, but I disagree with this statement. FYI I spent years as a senior investment officer for a multinational financial institution. Getting stuck in a low return investment is a huge risk, not only for the institution, but for the guy signing off on it.

It's also one of the largest risks for individuals saving for retirement. Getting a big portion of your portfolio trapped in, say, low coupon fixed rate LT treasuries is about as big a risk as it gets. That's why the "20% of assets in LT treasuries" thread was so destructive.

Again, I think we agree on 99% of things - this might just be semantics.
You can call it a risk if you want, but according to classic portfolio theory, risk is the uncertainty that an investment will provide the expected return over the holding period. That definition has worked well for me in thinking about portfolio risk, and in making investment decisions. I've read and participated in endless discussions about this here over the years, and I have not seen a compelling argument that makes me inclined to change my view.

Credentials mean very little to me. I've had experiences with people with credentials getting things objectively very wrong. I've also had debates with folks with credentials here--if their arguments do not persuade me, then their credientials certainly do not.

But thanks for sharing your perspective. Glad that we agree on 99%! :sharebeer
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

JBTX wrote: Tue May 23, 2023 1:35 pm
Kevin M wrote: Tue May 23, 2023 1:21 pm
abc132 wrote: Mon May 22, 2023 7:15 pm
watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
So it's a good idea now that rates have risen?

Keep in mind we could see those +20-50% returns if rates need to drop significantly.

That is when I would consider buying TIPS.

I don't get the hate for LTT now. It seems like recency bias.
It should depend on what you're trying to accomplish.

If you want close to zero risk, then matching duration and unit of account to liabilities always is the lowest risk. That hasn't changed with higher yields.

Yields could go much higher, so you still could end up better rolling shorter term issues.

However, I've always been skeptical that nominal yields could go much below zero, so IMO, there is more downside price risk now that yields are higher.
By having TIPS vs a TIPS fund aren’t you mostly just hiding the risk vs experiencing risk. If you create a ladder at 1.0% real, and then rates go to 2.0%, you’ve experienced a real loss. Perhaps unroegnized. Perhaps you’ll never see it because you won’t track the day to day price of the TIPS, because there is no need to. But there is at least an opportunity loss. Seems to me if you had 3 funds, short, intermediate and long term TIPS, and each year you draw from the short term, and then rebalance steadily towards shorter term as you age, you will get to close to the same place, although you will see the portfolio value and fluctuations whenever you check, and will see modest gains or losses as you rebalance.
Certainly. As has been discussed many times, a rolling ladder is similar to a fund of comparable composition.

Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.

As you say, this impact could be modest. I've never modeled it, but it's easy enough for me to hold individual securities, so why take this additional risk if I don't have to?

In a 401k, it might be the best option, if you even have access to the appropriate funds. Most 401k plans I've seen don't.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

JBTX wrote: Tue May 23, 2023 3:00 pm Plus if rates drop your existing portfolio has an unrealized gain, and a TIPS fund will probably selling something at a gain prior to reinvesting at a lower rate.
This implies that TIPS would be part of typical rebalancing activity.

That's not how I use them in my non-rolling LMP ladder of individual TIPS.

They're consumed as they mature every 6 months.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

watchnerd wrote: Tue May 23, 2023 1:37 pm
Jaylat wrote: Tue May 23, 2023 1:25 pm It's also one of the largest risks for individuals saving for retirement. Getting a big portion of your portfolio trapped in, say, low coupon fixed rate LT treasuries is about as big a risk as it gets. That's why the "20% of assets in LT treasuries" thread was so destructive.
It may have been one of the most wealth-destroying threads in BH history, given the popularity the idea seemed to have.

Although I have no idea how many actually implemented it as opposed to just jaw-boned about it.
The dominant meme I sensed at the time is that forum members who post were primarily supporting the idea, heaping great accolades onto the dominant proponents (there were more than one, two have which have not posted here in quite some time as far as I know). Because of my experience in engaging in these discussion, I basically quit engaging in them after saying my piece.

Again, the theory is solid if properly framed with respect to risk, holding period and unit of account. That doesn't mean you can't lose a truck load relative to other opportunities if you follow it. The proper framing is what many may not have understood, and which I initially tried to help with.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

Kevin M wrote: Tue May 23, 2023 3:09 pm
Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I get the theory, I just don't see why one would would do it.

It seems much simpler to buy individual TIPS for a non-rolling ladder.

Cheaper ER, too.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Bill Bernstein »

Credentials mean very little to me
Nor to me. Occasionally posters will point out that they, or some other poster, graduated from here or worked there.

The best research on forecasting that I'm aware of, by Phil Tetlock (start with Expert Political Judgment), shows that expertise beyond a given middling level (Tetlock only half-jokingly cites the typical reader of The New York Times, The Wall Street Journal, and Economist) adds nothing to accuracy/calibration.

In addition, he found that "hedgehogs" who see the world from a single point of view, even at a high level of expertise, are especially poor forecasters.

Contrariwise, the best forecasters tend to be hyperrational dilettantes ("superforecasters," in his lingo) who can view the world through multiple lenses, of which there are, happily, a lot of on this forum.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

watchnerd wrote: Tue May 23, 2023 3:16 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm
Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I get the theory, I just don't see why one would would do it.

It seems much simpler to buy individual TIPS for a non-rolling ladder.

Cheaper ER, too.
The only reasons I can think of are:

1. You only have access to a TIPS fund in your 401k.

2. You just are not comfortable with individual bond ladders, or would rather not mess around with them even if you have the ability to do so.

3. You have considered it enough to conclude that one or more funds provides good enough results. A member that I highly respect that is in this category is dbr, who holds all fixed income in an intermediate TIPS fund. Of course another highly respected member who supports the use of 2 or 3 funds is BobK.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by retiringwhen »

watchnerd wrote: Tue May 23, 2023 1:08 pm
Kevin M wrote: Tue May 23, 2023 1:02 pm
watchnerd wrote: Mon May 22, 2023 4:30 pm
Jaylat wrote: Mon May 22, 2023 3:57 pm

The really sad part was that I received a PM from a Boglehead who had bought into the “buy LTT to minimize interest rate risk” mantra, and was shocked to see his bond portfolio collapse in value. He really had no understanding of the risks involved in buying LTT.
It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
And yet the poster who was adamantly recommended this dominated the dialogue, and apparently was highly respected and widely applauded.
See d). ;)

Some people just want to be told what to do and are willing to grant 'authority' to someone who gives seemingly 'easy' answers, rather than learn for themselves.
I bought LTPZ at the nadir of the rates in part because I was beginning a journey to adding TIPS to my portfolio in a barbell model advocated by the unnamed poster. The TIPS nominal balance in my portfolio took a terrible hit in the last 18 mos., but in reality my duration matching to perceived liabilities is actually slightly better than at the time of the purchase. IOW, the plan worked just as expected. I am perfectly happy with my choice.

The journey began when it did because my transition to retirement schedule became clear in late 2019 and I was behind schedule restructuring for the new phase.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by slicendice »

I think it is a little soon to litigate the 20% in LTT thread as it was intended for long term investors who are able to overlook short term volatility. When we were staring into the abyss in March of 2020, they were sure nice to have in the portfolio. In times when they shine, one pines for holding more than only 20% that is for sure.

In line with the topic of this thread though,long TIPS at 1.7% real seem a much better deal than long treasuries at 3.8-4% nominal and with the time to retirement getting relatively short 100% of my new bond purchases are LTPZ.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

Kevin M wrote: Tue May 23, 2023 3:09 pm
JBTX wrote: Tue May 23, 2023 1:35 pm
Kevin M wrote: Tue May 23, 2023 1:21 pm
abc132 wrote: Mon May 22, 2023 7:15 pm
watchnerd wrote: Mon May 22, 2023 4:30 pm

It really was a pretty poor recommendation by the parties involved to suggest that typical retail investors should buy into LTT funds given a) the miserably low yields that one was buying at the time b) the mischaracterization of defeasance of interest rate risk c) the lack of clarity on nominal vs real liabilities and d) the lack of general bond literacy amongst most Bogleheads.
So it's a good idea now that rates have risen?

Keep in mind we could see those +20-50% returns if rates need to drop significantly.

That is when I would consider buying TIPS.

I don't get the hate for LTT now. It seems like recency bias.
It should depend on what you're trying to accomplish.

If you want close to zero risk, then matching duration and unit of account to liabilities always is the lowest risk. That hasn't changed with higher yields.

Yields could go much higher, so you still could end up better rolling shorter term issues.

However, I've always been skeptical that nominal yields could go much below zero, so IMO, there is more downside price risk now that yields are higher.
By having TIPS vs a TIPS fund aren’t you mostly just hiding the risk vs experiencing risk. If you create a ladder at 1.0% real, and then rates go to 2.0%, you’ve experienced a real loss. Perhaps unroegnized. Perhaps you’ll never see it because you won’t track the day to day price of the TIPS, because there is no need to. But there is at least an opportunity loss. Seems to me if you had 3 funds, short, intermediate and long term TIPS, and each year you draw from the short term, and then rebalance steadily towards shorter term as you age, you will get to close to the same place, although you will see the portfolio value and fluctuations whenever you check, and will see modest gains or losses as you rebalance.
Certainly. As has been discussed many times, a rolling ladder is similar to a fund of comparable composition.

Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.

As you say, this impact could be modest. I've never modeled it, but it's easy enough for me to hold individual securities, so why take this additional risk if I don't have to?

In a 401k, it might be the best option, if you even have access to the appropriate funds. Most 401k plans I've seen don't.
Fair enough. Don’t want to rehash a tired argument. There is a certain amount of cleanness and perceived certainty about a ladder, and it is likely more conducive to long term compliance. I eventually may consider a ladder. I’m just too lazy right now, and TIPS funds are a way get more exposure while rates are historically favorable. I have had TIPS funds a while, and really didn’t pay attention to how badly they may have been beaten up during our ZIRP stent. While I conceptually understand how TIPS work practically I was still surprised to see after the fact how much they fluctuate. At a superficial level it’s counter intuitive, but not if you really think it through.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

Kevin M wrote: Tue May 23, 2023 3:09 pm You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I note if you do this per the recommendations, basically you are tracking long bonds all the way down to the short end even though they are being sold and re-bought along the way. And since the shortest funds are 0-5 funds (like STIP or VTIP), you actually are getting a similar "roll return".
I've never modeled it, but it's easy enough for me to hold individual securities, so why take this additional risk if I don't have to?
My two cents is it is purely a practical/convenience factor. I personally like the fact it is easy to contribute new amounts to my "TIPS ladder" through a couple ETF purchases, and that it will roll +1 rung per year without any new purchases, meaning if something happened to me it would turn into a fairly reasonable rolling ladder for an aging but still healthy spouse.

But it really isn't a big deal either way in my view.
In a 401k, it might be the best option, if you even have access to the appropriate funds. Most 401k plans I've seen don't.
We just have the one market TIPS fund in our 401K. I wasn't actually planning to use it, but then a contingent arbitration opportunity with the stable value fund in that account opened up, so I went ahead and used the stable value to buy the TIPS.

Obviously a market TIPS fund is a purely rolling ladder--but really, for my purposes it isn't such a bad one. If I wanted a 30 year ladder, it would be underweight LT TIPS, but I am fine with a somewhat shorter length and rolling it, so a market fund isn't really that bad.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

Kevin M wrote: Tue May 23, 2023 3:20 pm
watchnerd wrote: Tue May 23, 2023 3:16 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm
Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I get the theory, I just don't see why one would would do it.

It seems much simpler to buy individual TIPS for a non-rolling ladder.

Cheaper ER, too.
The only reasons I can think of are:

1. You only have access to a TIPS fund in your 401k.

2. You just are not comfortable with individual bond ladders, or would rather not mess around with them even if you have the ability to do so.

3. You have considered it enough to conclude that one or more funds provides good enough results. A member that I highly respect that is in this category is dbr, who holds all fixed income in an intermediate TIPS fund. Of course another highly respected member who supports the use of 2 or 3 funds is BobK.
To a degree I’d fall in all 3.

1. All of our investments, apart from ibonds are in qualified accounts.
2. Just laziness. For deciding to take a certain portion of fixed income and build a portfolio ladder, with dozens of securities, is a commitment of time and energy that I haven’t decided to make. Buying a few TIPS fund is easy. Eventually I may get around to a ladder.
3. I have had TIPS funds for years and have mostly ignored their value fluctuations.

I actually like the conceptual appeal of a TIPS ladder. It’s just something I don’t feel like committing to at the moment.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

JBTX wrote: Tue May 23, 2023 3:37 pm I’m just too lazy right now
If you've ever bought individual bonds via bond desk before, it's just as easy.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

watchnerd wrote: Tue May 23, 2023 3:55 pm
JBTX wrote: Tue May 23, 2023 3:37 pm I’m just too lazy right now
If you've ever bought individual bonds via bond desk before, it's just as easy.
I’ve never bought an individual bond other than savings bonds on TD.

I don’t doubt it’s easy. But seems to me if you are going to do a ladder, it should be large enough to matter. Is it worth doing a ladder of a bunch of $5000 ones (I have no clue of the denominations) or even $10k ones? So you get to really talking about restructuring most of your bond portfolio around this ladder. For me, I’d have to restructure and combine some IRAs and 401ks to make it logistically feasible.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Bill Bernstein »

It all depends on how you bought your TIPS ladder/TIPS funds.

One poster suggested that you would still have been better off buying TIPS, say, at the beginning of 2022 when stock prices were high, even at ridiculously low TIPS yields

Well, if you sold your global equities (VT) near their high on 12/31/21, by the near bottom of both the TIPS and stock market about 9/30, here's how things went:

VT (global stocks) down 23.4%
LTPZ (long TIPS) down 33.07%
VAIPX (int TIPS) down 9.42%
VTIP (short TIPS) down 8.17%

So if your goal was short or intermediate TIPS, exchanging stocks for TIPS at the beginning of 2022, even at very low yields was clearly the way to go. And if your goal was long TIPS, you came out behind waiting 9 months to do the exchange.

But, of course, there was a better way to do it, which was to rebalance out of stocks at high prices and hold onto the cash to buy your TIPS ladder til much later in 2022.

But that's, boo hoo, market timing.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

JBTX wrote: Tue May 23, 2023 4:01 pm
watchnerd wrote: Tue May 23, 2023 3:55 pm
JBTX wrote: Tue May 23, 2023 3:37 pm I’m just too lazy right now
If you've ever bought individual bonds via bond desk before, it's just as easy.
I’ve never bought an individual bond other than savings bonds on TD.

I don’t doubt it’s easy. But seems to me if you are going to do a ladder, it should be large enough to matter. Is it worth doing a ladder of a bunch of $5000 ones (I have no clue of the denominations) or even $10k ones? So you get to really talking about restructuring most of your bond portfolio around this ladder. For me, I’d have to restructure and combine some IRAs and 401ks to make it logistically feasible.
Our ladder rungs are in 6 months of basic living expenses per rung because TIPS mature (and are auctioned) on January and July dates. For us that's $42k per rung / $84k per year in present dollars. We have 14 years in the ladder to act as bridge from possible early retirement in the present until we can take full SS at 67.

So it takes a chunk of change and we didn't make the pivot until 2021 / age 51 to reduce our equity exposure to fund the ladder.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

Bill Bernstein wrote: Tue May 23, 2023 4:05 pm It all depends on how you bought your TIPS ladder/TIPS funds.

One poster suggested that you would still have been better off buying TIPS, say, at the beginning of 2022 when stock prices were high, even at ridiculously low TIPS yields

Well, if you sold your global equities (VT) near their high on 12/31/21, by the near bottom of both the TIPS and stock market about 9/30, here's how things went:

VT (global stocks) down 23.4%
LTPZ (long TIPS) down 33.07%
VAIPX (int TIPS) down 9.42%
VTIP (short TIPS) down 8.17%

So if your goal was short or intermediate TIPS, exchanging stocks for TIPS at the beginning of 2022, even at very low yields was clearly the way to go. And if your goal was long TIPS, you came out behind waiting 9 months to do the exchange.

But, of course, there was a better way to do it, which was to rebalance out of stocks at high prices and hold onto the cash to buy your TIPS ladder til much later in 2022.

But that's, boo hoo, market timing.
We were close.

Sold the equities that funded the ladder in summer / fall 2021.

As not all of the TIPS we wanted were available yet, a chunk of those monies went into MMF to sit and wait for future auctions in 2022 and 2023.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Jaylat »

Kevin M wrote: Tue May 23, 2023 3:03 pm
You can call it a risk if you want, but according to classic portfolio theory, risk is the uncertainty that an investment will provide the expected return over the holding period. That definition has worked well for me in thinking about portfolio risk, and in making investment decisions. I've read and participated in endless discussions about this here over the years, and I have not seen a compelling argument that makes me inclined to change my view.

Credentials mean very little to me. I've had experiences with people with credentials getting things objectively very wrong. I've also had debates with folks with credentials here--if their arguments do not persuade me, then their credientials certainly do not.
I like this classic definition of portfolio risk: "Portfolio risk is the chance that the combination of assets or units, within the investments that you own, fail to meet financial objectives."

Obviously "expected return" may be very different from "financial objectives."

My financial objective is to retire worry-free. Investments that provide a particular expected return may not achieve that objective.

Credentials mean little to me as well, I referenced my background just to show the perspective I'm coming from. That's the last time I'll make that mistake!
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

slicendice wrote: Tue May 23, 2023 3:30 pm I think it is a little soon to litigate the 20% in LTT thread as it was intended for long term investors who are able to overlook short term volatility. When we were staring into the abyss in March of 2020, they were sure nice to have in the portfolio. In times when they shine, one pines for holding more than only 20% that is for sure.

In line with the topic of this thread though,long TIPS at 1.7% real seem a much better deal than long treasuries at 3.8-4% nominal and with the time to retirement getting relatively short 100% of my new bond purchases are LTPZ.
What abyss? I barely noticed it, and simply added more stocks to the portfolios where it was appropriate.

My own portfolio was already over target in stocks, so all I did was a little market timing in my Roth, and have cashed out all but the first three of those lots at a 5-10% profit.

The last abyss I remember staring into was in late 2008, and I just continued to add to stocks even though my anxiety level was through the roof. Since then, nada in terms of an emotional response.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

NiceUnparticularMan wrote: Tue May 23, 2023 3:42 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm You don't get the benefit of the return to par at maturity effect for the longer term holdings.
I note if you do this per the recommendations, basically you are tracking long bonds all the way down to the short end even though they are being sold and re-bought along the way. And since the shortest funds are 0-5 funds (like STIP or VTIP), you actually are getting a similar "roll return".
I don't think so. If the yield curve is positive, you're selling long at higher yields (lower prices), and buying short term at lower yields (higher prices).

But I guess it depends how the yield curve shifts. If it falls in parallel, prices on the long bonds will come down a lot more than the short bonds. But if the shift isn't parallel, it depends on how it shifts.
NiceUnparticularMan wrote: Tue May 23, 2023 3:42 pm We just have the one market TIPS fund in our 401K. I wasn't actually planning to use it, but then a contingent arbitration opportunity with the stable value fund in that account opened up, so I went ahead and used the stable value to buy the TIPS.

Obviously a market TIPS fund is a purely rolling ladder--but really, for my purposes it isn't such a bad one. If I wanted a 30 year ladder, it would be underweight LT TIPS, but I am fine with a somewhat shorter length and rolling it, so a market fund isn't really that bad.
Makes sense to me.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by slicendice »

Kevin M wrote: Tue May 23, 2023 6:56 pm
slicendice wrote: Tue May 23, 2023 3:30 pm I think it is a little soon to litigate the 20% in LTT thread as it was intended for long term investors who are able to overlook short term volatility. When we were staring into the abyss in March of 2020, they were sure nice to have in the portfolio. In times when they shine, one pines for holding more than only 20% that is for sure.

In line with the topic of this thread though,long TIPS at 1.7% real seem a much better deal than long treasuries at 3.8-4% nominal and with the time to retirement getting relatively short 100% of my new bond purchases are LTPZ.
What abyss? I barely noticed it, and simply added more stocks to the portfolios where it was appropriate.

My own portfolio was already over target in stocks, so all I did was a little market timing in my Roth, and have cashed out all but the first three of those lots at a 5-10% profit.

The last abyss I remember staring into was in late 2008, and I just continued to add to stocks even though my anxiety level was through the roof. Since then, nada in terms of an emotional response.
Well good for you I guess. Frankly, sitting in my house under lock down, unable to buy certain basic household commodities with a contagious, life-threatening virus circling in the air and 20+ percent unemployed with our only near-term path to a resolution of the crisis, the development of a highly effective vaccine based on a clinically unproven at the time technology was way more stressful than the 2008 debacle.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Joey Jo Jo Jr »

Can you sell covered calls for directly owned TIPS? If not then a possible advantage of LTPZ would be the ability to do that if you didn’t expect the value to increase quickly.

For example, iShares came out with call writing versions of TLT, LQD, and HYG (each adding a W to the end) and the early results seem promising, although I don’t know that I’d want to do that with TLT since the point is more crash protection and the calls would probably stunt that effect. But the others might work out if you believe real rates will gradually revert to mean and, with regard to LTPZ, don’t expect another inflation spike like we saw after the shutdowns.

As for the .2% expense ratio, if not aiming for liability matching then the ratio should be a minor issue assuming real rates do revert within a few years and you take your LTPZ profits at that time. E.g., maybe a 10% annual gain (including call income) minus .2% annual ER. You can then swap into a low duration TIPS fund (with low expense ratio) if wanting to maintain the inflation projection but without the interest rate risk. See, e.g., discussion above about holding TLT at low interest rates.

Of course I could be wrong about everything.
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