TIPS vs. Corporate Inflation Protected Securities

[rapoole]

I have discovered a calculator which compares Internotes inflation-protected bonds with TIPS. It provides a partial answer to the question I have had about how to compare the two.

TIPs have a fixed coupon and adjust the principle amount by the change in the CPI-U. Thus, when the bond matures, you get back your principal adjusted for inflation. Coupon payments rise slowly with the rise in principal amount.

Internotes have a coupon with two parts: a fixed amount (currently 1.62 on the ten year bond) plus the current CPI. Simplifying a bit, if inflation for the year is 3%, then the coupon is 4.62%. When the bond matures, you get back your principal unadjusted for inflation.

This website plots graphs comparing current TIPs rates with current Internotes:

http://www.internotes.com/index.cfm?...TOKEN=17844198

Unlike TIPs there is no secondary market for internotes, so you must plan to hold to maturity. Still, it looks like a reasonable alternative for constructing an inflation protected bond ladder. I'm in the process now, and am using both.

Here an article by Bob Arnott published in the Financial Analyst's Journal which furnishes a basis for the laddered approach (matching maturities to anticipated outflows):

http://aimrpubs.org/faj/issues/v60n5/pdf/f0600006a.pdf

I'm currently in the accumulation phase, and the bond ladder is my tool for phasing in fixed income (till last year I was 100% equities). Still probably 10 years from complete retirement, but planning to shift gears in the next few years to a sole proprietor low-stress business which will let me enjoy life a little more.

Sorry for rambling. Comments?

rapoole

A couple of asides................I called my broker yesterday
just to bounce a couple of ideas. He has been a broker
for a long time. He knew about TIPS of course, but had never actually sold them to anyone. I was surprised at that. Also, we discussed a bond "ladder". I told him I
already had one. It's just that the first 6 steps are missing

JG

[rapoole]

Hi John-

"First six steps are missing" - yeah, that's what I'd like to avoid.

One problem with building a bond ladder is commission and the spread you pay with each purchase - so I'm buying them at auction (mkt price, no "spread" to a dealer), and no commission, thanks to Fidelity's new no-fee policy regarding bonds purchased at auction.

I doubt your broker can beat that deal, so maybe it's no surprise he hasn't sold any.

rapoole2000

[Beststash]

I am a Fidelity user, what is the process to purchase TIPS at action?? Call broker?Thru Web?
I heard thru a friend that they (Fidelity) also had CD's for sale - I am thinking of going to PFCU if I can swing the timeline but might check with Fidelity. I like having everything at one house - easier for asset allocation etc. Like a lot of folks, I expect a dip in the equity markets and would like to have available cash when, if....but the 5.25 APY at PFCU is tempting.
ER'd 52 (now 54) everything is very cool - my only concerns are "W" will screw up SS and get my son killed in Iraq. He has done his time but cannot leave - as a vietnam vet, I do understand duty (drafted) but I also understand leadership. Sorry for the rant - I am trying to get over it.

[rapoole]

Stash-

I'll say a little prayer for your son. (I'm not religious, but some situations require extreme measures.) I entirely understand your strong feelings. I hope the leadership gets better.

On a more cheerful note, to buy treasuries at auction through Fidelity free, you need to do it over the web. If you do it using a broker, they charge $20 as I recall. But you can call to ask questions about online ordering without a fee. Here's the link for online purchase at Treasury auction:

http://personal.fidelity.com/researc...me_frame.shtml

The above page shows the treasuries to be auctioned in the next few days (as I write this, it doesn't list any). However, a day or two before the auction you are interested in it will pop up on this page.

So probably you are wondering how do I find out when the next auction will be (for free you need to do a little work). Look here on the Treasury website to figure you when the auction you are interested will occur:

http://www.treas.gov/offices/domesti...s/auctions.pdf

Give it a try. No broker will recommend it because they don't get a dime. Fidelity allows it (but doesn't make it TOO easy) because they want to accumulate assets even from cheap types like us. But it works and IMHO is reliable. I think Fidelity is doing the no-fee deal because they hope to sell us services in the future. And to compete with Vanguard, which was threatening to eat their lunch.

Best,
rapoole

[brewer12345]

I am a Fidelity user, what is the process to purchase TIPS at action?? Call broker?Thru Web?
I heard thru a friend that they (Fidelity) also had CD's for sale - I am thinking of going to PFCU if I can swing the timeline but might check with Fidelity. I like having everything at one house - easier for asset allocation etc. Like a lot of folks, I expect a dip in the equity markets and would like to have available cash when, if....but the 5.25 APY at PFCU is tempting.
ER'd 52 (now 54) everything is very cool - my only concerns are "W" will screw up SS and get my son killed in Iraq. He has done his time but cannot leave - as a vietnam vet, I do understand duty (drafted) but I also understand leadership. Sorry for the rant - I am trying to get over it.

Stash:

Most of the brokers (including Fido) sell CDs. However, rates are usually far below what you could get by shopping around. Certainly they will be nowhere near the 5.25% that PFCU offers, and in many cases broker-old CDs sport below market rates due to the convenience/laziness factor. I also think that you get the best of both worlds with a high rate CD with a small surrender penalty. If the equity market crashes, you yank the CD, pay the 6 month interest penalty, and make a fortune. If the equity market continues to cruise, you leave the money at work at 5.25%.

Given the tight pricing on TIPS, high rate CDs like the PFCU deal look a lot better to me than TIPS. I bet you would come out well ahead over the 5 years.

Sorry to hear about your son. I sincerely hope he gets out of Iraq ASAP. Unfortunately, it looks a lot like the US is over committed and that soldiers will be a precious commodity for some time. Doesn't bode well for those already in the military or those of us who are potentially of draft ages.

I agree that 5.25% (guaranteed) for 5 years looks pretty
good. As someone recently reminded me, the extra interest I am making comes with a lot more risk built in.

JG

[searcher]

PFCU ? Where can you get CDs over 5% ?

[MJ]

PFCU ? Where can you get CDs over 5% ?

Review this thread.

http://early-retirement.org/cgi-bin/...num=1104436801

MJ