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20 year TIPS auction reopened today
Old 07-23-2009, 05:25 PM   #1
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20 year TIPS auction reopened today

Just a public service announcement - the auction reopened today and closes on Monday. These are the same 2029s originally priced in January with the 2.5% coupon. They're trading a bit above par in the secondary market, yielding around 2.33%.
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Old 07-23-2009, 06:18 PM   #2
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Is that 2.5% above inflation
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Old 07-23-2009, 06:53 PM   #3
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Is that 2.5% above inflation
That would be correct.
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Old 07-23-2009, 07:05 PM   #4
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Is that 2.5% above inflation
Well, 2.5% above the CPI, anyway. A lot of people (myself included) would question whether or not that really captures the inflation most of us feel, but that's a separate discussion...
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Old 07-23-2009, 07:52 PM   #5
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Just a public service announcement - the auction reopened today and closes on Monday. These are the same 2029s originally priced in January with the 2.5% coupon. They're trading a bit above par in the secondary market, yielding around 2.33%.
Thanks for mentioning this. That seems quite reasonable to me- not a huge bargain, but pretty good.

When the inflation that is already in the pipeline manifests there will be a huge scramble for these.

Ha
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Old 07-24-2009, 05:57 AM   #6
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Ha - I agree, there's a good chance that in a few years we'll look back and be glad we bought insurance before the house caught fire.
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Old 07-24-2009, 06:52 AM   #7
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TIPS lose value when deflation occurs or the threat of deflation is present. Here's today's article on global deflation
Global Deflation Pandemic Brews - WSJ.com

There are reasons to own TIPS. I think it's pretty easy to time the purchase as well. TIPS are not as safe as many people have been led to believe. Don't pay too much for your insurance.
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Old 07-24-2009, 09:14 AM   #8
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There are reasons to own TIPS. I think it's pretty easy to time the purchase as well. TIPS are not as safe as many people have been led to believe. Don't pay too much for your insurance.
The biggest risk to TIPS that I can see (when held to maturity) is the risk that "real" inflation is not adequately captured in the CPI. Other than that, the credit risk is as safe as can reasonably be expected, and you lock in a sure-thing 2%+ real return (relative to the CPI). Of course, in a mutual fund you can't hold to maturity so there is risk that the fund will decline in value. That's why I prefer holding individual TIPS to maturity (something I wouldn't do with corporate bonds because of credit risk).

Having said that, the best time to buy inflation protection is when the market isn't too worried about inflation. That's when the "insurance" will be cheapest, most likely.

I have a good chunk of TIPS in my IRA -- some of them maturing in 2016 and the rest in 2025. I bought them in November with a real YTM of 2.8%. Even worst case, if deflation persists and these mature at par, it's over 2.5% at the price I paid.
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Old 07-24-2009, 11:39 AM   #9
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Yes, Nov-Dec 2008 was a much better time to buy TIPS. Such a time will come again.
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Old 07-24-2009, 02:11 PM   #10
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Yes, Nov-Dec 2008 was a much better time to buy TIPS. Such a time will come again.
Yes, but the "problem" for me was, I would be selling something to buy those TIPS. My bond funds and equities were both down of course, so in a way, those TIPS didn't look so cheap when I thought about buying them with stuff that I'd have to sell at lows.

Now that the market has recovered from those points, TIPS might look better in that regard. If I want to adjust my AA, I could do it and sell ~ 20% less of my equities than at the lows of Nov (but there were other points in Nov/Dec that were not so much lower than today).


I actually made a note of this and kept it on my computer. It is easy to look back at a chart and say "heck, what was I thinking, I should have jumped in!", but there were other factors that were not on that chart. But for someone moving from cash, that could be a different story.

What were the TIPS yielding back then?

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Old 07-24-2009, 02:16 PM   #11
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What were the TIPS yielding back then?
Mine were priced to yield between about 2.8% and 2.9% when I bought in November. As I mentioned earlier, these are issues that mature in 2016 and 2025.
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Old 07-24-2009, 02:29 PM   #12
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Yes, but the "problem" for me was, I would be selling something to buy those TIPS. My bond funds and equities were both down of course, so in a way, those TIPS didn't look so cheap when I thought about buying them with stuff that I'd have to sell at lows.
You seem to have a problem with loss aversion which is a well-known behavioral finance trap. You have got to get over this and make unemotional decisions. Tax-loss harvesting is helpful: sell low, buy low. That goes for equities and bonds. So selling losing bonds to buy bonds at a low price is just fine. Of course, rebalancing is also helpful.

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What were the TIPS yielding back then?

-ERD50
Charts galore show the answer: St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity
St. Louis Fed: Series: DFII20, 20-Year Treasury Inflation-Indexed Security, Constant Maturity

So buy 10-year TIPS when the blue line is above 2.5%.

I bought VIPSX (Vanguard TIPS fund) in late Oct 2008 when yield was about 2.6% (It was 3% the week before and later in Nov-Dec). I sold in late March 2009 when the yield dropped to 1.35% and made a tidy capital gain in that 5 months.
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Old 07-24-2009, 03:29 PM   #13
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You seem to have a problem with loss aversion which is a well-known behavioral finance trap. You have got to get over this and make unemotional decisions. Tax-loss harvesting is helpful: sell low, buy low. That goes for equities and bonds. So selling losing bonds to buy bonds at a low price is just fine. Of course, rebalancing is also helpful.
Loss aversion is a trap, but I don't think that was the issue for me at the time. I thought the market was over-reacting, and would likely be higher if I waited (which it has, to a degree).

I had already done tax-loss harvesting, and have carryovers now. I sold some of my more stable bond funds at a relatively small loss, and bought some more of a "junkier" bond fund which had dropped relatively more (mid Oct '08). Thinking that if we had a recovery, the junkier fund would rise faster, as it had fallen faster.

Just checked, NAVS of each are not really much different (the junk has risen more, but ~ 11% versus ~10%), but I have been getting the higher yield from the junk, so that has been good.


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Charts galore show the answer: St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity
St. Louis Fed: Series: DFII20, 20-Year Treasury Inflation-Indexed Security, Constant Maturity

So buy 10-year TIPS when the blue line is above 2.5%.

I bought VIPSX (Vanguard TIPS fund) in late Oct 2008 when yield was about 2.6% (It was 3% the week before and later in Nov-Dec). I sold in late March 2009 when the yield dropped to 1.35% and made a tidy capital gain in that 5 months.
Thanks, I'll check those out.

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Old 07-24-2009, 11:41 PM   #14
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TIPS lose value when deflation occurs or the threat of deflation is present. Here's today's article on global deflation
Global Deflation Pandemic Brews - WSJ.com

There are reasons to own TIPS. I think it's pretty easy to time the purchase as well. TIPS are not as safe as many people have been led to believe. Don't pay too much for your insurance.
It seems to me that one good reason to buy TIPS is if you have a non-COLA'd DB pension. Your big risk on the pension is inflation, but deflation actually makes your pension more valuable. Therefore, TIPS provide an offsetting position.

At least I hope I'm right on this analysis, since this is what I'm doing.
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Old 07-25-2009, 10:19 AM   #15
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It seems to me that one good reason to buy TIPS is if you have a non-COLA'd DB pension. Your big risk on the pension is inflation, but deflation actually makes your pension more valuable. Therefore, TIPS provide an offsetting position.

At least I hope I'm right on this analysis, since this is what I'm doing.
TIPS will barely keep up with themselves with respect to inflation, so I think they will do no good helping your pension combat inflation.
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Old 07-25-2009, 10:41 AM   #16
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It seems to me that one good reason to buy TIPS is if you have a non-COLA'd DB pension. Your big risk on the pension is inflation, but deflation actually makes your pension more valuable. Therefore, TIPS provide an offsetting position.

At least I hope I'm right on this analysis, since this is what I'm doing.
I also have a noncola DB. It's a fairly common recommendation that folks split their bond AA 50/50 TIPS/Nominal. In my case I am buying 100% individual TIPS until the NPV of the TIPS equals the NPV of the pension at that point I will consider myself 50/50 (the pension is the nominal bond) and then reevaluate. If I had to decide today I would continue buying TIPS beyond that point.
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Old 07-25-2009, 12:58 PM   #17
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That's an interesting idea.

I would say that a nominal bond fund does have some inflation-protection built-in. Since a bond fund is always buying new bonds and presumably the manager will not overpay for a bond, they will want to get a yield that accounts for the prevailing notion of inflation at the time of purchase.

OTOH, if you buy a nominal bond itself and hold to maturity, you know exactly what you are getting. You are stuck with whatever yield you have no matter what inflation does on the side lines. To overcome this, folks try to build a bond ladder with the idea that when a bond matures, you buy another one. That is, you don't spend it. LOL!

So it seems to me that a non-COLA'd pension is more like the latter and one would need something like equities or commodities to get inflation protection.
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Old 07-25-2009, 02:41 PM   #18
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TIPS will barely keep up with themselves with respect to inflation, so I think they will do no good helping your pension combat inflation.
?? Assuming there is no tricksterism with the CPI, TIPS will exceed inflation by 2+%, right? That may not be a huge gain, but it ain't "no good" either. Someone looking for a rock-solid way to have a portion of his portfolio keep up with inflation could do a lot worse. If we have inflation combined with a slow/stagnant economy (depressing commodity prices and stock price growth), TIPS would look very good. And, if we get a very long period of deflation, they still do okay (held to maturity, especially if bought at issue or early in their term).
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Old 07-25-2009, 03:38 PM   #19
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A portfolio of 100% laddered individual TIPS bonds would not be a bad retirement portfolio according to Ziv Bodie. I just don't see how having a few TIPS is going to make a non-COLA'd pension keep up with inflation.

When the love for TIPS drops and the yield goes above 2.5% for the 10-year TIPS is when I am going to buy. Right now the 10-year real-yield is at 1.75%, so there is a ways to go. In the meantime, I am gonna stick to shorter maturity nominal bonds.

Consider this: if TIPS were such a great investment, why wouldn't fund managers simply load up on them and ditch nominal bonds. It is true that PIMCO loaded up when the real yields were around 3%. I don't see that happening nowadays at current prices.
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Old 07-26-2009, 08:35 AM   #20
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I just don't see how having a few TIPS is going to make a non-COLA'd pension keep up with inflation.

.
You're the only one saying that, so it seems you are disagreeing with yourself.......

I, OTOH, don't see how a few equities is going to make a non-COLA's pension keep up with inflation.

I do agree with Independent that if a significant portion of your FIRE status is dependent on a non-COLA'd pension, you need to make a defensive effort to construct the balance of your portfolio to do well in an inflationary environment. TIP's, equities, commodities........... Pay your money, take your chances......
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