TIPS yields

[samclem]

Yep. They were up there before, maybe they'll come back. And when they do, I still won't understand how they work, and I still won't buy them. Compared to TIPS, explaining and understanding the blue lines in hockey is a piece of cake.

For anyone interested, here's a good explanation of the whys/hows of TIPS during deflationary periods.

 

[Lsbcal]

Well you can still buy a 2.98% 8yr TIPS. If you hold for 8 years you will get 2.98% real return. Seems pretty easy to understand to me. OK, there are a few issues that confuse people but if you hold to maturity then it is not so difficult. Personally I may well sell some before then if yields come down a lot. Would then probably move to short term treasuries until real rates go back up.

But I don't know anything about those blue hockey lines .

 

[FIRE'd@51]

I think the reverse is true.

I think what Greg Mankiw is saying is that the older (off-the-run) TIPS may be more meaningful in obtaining the market's expectation for inflation/deflation, due to the hybrid nature of TIPS. When you buy a TIPS you are buying a pure CPI-linked security with an embedded put which guarantees you will receive 100 in today's $ at maturity, even if you experience net deflation over the life of the TIPS. The older TIPS with a significant accrued principal will behave in a more symmetric fashion should net deflation occur over the time between when you purchase the TIPS in the secondary market and its maturity. The higher the accrued principal, the less the value of the embedded put (it is more out-of-the-money), and the more closely the TIPS will behave like a pure CPI-linked security. By pure CPI-linked security, I mean one that will perfectly track the CPI at maturity, both with inflation and with deflation, so that you could receive less than 100 in today's $ at maturity.

If you buy TIPS at auction, the index ratio is unity, so the put is at-the-money and has more value, hence the lower real yield (part of what you are paying for the TIPS goes to pay for the put). To correctly deduce the market's expectation for inflation/deflation, one would have to calculate the value of this put. Since this calculation is difficult, he is suggesting using a TIPS with a large accrued principal, in which the put has negligible value.

 

[ziggy29]

A lot of those 3% yields not available now. This Fidelity listing shows they are now history if you want to go out beyond 8 years

Last week I bought $25K face in TIPS maturing in January 2025. The latest quote I saw for these bonds was about 7% higher than my purchase price. I think that takes their YTM down from about 3.4% (where I bought them) to around 2.8%, maybe slightly less.