Up coming TIPS auction

[ak4195]

as promised heres notification of upcoming Tips auction

10/4:announce 10 yr TIPS
10/7:TIPS 10 yr auction


10/21:announce 5 yr TIPS
10/26TIPS 5 yr auction

keep in mind the auction dates are tentative,generally good dates tho,this is your first warning--ak

[WilliamG]

Will this be the first auction for 5 years? I wonder what rate these can be expected to go for?.... Bill

[wabmester]

The 5-year will probably yield just north of 1%.

The auction really isn't much of a crap shoot. You can come close to determining the auction yield by looking at the previous day's market rates on the secondary market.

[rapoole]

I agree that the auctions normally come in close to the previous day's results, but with a new issue, it is a bit more of a crapshoot. When the TIPS 20's were issued this summer, the yield came in significantly higher than would be expected based on the yields of the existing 30's. Made me regret sitting it out.

[ak4195]

Quote:

as promised heres notification of upcoming Tips auction 10/4:announce 10 yr TIPS 10/7:TIPS 10 yr auction 10/21:announce 5 yr TIPS 10/26TIPS 5 yr auction keep in mind the auction dates are tentative,generally good dates tho,this is your first warning--ak

ok all,heres the second notice,-ak

[cute fuzzy bunny]

I'm gonna wait until the rates come up.

While you could sell these on the secondary market, I think we might see north of 3% before long on the 20 years.

Once we get some better rates, I'll start building a ladder.

[wabmester]

Quote:

I think we might see north of 3% before long on the 20 years.

Could you explain your thinking?

The treasury department doesn't think so. They think that eventually people will realize it doesn't make sense to get a yield premium for long-term TIPS, and the TIPS yield curve will flatten. I can't see any rationale for the long-end to pay much higher than it does now, unless the TIPS supply far exceeds demand.

[cute fuzzy bunny]

Yep I can.

Wasnt the last batch you bought at a higher rate than you expected?

With rates on the rise and inflation still tame, they'll need to raise the yield to get people like me to bite on something that pays me 2.5%, makes me pay taxes on the inflation adjustment annually, and doesnt give me that inflation adjusted principal back until the bond matures at 20 years.

I'd rather put the money into something like the Wellesley fund, get a 4% dividend, see my capital improve every year at a historic 4-5%, not have to pay any taxes on anything except the dividend distribution unless I decide to sell shares, and have full access to those capital gains when I want them.

I'd just be pissed if I locked in a bunch of 2.5% tips and 2-3 years from now they were paying 3 or 3.25% and I couldnt sell mine on the secondary market without taking a bath.

[ak4195]

quite a few people have been waiting,including the House of Morgan Stanley,who reported a big loss this quarter expecting the same thing,long end is compressing even further.Near term target for 30 yr yeild =~4.67%,with a possible bounce to ~ 5.05%.keep in mind this is a near term projection.The seasonal tendancies for SP to be down into roughly october would support yield compression as well.Economic theory sez rates will rise,and like a broken clock,theory will be right in the end,but in the mean time many were left on the sideline watching rates compress even further.If history is any guide,the public will buy the last 10% of the move up in price only to see a dramatic collapse.Interesting to note that Bill Gross mentioned in his monthly newsletter that Pimco had recently bought $35billion in treasuries.Where exactly and what form of course was left out.One clue was his reference to past articles,which to long time readers have many references to TIPS as a asset class.All imho-ak

[wabmester]

Quote:

Wasnt the last batch you bought at a higher rate than you expected?

No, I expect a little bump every auction, and then I expect the bump to go away. * And that's usually what happens because demand is fairly constant and each auction increases the supply.

Short-term rates *will* go up. *No question. *Currently, short-term yields are lower than the rate of inflation, and that is an abnormal condition (and normally a bad sign for the economy). * The same can't be said about long-term yields, which are more a function of long-term inflation expectations. * And, of course, TIPS removes that guess from the equation, so what you're left with is pure supply/demand-driven real rates.

Sure, you *might* be able to get higher returns from the stock market, but by all of our nifty future-return calculations, you're not getting much of a risk premium. * That risk premium will probably go up, which means either that stocks will do great or TIPS real yields will go down. * *(Guess which I think will happen *)

[cute fuzzy bunny]

Tips removes SOME of the inflation situation from the equation.

It removes what the fed decides constitutes valid inflation.

Which as I've chronicled, has very little bearing against reality, at least in my little part of the world.

Which is not to say that the return sucks. Just that the way they give you the return isnt palatable to me at a 2.5% level.

But I see a lot of people oversimplifying tips, imo. Going back to my last statement on them, if we presume inflation stays around 3%, fine, your principal will be adjusted by 3% every year. And you'll pay taxes on that. And you wont get it for 20 years.

Super if you've got a ladder set up.

Crappy if you set up a 20 year ladder and then rates improve.

I think stocks will do just fine, more or less, for another 2-3 years at least. Might tease the rates up a little.

I guess we'll see!

[wabmester]

Quote:

Tips removes SOME of the inflation situation from the equation. It removes what the fed decides constitutes valid inflation. Which as I've chronicled, has very little bearing against reality, at least in my little part of the world.

IIRC, you chronicled that some of your expenses have increased faster than the CPI, which doesn't tell you much, even about your personal inflation rate.

Computers and gadgets used to be a big chunk of my budget, but those expenses have gone to almost zero for me. * *My cars are much more reliable, so my repair expenses approach zero. * *I really have no idea what my personal inflation rate is, but all of that hedonics mumbo-jumbo does have a real effect on my budget.

[cute fuzzy bunny]

Actually I pointed out that the car I bought 4 years ago, the gas to go in it, the homes I've bought recently, and the common food items I buy have all gone up by 10% or more annually.

The rest of my bills: cable, telephone, electricity, internet...all have by far exceeded 3% annually.

CPI may work in some areas of the country, but for at least a strong minority, its not equal to inflation.

Again...I am not saying tips returns arent good. I'm not saying that CPI is complete horsepuckey everywhere.

What I'm railing against is the commonly issued claim that tips and ibonds "remove inflation from the equation". They most certainly do not. They offset a portion of it and for short terms, I imagine its close for many...especially those in middle america. For longer periods, I would doubt it.

Going back to the old "if you could buy tips at 4% and live off the 4%, you're done for life"...I just dont think so.

If the claim is "tips and ibonds pay a decent total return, some of which you cant get at until you turn in the bond, and the inflation portion should offset much of the effects of inflation, especially if you live in a state that doesnt see annual increases of 20% on real estate, 10% on car costs, and 8-12% on food costs"...then I'm right with ya.

[ak4195]

"But I see a lot of people oversimplifying tips, imo. Going back to my last statement on them, if we presume inflation stays around 3%, fine, your principal will be adjusted by 3% every year. And you'll pay taxes on that. And you wont get it for 20 years"

TH,I assume theres a good reason why u dont put them in a personal IRA,which is where i purchase them for my mom (63 yrs and hot to trot)--ak

[cute fuzzy bunny]

Because my IRA money is 20+ years away from being used, and I'm currently holding 100% stocks in it.

Because my IRA will probably be tapped in weeks,
or months at the latest, I am 100% non-stocks.

John Galt

[wabmester]

Quote:

Actually I pointed out that the car I bought 4 years ago, the gas to go in it, the homes I've bought recently, and the common food items I buy have all gone up by 10% or more annually.

The prices for Ford Expeditions have gone up where you live? They practically give them away in my neighborhood. Especially in the used market, but even for new cars. Personally, I paid less for a new 2004 Explorer than I did for the new Explorer I bought in 1998. Less! That's net deflation over a 6 year period, and the new one has more features and is much better designed, and probably more reliable.

Also, my mortgage rate has dropped quite a bit since I bought my current house 4 years ago, reducing my costs of housing quite a bit.

So, for my situation at least, I suspect that the CPI has me covered.

[cute fuzzy bunny]

I guess its fortunate to have the current gas crisis to establish a parity in large SUV prices! Wish I was buying one today, but it'll be 6-8 years...

Four years ago I paid $22k for my truck on a list price of $28k. Same truck today has a list price of >$38k. Four years later.

As far as whether I could score one for $22k+12% right now...maybe. But not a year ago and I'll bet not a year from today. One dealer was advertising them on tv for $25k after big discounts, but its a stripped down model...mine isnt. And good luck actually getting one for that advertised bait-and-switch price.

But its funny you bring that up! Because the reason why I *might* be able to get one is because gas costs $2.00 a gallon now and it was $1.50 a gallon when I bought the truck. Up a third in four years. When I spend that extra third on gas to drive to the supermarket to buy the $8 steaks that cost $4.50 three years ago, the $2 milk that cost $1.40 three years ago, and the $2 dozen eggs that cost $1.20 three years ago...I wonder about that <3% CPI adjustment...

I know plenty of 'studies' show that cpi understates, overstates, and hits inflation right on the noggin. Most are short term, localized, and pick and choose their elements of analysis. I'll stick with the one good metric I've got...my dad says his adjusted social security buys a lot less now than it bought 10 years ago.

I believe him.

If cpi-w correctly states inflation, he should be living exactly the same lifestyle he lived 10 years ago. Instead, he golfs less, searches out sale items, bought a smaller car than he used to own, and picks things up second hand that he used to buy new.

Again, i'm not saying tips/ibonds are bad investments or that the returns aint ok. I'm saying it might be a bad idea to put all your eggs in that basket and declare yourself inflation proof for 20+ years. And that if you have other options, it might be worthwhile to wait for a little bit higher rates before you lock in for 20 years.

[farmerEd]

I'll stick with the one good metric I've got...my dad says his adjusted social security buys a lot less now than it bought 10 years ago.

There is a good reason for that...and its no accident:

http://www.gillespieresearch.com/cgi...article/id=300

[cute fuzzy bunny]

Yep there we go. I hadnt seen that analysis before, but it makes sense based on what I'm seeing here.

Fascinating...first we'll assume people will go from steak to hamburger as inflation rises (and we wont pay them to keep eating steak), later (from another method used) we'll assume computers are MUCH cheaper than they used to be because they're faster and therefore better. To the tune of 30%.

All sorts of magic being employed, isnt there...