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TIPS vs. Treasuries - What Am I Missing?
Old 12-17-2008, 10:24 AM   #1
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TIPS vs. Treasuries - What Am I Missing?

Given that treasuries are yielding about 0.5% for maturities of two years, I figure I must be missing something on TIPS pricing.

Right now I can purchase a TIP that matures in 2 years for $96.22 (matures Jan 2011). This TIP has a coupon value of 3.5% and a yield to maturity of 5.193%. The index value is 1250. Even if worst case deflection causes a reversion in the index to 1000, I am still getting a yield of 3.5% on my investment of $96.22 per $100 of face value. Why would I even consider purchasing a short term treasury?

What am i missing? The only thing I can figure is that the price of $96.22 is not for $100 face value, but for $100 of indexed value. However, the math does not work out for this to be correct. Thanks,
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Old 12-17-2008, 01:42 PM   #2
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Yes, TIPS prices are normally quoted per $100 of face value, so you
have to multiply by the inflation factor. Also, the deflation that has been
occurring will immediately erode the principal (there is a two-month lag).
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Old 12-17-2008, 02:29 PM   #3
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Quote:
Originally Posted by RustyShackleford View Post
Yes, TIPS prices are normally quoted per $100 of face value, so you have to multiply by the inflation factor. Also, the deflation that has been occurring will immediately erode the principal (there is a two-month lag).
Thanks. I talked to VG again and verified that you are correct. I knew this had to be true, or otherwise it was a to good to be true offer.
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