Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
auction of 10-year TIPS next week
Old 07-06-2007, 09:53 PM   #1
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
auction of 10-year TIPS next week

Wow, the YTMs on TIPS are something ! I am as excited (as a
little French school-girl on Bastille Day) about next week's
auction of 10-year TIPS. I believe the announcement is Monday,
so with today's closing YTM (according to Bloomberg) at 2.77%,
looks like the coupon will be 2.5% or more, and even at that
the price will be discounted (*IF* I understand the process
correctly).

What do folks think ? Time to back up the truck ?
__________________

__________________
JohnEyles is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-07-2007, 10:18 AM   #2
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,322
I'm not quite as excited as you are, but it definitely appears that we are looking at the highest coupon in 5 years. If YTM's stay where they are now, the coupon will probably be 2.75%.

With respect to "backing up the truck", I think it depends upon what you are trying to accomplish. If you are expecting a slowing of the economy over the next year with a concomitant drop in real rates, you might want to save some powder to buy some 20-year TIPS at the July 24 auction. Since the 20-year auction is a re-open of the 2.375% coupon, it will sell at a discount (Bloomberg shows it around 94.5). The combination of the discount, and the longer maturity, will give you a larger capital gain should real yields drop. If you simply want to buy and hold, the 10-year looks like it will let you lock in a 2.75% SWR for the next 10 years, which IMO is attractive. I believe I read somewhere, that some TIPS "experts" recommend a 50/50 allocation between TIPS and regular Treasuries when the TIPS yield is 2.5%, and an increasing allocation to TIPS as the yield rises above 2.5%.
__________________

__________________
FIRE'd@51 is offline   Reply With Quote
Old 07-07-2007, 02:01 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Quote:
Originally Posted by FIRE'd@51 View Post
the 10-year looks like it will let you lock in a 2.75% SWR for the next 10 years

If your personal rate of inflation is equal to or less than the TIPS inflation adjustment...
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 07-07-2007, 03:05 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Quote:
Originally Posted by cute fuzzy bunny View Post
If your personal rate of inflation is equal to or less than the TIPS inflation adjustment...


Do you have a macro to write that?

Realize that "personal inflation rate" has nothing to do with anything. Fire Calc doesn't know or care what your personal inflation rate is. So if we are comparing TIPS offering a definite 2.75% withdrawal rate with no drawdown, we would also be comparing it to some other scheme which uses a published inflation rate- usually the same one that TIPS uses-CPI-U. This doesn’t argue that CPI-U is perfect, or even good. Only that it is available and it is what the calculators and the entitlement programs and the TIPS program and the tax code ordinarily use.

Also, realize that FireCalc has no provision for preserving your real principle. A success at any given WR may leave you flat broke at the end, it may also leave you with just a few thousand bucks somewhere along the way. Granted, it also has more open ended upside.

But compared to an assumed SWR of 4% and an unknown success rate and an unknown maximum drawdown and an unknown end point, a definite 2.75% with maintenance of real principle might strike some people as a pretty reasonable alternative.

Ha
__________________
haha is offline   Reply With Quote
Old 07-07-2007, 03:16 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Not too exciting to me, but I am still after the big fish. Now if we were talking 4% real...
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 07-07-2007, 03:18 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Do I get extra points for using a macro to remind people that theres more to some things than meets the eye?

I dont particularly care whether the cpi-u is perfect or not. It measures someone who works in the city, rents and doesnt pay health care. Doesnt sound like most early retirees.

I just think its a good idea to understand that an instrument paying 2.75% + cpi wont produce a stable SWR of 2.75% if your health care costs are going up 14% a year, your energy costs are going up 10% a year, etc...

But I guess its a workable strategy to proclaim any measurement of actual inflation on how you spend money as irrelevant, presume the 'standard' inflation adjustment will be "good enough" and then wondering what the hell happened ten years from now when your buying power is down 20%+.

And good luck with that
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 07-07-2007, 10:12 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Quote:
Originally Posted by cute fuzzy bunny View Post
But I guess its a workable strategy to proclaim any measurement of actual inflation on how you spend money as irrelevant, presume the 'standard' inflation adjustment will be "good enough" and then wondering what the hell happened ten years from now when your buying power is down 20%+.

And good luck with that
This is tilting at windmills. I probably am no more fond of CPI-U than you are- but I am just pointing out that there are no investments that we talk about around here anyway which have been tested against one's "personal inflation rate." Perhaps you would enjoy explaining to us how that might be done?

Ha
__________________
haha is offline   Reply With Quote
Old 07-08-2007, 09:16 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
I dont think its tilting at windmills at all, and the topic I'm trying to address has nothing to do with whether the CPI is a good measure or not.

The whole idea of investing is to make money, and ideally to make enough to pay ones bills and not run out of money.

It seems acceptable to keep a budget, to check ones spending against ones budget, and to identify areas where costs are increasing faster than expected and try to mitigate those costs.

But on the investment side, it seems some people feel its acceptable to buy products that may be returning a zero or negative return against those spending increases because its somehow impossible to measure or trend those costs...even though many people are already somehow doing it.

I think its dangerous in the long term for someone to presume that cpi indexed securities produce a "real" return or a "safe withdrawal same as the coupon" return without any practical determination if the cpi indexing is enough to overcome ones individual spending increases.

Is that unreasonable?

When I look at all the data, it seems to suggest that a "safe withdrawal rate" plus inflation plus taxes lands you into a 6-8% range.

TIPS only pays that much during rare periods of very high inflation.

What about the other 90-95% of the time?
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 07-08-2007, 12:08 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by haha View Post
This is tilting at windmills. I probably am no more fond of CPI-U than you are- but I am just pointing out that there are no investments that we talk about around here anyway which have been tested against one's "personal inflation rate." Perhaps you would enjoy explaining to us how that might be done?

Ha
Just ignore him/stop feeding the troll and this will die out quickly...
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 07-08-2007, 12:34 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Hmm, I thought you had me on your 'ignore' list, so how do you even know what i'm saying?

So expressing an informed opinion that may help people look at things a little differently or more in depth is "trolling"? I'll have to go look that definition up again, I seem to have it all wrong.

I still dont have you on my ignore list though. I find it interesting to see which investment products you're pumping and dumping this week, along with how well everyone remembers the one or two decent picks you throw out while forgetting the half dozen that dropped like a rock.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 07-09-2007, 12:24 PM   #11
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Sorry to interrupt the pissing contest about CPI ...

But, I guess I misunderstood, the Treasury apparently does NOT
specify the coupon rate in the announcement for the TIPS (the
one for the new 10-year occurred today). Apparently that AND
the price are determined at auction. Which doesn't make sense,
how do you know the price you're willing to pay without knowing
the coupon ?!?
__________________
JohnEyles is offline   Reply With Quote
Old 07-09-2007, 12:28 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
My understanding is that the bid is a yield. So you'd bid, say, $10MM par at a real rate of 2.85%, for example. The coupon would probably be based on whatever the closest 1/8 or 1/4 % is closes to the winning bid, and ou would pay more or less over par to make up the difference between the coupon and the winning bid. But this is conjecture. You could go browse the treasury website to see what they say.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 07-09-2007, 12:30 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Quote:
Originally Posted by JohnEyles View Post

Which doesn't make sense,
how do you know the price you're willing to pay without knowing
the coupon ?!?
Small investors are passive yield takers. Accredited dealers bid a yield.

Ha
__________________
haha is offline   Reply With Quote
Old 07-09-2007, 12:38 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by cute fuzzy bunny View Post
Hmm, I thought you had me on your 'ignore' list, so how do you even know what i'm saying?

So expressing an informed opinion that may help people look at things a little differently or more in depth is "trolling"? I'll have to go look that definition up again, I seem to have it all wrong.

I still dont have you on my ignore list though. I find it interesting to see which investment products you're pumping and dumping this week, along with how well everyone remembers the one or two decent picks you throw out while forgetting the half dozen that dropped like a rock.

__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 07-09-2007, 12:44 PM   #15
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,322
Quote:
Originally Posted by JohnEyles View Post
But, I guess I misunderstood, the Treasury apparently does NOT
specify the coupon rate in the announcement for the TIPS (the
one for the new 10-year occurred today). Apparently that AND
the price are determined at auction. Which doesn't make sense,
how do you know the price you're willing to pay without knowing
the coupon ?!?
As I understand it, competitive bidders submit YTM bids. The coupon is then chosen so that the highest accepted bid will yield a price as close to par as possible. Since the coupon is a multiple of 1/8, there may be a final price adjustment after the coupon is chosen. For example, if the highest accepted yield is 2.75%, the coupon will be 2.75% and the price 100. If it is 2.76%, the coupon will be 2.75%, and the price slightly below 100. All accepted bids (competitive and non-competitive) are awarded at the highest accepted YTM.
__________________
FIRE'd@51 is offline   Reply With Quote
Old 07-09-2007, 12:48 PM   #16
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,322
Sorry for the redundant post. The new software doesn't warn you that a post was made while you are constructing and submitting a reply.
__________________
FIRE'd@51 is offline   Reply With Quote
Old 07-09-2007, 01:02 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Quote:
Originally Posted by JohnEyles View Post
Sorry to interrupt the pissing contest about CPI ...

That seems to be the problem. I wasnt engaged in a pissing contest about CPI, but the other guys seemed to take it that way.

My comment was in relation to the statement that an investment in tips created a fairly certain 'safe' withdrawal rate. I've made similar comments regarding claims of 'real' rates of return.

I have no issues with the CPI, it is what it is. Its just apparent that some investors dont understand what it measures or how it measures cost changes or what segment of the population is being measured.

My comments are intended to assure that investors take all facets of an investment into account so they dont lose buying power.

It IS my belief that CPI understates inflation for many early retirees, it IS my concern that someone in their 30's/40's/50's could see a loss of buying power if they dont invest in a manner that exceeds inflation, and it IS my concern that people dont always take the time to understand inflations effect on their retirement.

Examining the CPI-R measure gives a good example of this problem...the CPI-R creates a framework for retirees cost of living changes and often produces a far higher number than the CPI-U. The BLS examined the CPI-R structure and noted that it is a far better measure of a retirees cost of living changes, but that it was simply too expensive to use.

I guess a quote from the BLS's FAQ on CPI would help explain the situation. Note that if you read the FAQ, it quite clearly states that while it is *a* measure of inflation, it is not *the* measure of inflation.

Quote:
5. Does the CPI measure my experience with price change?

Not necessarily. It is important to understand that BLS bases the market baskets and pricing procedures for the U and W populations on the experience of the relevant average household, not on any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.
Quote:
For example, if you or your family spend an average share of your budget on medical expenses, and medical care costs are increasing more rapidly than the cost of other items in the CPI market basket, your personal rate of inflation (or experience with price changes) may exceed the increase in the CPI. Conversely, if you heat your home with solar energy, and fuel prices are rising more rapidly than other items, you may experience less inflation than the general population does. A national average reflects all the ups and downs of millions of individual price experiences. It seldom mirrors a particular consumer's experience.
Seems like the people who produce the dang number agree with me in spades.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 07-09-2007, 01:06 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
The ONLY inflation rate I care about is my PERSONAL inflation rate..........

Plus, the govt has proven to be awfully good at "smoke and mirrors" over the years..........

There's lies, damn lies, and statistics..........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 07-09-2007, 01:08 PM   #19
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Quote:
Originally Posted by FIRE'd@51 View Post
As I understand it, competitive bidders submit YTM bids. The coupon is then chosen so that the highest accepted bid will yield a price as close to par as possible. Since the coupon is a multiple of 1/8, there may be a final price adjustment after the coupon is chosen. For example, if the highest accepted yield is 2.75%, the coupon will be 2.75% and the price 100. If it is 2.76%, the coupon will be 2.75%, and the price slightly below 100. All accepted bids (competitive and non-competitive) are awarded at the highest accepted YTM.
That's ok (redundant post). You explained it well.

Another thought. If my main reason for buying TIPS is long-term
real growth with inflation protection, can't it be argued that you want
a lower coupon and corresponding lower price ? In other words,
that it'd make more sense to buy the Jan '07 10-year issue (with
2.375% coupon and 97'ish price) on the secondary market, rather
than this week's with a 2.75%'ish coupon and par price ? The reason
is that the lower coupon/price gives you essentially get less interest
but more growth of principal, so it's (a little) like DRIP'ing, whereas
the larger interest payments (from the higher price/coupon of this
week's issue) is not getting the same real yield going forward,
depending on how I choose to invest that money. Of course, this
only makes sense assuming the same YTM for the new issue and
last Jaunary's, which is reasonable I think for Schwab's new bond
pricing policy, although the nice lady at Schwab did opine that the
auction will typically give one a few basis points higher YTM.

Does this make any sense ? I appreciate you (FIRE'51, Brewr, etc)
taking the time to help me understand this complicated investment !
__________________
JohnEyles is offline   Reply With Quote
Old 07-09-2007, 01:15 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
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.
__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Investing in TIPS Gearhead Jim FIRE and Money 8 02-17-2007 08:02 PM
TIPS vs. Vanguard TIPS Fund Cut-Throat FIRE and Money 16 08-15-2006 06:32 AM
TIPS funds: FIREcalc inputs, withdrawal strategy.. Cb FIRE and Money 2 09-28-2004 02:13 PM
I-Bonds vs. TIPS? jonathan_b FIRE and Money 2 04-07-2003 08:05 AM
New version of FIRECalc for testing dory36 FIRE and Money 24 11-25-2002 08:12 AM

 

 
All times are GMT -6. The time now is 10:54 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.