TIPS price going down while inflation above expectation

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Neus
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TIPS price going down while inflation above expectation

Post by Neus »

TIPS are supposedly goes up when the inflation is above expectation

In the last month, Inflation is above expectation, i expect my TIP5 ETF is going UP, but instead it's going down

Any idea what's going on?
tonyclifton
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Re: TIPS price going down while inflation above expectation

Post by tonyclifton »

This is expected when interest rates are rising. Interest rates are rising which causes the price of bond funds to fall but should also make dividend payouts increase. Check this wiki entry on Bond Fund Duration.

If you hold on to the Bond Fund long enough you should be made whole through greater dividend payments.
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Neus
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Re: TIPS price going down while inflation above expectation

Post by Neus »

tonyclifton wrote: Fri Sep 30, 2022 5:03 am This is expected when interest rates are rising. Interest rates are rising which causes the price of bond funds to fall but should also make dividend payouts increase. Check this wiki entry on Bond Fund Duration.

If you hold on to the Bond Fund long enough you should be made whole through greater dividend payments.
But Tip5 etf has relatively low eff dur of 2.48

https://www.ishares.com/uk/individual/e ... -ucits-etf
exodusNH
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Re: TIPS price going down while inflation above expectation

Post by exodusNH »

Neus wrote: Fri Sep 30, 2022 6:07 am
tonyclifton wrote: Fri Sep 30, 2022 5:03 am This is expected when interest rates are rising. Interest rates are rising which causes the price of bond funds to fall but should also make dividend payouts increase. Check this wiki entry on Bond Fund Duration.

If you hold on to the Bond Fund long enough you should be made whole through greater dividend payments.
But Tip5 etf has relatively low eff dur of 2.48

https://www.ishares.com/uk/individual/e ... -ucits-etf
And interest rates have already gone up from 0 to 3%, which would be about a 7.5% NAV drop, but the market is expecting 4%-4.5% soon, which would be a total of 10%-11.25% drop. The market prices future rate moves into the current price. And with TIPS, they're also pricing in expected inflation.

TIPS are still bonds and are subject to the same market forces. It's just that you get an additional boost for inflation, but only "win" when inflation turns out higher than the market expected.

On top of that, TIPS are also less liquid than nominal bonds (and it's a smaller market.) They also have deflation risk. I.e., if, for US TIPS, the inflation rate goes negative, the Treasury will claw back some of the prior principal adjustment. (Though they will never drop it below face value.)

Finally, there's a lag on the inflation adjustments.
billyt
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Re: TIPS price going down while inflation above expectation

Post by billyt »

The inflation adjustment is currently negative as CPI has gone down for the last 2 months!
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vineviz
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Re: TIPS price going down while inflation above expectation

Post by vineviz »

Neus wrote: Fri Sep 30, 2022 3:50 am TIPS are supposedly goes up when the inflation is above expectation
There is no rule which says that the market price of TIPS must go up with inflation.

What is certain, though, is that the coupon payments and principal value of TIPS will absolutely do so.

If you’re using bonds as they were intended, as a source of fixed income, the market price can largely be ignored.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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tipswatcher
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Re: TIPS price going down while inflation above expectation

Post by tipswatcher »

Neus wrote: Fri Sep 30, 2022 6:07 am
tonyclifton wrote: Fri Sep 30, 2022 5:03 am This is expected when interest rates are rising. Interest rates are rising which causes the price of bond funds to fall but should also make dividend payouts increase. Check this wiki entry on Bond Fund Duration.

If you hold on to the Bond Fund long enough you should be made whole through greater dividend payments.
But Tip5 etf has relatively low eff dur of 2.48

https://www.ishares.com/uk/individual/e ... -ucits-etf
One very interesting trend in 2022 and especially in the last few weeks has been the strong surge higher in 5-year TIPS real yields, which was predictable since this maturity seems to be most sensitive to increases in the federal funds rate.

5-year real yields
Jan 1 = -1.58%
Mar 1 = -1.58%
Jun 1 = -0.02%
Sep 1 = 0.87%
Sep 29 = 1.80%

That increase is amazing, up 338 basis points year to date, which is more than a 3x duration event. Even just this month, the 5-year real yield is close to a 1x duration event, up 93 basis points. At this point, according to Morningstar, STIP has a total return of -3.93% year to date. VTIP has a total return of -3.90%. Those results are actually pretty good after 3x duration event, but both funds have taken a hit in the last two weeks because of wild volatility in the Treasury market.

YTD (January to August), non-seasonally adjusted U.S. inflation is up 5.3%. Even if you look back to November 2021, inflation through August ran at 6.6%, not enough to overcome the huge increase in real yields and the hit on market value of individual TIPS in these funds.

I wouldn't be a seller of these funds at this point, but no one can predict the future.
TIPS: Perfect investment for imperfect times?
evancox10
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Re: TIPS price going down while inflation above expectation

Post by evancox10 »

tipswatcher wrote: Fri Sep 30, 2022 7:36 am
Neus wrote: Fri Sep 30, 2022 6:07 am
tonyclifton wrote: Fri Sep 30, 2022 5:03 am This is expected when interest rates are rising. Interest rates are rising which causes the price of bond funds to fall but should also make dividend payouts increase. Check this wiki entry on Bond Fund Duration.

If you hold on to the Bond Fund long enough you should be made whole through greater dividend payments.
But Tip5 etf has relatively low eff dur of 2.48

https://www.ishares.com/uk/individual/e ... -ucits-etf
One very interesting trend in 2022 and especially in the last few weeks has been the strong surge higher in 5-year TIPS real yields, which was predictable since this maturity seems to be most sensitive to increases in the federal funds rate.

5-year real yields
Jan 1 = -1.58%
Mar 1 = -1.58%
Jun 1 = -0.02%
Sep 1 = 0.87%
Sep 29 = 1.80%

That increase is amazing, up 338 basis points year to date, which is more than a 3x duration event. Even just this month, the 5-year real yield is close to a 1x duration event, up 93 basis points. At this point, according to Morningstar, STIP has a total return of -3.93% year to date. VTIP has a total return of -3.90%. Those results are actually pretty good after 3x duration event, but both funds have taken a hit in the last two weeks because of wild volatility in the Treasury market.

YTD (January to August), non-seasonally adjusted U.S. inflation is up 5.3%. Even if you look back to November 2021, inflation through August ran at 6.6%, not enough to overcome the huge increase in real yields and the hit on market value of individual TIPS in these funds.

I wouldn't be a seller of these funds at this point, but no one can predict the future.
What is an Nx duration event?
dbr
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Re: TIPS price going down while inflation above expectation

Post by dbr »

After some years holders of funds like this will benefit from rising interest rates. Even a 3 year duration is an investment that belongs in a plan much longer than that. The fastest way for the value to recover some would be for interest rates to actually fall. It is pretty much a guarantee that interest rates do rise and fall over time.

Against all this the inflation increment to principal is always applied. In the case of a fund that does get paid out in the dividend, but if you want to fund value to pace inflation, interest rate changes up or down as may be, you have to reinvest that dividend. The real yield on the bonds you can spend. That is about 1.5% or whatever right now.

Note, as an alternate example, I bonds have a fixed value that is just exactly inflation incremented but I bonds also pay a real rate of 0% right now. So with I bonds you do see an exact pace to inflation but you can't spend any of it and also keep up with inflation because there is no real return.
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Kenkat
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Re: TIPS price going down while inflation above expectation

Post by Kenkat »

I posted a similar question - this conversation may also be helpful:

viewtopic.php?p=6879456#p6879456

In a nutshell, using round numbers as an example, it is:

+8% inflation adjustment
-20% interest rate adjustment

-12% net return

The positive news is that real rates are now positive so TIPS will earn a return in excess of inflation going forward. This will trickle in over a number of years however.
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