TIPS, VIPSX and Current Yields

[Culture]

I note that TIPS yields are near historic highs, currently at 3.76% real for 7 year bonds. I also note that VIPSX has fallen 15% in the past 15 months, and 11% in the past 2.5 months.

I assume that the drop in VIPSX is a result of the interest rate risk, as the real yield was 1.2% 2.5 months ago. My question is this: If I am willing to accept that real yields are not going to go significantly higher than they already are, is there any reason to purchase individual TIPS as opposed to VIPSX? The effectve yield of VIPSX is the same as curernt TIPS due to the discount in principal (i.e. I am paying 15% less per share to account for the fact that the normial yield of the underlying bonds is actually on the order of 2%).

Am I correct? I hope so, as I just shifted $220,000 from my treasury money market fund into VIPSX. This is long term cash, not near term.

Did I miss something?

 

[soupcxan]

Didn't you get the memo? We're all afraid of deflation these days. Look for the next memo when we have to start being afraid of inflation again.

 

[Culture]

Didn't you get the memo? We're all afraid of deflation these days. Look for the next memo when we have to start being afraid of inflation again.

Actually, I got the memo. Its just that with all the helicopters dropping cash on my house, I just find it hard to believe, plus I am more than happy to accept a 3.34% return, which is the worst case scenario, as opposed to the 3.4% I am currently getting with no inflation protection (with a similar duration of regular treasuries).

Edit: This is a tax-deferred account.

 

[MichaelB]

I note that TIPS yields are near historic highs, currently at 3.76% real for 7 year bonds. I also note that VIPSX has fallen 15% in the past 15 months, and 11% in the past 2.5 months.

I assume that the drop in VIPSX is a result of the interest rate risk, as the real yield was 1.2% 2.5 months ago. My question is this: If I am willing to accept that real yields are not going to go significantly higher than they already are, is there any reason to purchase individual TIPS as opposed to VIPSX? The effectve yield of VIPSX is the same as curernt TIPS due to the discount in principal (i.e. I am paying 15% less per share to account for the fact that the normial yield of the underlying bonds is actually on the order of 2%).

Am I correct? I hope so, as I just shifted $220,000 from my treasury money market fund into VIPSX. This is long term cash, not near term.

Did I miss something?

Now that you've made the exchange, do you still want an answer to your question? A new TIPS at auction will redeem at face value plus pay the coupon. VIPSX TIPS will pay the coupon but already have past inflation adjustments that may fall if there is deflation in the near future.


Edit - hit post too quickly.

 

[haha]

Can anyone remind me how to paste tabular data into a post?

I am struggling with understanding something on the Treasury Direct site that relates to the inflation adjustments made to TIPS.

If i could post it you guys could maybe help me figure it out.

Ha

 

[Culture]

Now that you've made the exchange, do you still want an answer to your question?

Yes .

A new TIPS at auction will redeem at face value plus pay the coupon. VIPSX TIPS will pay the coupon but already have past inflation adjustments that may fall if there is deflation in the near future.

Makes sense, I think. You are saying the pricing of existing TIPS reflects past inflation adjustments, that could be revoked by the treasury in the future if deflation occurs. A newly issued TIP will not have this risk. Is this correct?

 

[Culture]

Off Topic:

"The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts."

Amen to that, bother!

 

[FUEGO]

Hey, did you consider the admiral shares (VAIPX)? .1% less expense ratio equals .1% more yield. If this was/is an option. I guess you could always sell VIPSX and buy VAIPX...

 

[youbet]

Makes sense, I think. You are saying the pricing of existing TIPS reflects past inflation adjustments, that could be revoked by the treasury in the future if deflation occurs. A newly issued TIP will not have this risk. Is this correct?

I had a short chat with a Schwab bond person today. She explained that TIPS bought on the secondary market, in an ETF or in a fund contain the inflation adjustment from past periods in their principal value. Some of this inflation adjustment can be taken back by the Feds if we get deflation. That is a risk you wouldn't have if you go for a new TIPS bond at auction.

 

[MichaelB]

Makes sense, I think. You are saying the pricing of existing TIPS reflects past inflation adjustments, that could be revoked by the treasury in the future if deflation occurs. A newly issued TIP will not have this risk. Is this correct?

Yes. The way to avoid this is to buy new issues - which is not always an option.

I'm not sure how big a deal it is. It really depends on your time horizon and portfolio risk. If Helicopter Ben fully lives up to his nickname, the risk of inflation is greater, just not imminent.

Michael

 

[Culture]

Hey, did you consider the admiral shares (VAIPX)? .1% less expense ratio equals .1% more yield. If this was/is an option. I guess you could always sell VIPSX and buy VAIPX...

Opps, I meant VAIPX. You actually can't buy $220,000 worth of VIPSX through a Vanguard account. Vanguard won't allow it. It automatically kicks you into VAIPX if you try.

 

[FIRE'd@51]

You didn't mention whether this investment is in a taxable or tax-deferred account. If it's a taxable account, you are probably better off with VIPSX (or VAIPX), since those funds pay out the inflation component as current interest, so there is no phantom interest as is the case with a direct TIPS holding, and the phantom interest is subject to Federal taxes if held in a taxable account.

oops: I just saw your edit about if being tax-deferred.

 

[FIREd]

Am I correct? I hope so, as I just shifted $220,000 from my treasury money market fund into VIPSX. This is long term cash, not near term.

I hope you are correct because I did the same thing this afternoon... Though I only shifted $5,000 from VG prime MMF to VIPSX in my wife's IRA.