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Old 07-09-2007, 01:20 PM   #21
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I think whether you buy at a discount or a premium, its probably a wash if both bonds are at the same yield. If you were a highly levered financial institution, you would care about a few basis points, but not a retail guy.

I would buy at auction for a real simple reason: its about the only time that you as a retail investor can get a bond with no markup/bid-ask spread/commission/pixel storage fees/wear & tear on beavers fee/etc. If you buy on the secondary market, bend over.
Thanks Brewer, but do you not buy my argument that the TIPS with
the lower price&coupon is better, because instead of having all that
interest I have to figure out something smart to do with, instead it's
essentially staying "in" the principal and continuing to earn the real
yield that I decided was so attractive when I bought the bond in the
first place ?
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Old 07-09-2007, 01:22 PM   #22
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Quote:
Originally Posted by JohnEyles View Post
Thanks Brewer, but do you not buy my argument that the TIPS with
the lower price&coupon is better, because instead of having all that
interest I have to figure out something smart to do with, instead it's
essentially staying "in" the principal and continuing to earn the real
yield that I decided was so attractive when I bought the bond in the
first place ?
Maybe. But you are implicitly assuming that you never have a chance to buy more tips at an even more attractive yield. I almost never make the assumption that whatever I have bought won't be available for an even lower rice in the future...
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Old 07-09-2007, 01:28 PM   #23
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With any coupon bond there is always re-investment risk. The YTM calculation implicitly assumes all coupons are reinvested at the YTM. In the real world, there is path dependence. The only way to be sure that you are going to achieve exactly a 2.75% CPI-U adjusted return would be to buy a zero-coupon TIPS. Since no one has stripped TIPS yet, this instrument doesn't exist. So, in theory, I suppose the lower coupon TIPS with the same YTM will leave you with less coupon reinvestment risk.

As Brewer says, practically speaking, for a 1/8 difference in coupon this is probably a second-order effect, swamped by the transactions cost associated with purchasing the 2.375% TIPS in the secondary market. Furthermore, the 2.375% coupon TIPS doesn't have a full 10 years left until maturity, so you still face that re-investment risk.
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Old 07-09-2007, 01:44 PM   #24
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What is the advantage of a TIPS versus say a 5, 7 or 10 year CD where you have the option of taking the interest or letting it stay in the CD. I know the TIPS and the accrued interest in a CD are phantom income so both are sort of equal on this point. Say you can get a APY of 6% (APR 5.83%) versus the current 2.75%+inflation TIPS. Where does the break even point come and/or the advantage of the TIPS over the CD (discount the State Tax situation as that may or may not be applicable)?
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Old 07-09-2007, 01:48 PM   #25
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What is the advantage of a TIPS versus say a 5, 7 or 10 year CD where you have the option of taking the interest or letting it stay in the CD. I know the TIPS and the accrued interest in a CD are phantom income so both are sort of equal on this point. Say you can get a APY of 6% (APR 5.83%) versus the current 2.75%+inflation TIPS. Where does the break even point come and/or the advantage of the TIPS over the CD (discount the State Tax situation as that may or may not be applicable)?
If we assume a CD yield of 6% and a TIPS yield of 2.75%, the breakeven is 6% - 2.75% = 3.25%. So inflation would have to be over 3.25% for the TIPS to yield more. For those of us with significant state income tax rates, the trade off is a bit less for TIPS.
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Old 07-09-2007, 03:00 PM   #26
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Since no one has stripped TIPS yet, this instrument doesn't exist.
Actually, todays's announcement PDF says: "The securities being offered
today are eligible for the STRIPS program". I have no idea how one
can actually purchase these.

Quote:
So, in theory, I suppose the lower coupon TIPS with the same YTM will leave you with less coupon reinvestment risk.
My point. The problem I see with reinvesting the coupon payments
is that they'll be perhaps $300-500 every 6 months (for the amount
I'm thinking to invest) so it's dubious I'd invest each one in something
good right away, and if I did the $10 or so commission would be an
issue.



Quote:
Furthermore, the 2.375% coupon TIPS doesn't have a full 10 years left until maturity, so you still face that re-investment risk.
Ok, it's 9.5 years instead of 10 years.
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Old 07-09-2007, 04:20 PM   #27
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Actually, todays's announcement PDF says: "The securities being offered today are eligible for the STRIPS program". I have no idea how one can actually purchase these.
Yes, they are eligible for the STRIPS program, but to the best of my knowledge, no dealer has stripped them yet. We have talked about stripping TIPS on this forum before. I have been an advocate of this, mainly for the interest-only piece. You have just made a good argument for the principal-only piece.

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My point. The problem I see with reinvesting the coupon payments is that they'll be perhaps $300-500 every 6 months (for the amountI'm thinking to invest) so it's dubious I'd invest each one in somethinggood right away, and if I did the $10 or so commission would be an issue.
If you really want to go this route, you might consider purchasing some of the much lower-coupon TIPS issued back when real interest rates were lower - e.g. the 1.625% TIPS due in 2015. This would minimize your re-investment risk over the next 7.5 years.
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Old 07-09-2007, 04:48 PM   #28
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Yes, they are eligible for the STRIPS program, We have talked about stripping TIPS on this forum before. I have been an advocate of this, mainly for the interest-only piece. You have just made a good argument for the principal-only piece.
I guess one buys a secondary with the lowest coupon you can find if
you really want a principal-only (same as a "zero" ?) and the highest
you can find if you really want a STRIP.



Quote:
If you really want to go this route, you might consider purchasing some of the much lower-coupon TIPS issued back when real interest rates were lower - e.g. the 1.625% TIPS due in 2015. This would minimize your re-investment risk over the next 7.5 years.
Yeah, but really, even for that one the majority of the return is from
interest, so maybe this is all really a red-herring.

On another note, I believe the issue of markups on secondary offerings
is a red-herring too, at least if one is a Schwab client and given their
new policy (however, they did mention, when I pressed on the phone,
that although THEY have no markup on secondary treasuries, the
dealer they buy them from DOES). Nonetheless, the 10-yr TIPS due
1/17 is 96-31/32 on Bloomberg, and 97-1/32 at Schwab on a $30K
purchase; a difference of maybe 1 basis-point in YTM. Fluctuations
between now and Thursday's auction will probably swamp that.

Oh well, guess we've pretty much talked this one into the ground ...
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Old 07-09-2007, 05:06 PM   #29
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Agreed. In the absence of stripped TIPS, we are talking about nuance here (although it is an interesting theoretical discussion).

My comments above have assumed that the TIPS are held in a tax-deferred account, since the issue of taxes can alter the results, especially with the tax on the phantom interest (that would make a zero-coupon TIPS effectively useless for the purpose of preserving purchasing power if held in a taxable account).

The way I think about utilizing a 2.75% coupon TIPS is to hold it in a tax-deferred account and withdraw (to spend) the coupon payment. This would go toward meeting my total SWR goal (assuming one is willing to settle for the CPI-U as inflation). Every subsequent coupon would then increase by the CPI-U and the "real" value of the principal would be preserved in the tax-deferred account. Since I would be spending the coupons, I would have no re-investment risk.
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Old 07-09-2007, 05:13 PM   #30
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The way I think about utilizing a 2.75% coupon TIPS is to hold it in a tax-deferred account and withdraw (to spend) the coupon payment. This would go toward meeting my total SWR goal (assuming one is willing to settle for the CPI-U as inflation). Every subsequent coupon would then increase by the CPI-U and the "real" value of the principal would be preserved in the tax-deferred account. Since I would be spending the coupons, I would have no re-investment risk.
Great point.

Of course, I am not old enough to spend the coupon payments
(from TIPS held in my TIRA), but I suppose I can use them for
my no-brainer $2K/year Roth rollover ("no-brainer", 'cause my
state has hefty income-tax rate and does not tax first $2K of
IRA dist).
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Old 07-09-2007, 05:34 PM   #31
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Of course, someone under 59.5 who is using a T72 withdrawal plan would avoid the 10% early-withdrawal penalty.
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Old 07-09-2007, 06:52 PM   #32
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I would buy at auction for a real simple reason: its about the only time that you as a retail investor can get a bond with no markup/bid-ask spread/commission/pixel storage fees/wear & tear on beavers fee/etc. If you buy on the secondary market, bend over.
I think this problem is much less with treasuries bought through Fidelity or Schwab. The bid/ask yields are clearly displayed, and the commissions are transparent and low.

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TIPS vs, I-Bond ??
Old 07-09-2007, 10:20 PM   #33
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TIPS vs, I-Bond ??

Would someone please explain how to compare the TIPS expected 2.75% YTM with the I-Bond 1.3% fixed + 1.21% semi-annual inflation part (3.74% composite rate)?

Is it 2.75% vs 1.3% or is there more to the comparison?

Thanks.
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Old 07-10-2007, 12:33 AM   #34
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Would someone please explain how to compare the TIPS expected 2.75% YTM with the I-Bond 1.3% fixed + 1.21% semi-annual inflation part (3.74% composite rate)?

Is it 2.75% vs 1.3% or is there more to the comparison?

Thanks.
Details differ, but this is all you really need to know.
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Old 07-10-2007, 10:42 AM   #35
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There is also a big difference in how taxes are handled.
TIPS vs IBonds
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Old 07-10-2007, 12:55 PM   #36
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Nonetheless, the 10-yr TIPS due
1/17 is 96-31/32 on Bloomberg, and 97-1/32 at Schwab on a $30K
purchase; a difference of maybe 1 basis-point in YTM. Fluctuations
between now and Thursday's auction will probably swamp that.
Speak of the devil, Bloomberg quote has increased enough to
drop yield by 0.1% today. Of course, it could have easily gone
the other way ...
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Old 07-10-2007, 09:32 PM   #37
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There is also a big difference in how taxes are handled.
TIPS vs IBonds
Thanks for the link bunny
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Old 07-12-2007, 12:52 PM   #38
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Looks like results of today's auction of 10-year TIPS just
announced: 2.625% coupon, 98.942199 price, 2.749% YTM.

Not too bad. A 2.75% "real" return supports a 4% SWR for
40 years. (Notwithstanding concerns about CPI under-estimating
real folks' inflation ...)
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Old 07-12-2007, 12:58 PM   #39
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Hey, it might over estimate your real inflation.

Theres also that matter about dying on schedule 40 years from now, or what your plan "B" is when the money runs out. Or further changes to the way the CPI is calculated that reduce the return, like the Boskin commission did for us a decade ago.
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Old 07-12-2007, 02:31 PM   #40
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Theres also that matter about dying on schedule 40 years from now, or what your plan "B" is when the money runs out. Or further changes to the way the CPI is calculated that reduce the return, like the Boskin commission did for us a decade ago.
It starts again ...

Yes, valid concerns. But conventional wisdom seems to be that
having 10% (at least) of portfolio in inflation-linked bonds is a
good idea. Which is about where I'm at now, about 2/3 TIPS and
1/3 ISM/OSM.
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