FIRE'd@51 said:Does anyone know if they strip TIPS into an interest-only and principal-only part, like they began doing with mortgages 20 years ago (IO's & PO's)? If they do, the interest-only part could IMHO be very useful to some of us. If that doesn't exist, is there a zero-coupon TIPS? It could be shorted against the regular TIPS to create the interest-only piece, and we would have a 30yr annuity at a fair price.
Take a 30-yr TIPS bought at auction with a 2.25% coupon for 100
PV of principal repayment for 30 yrs at 2.25% = 51.30
100 - 51.30 = 48.70 = cost of annuity
2.25/48.70 = 4.6% SWR
I'm not convinced this doesn't exist - I've seen stuff in some articles that alludes
to stripping of TIPS ...
http://www.riskglossary.com/link/treasury_strips.htm
but I don't quite understand how strips work. It looks like each individual
(biannual) interest payment is a separate security, rather than just buying
all the interest payments (without the principal return at maturity) in one
fell swoop like you imply. I guess it's simply a procedural thing, and you
just purchase a bunch of the interest payments with staggered maturities.