TIPS funds vs Inflation

[swodo]

Fairly new in the bond market and would like your opinion of TIPS mutual funds in an inflationary/hyper inflationary economy.

It seems that as the CPI increases, TIPS mutual fund sharers would become more desirable as the nominal interest "paid" on the fund would increase.

True?

 

[ziggy29]

I have some TIPS -- two individual issues -- as a partial inflation hedge. Having said that, I like many others am skeptical of the government's CPI numbers and whether they really do reflect the typical household's reality.

Everywhere I look I see prices rising, not falling, and yet the general consensus is that inflation will be VERY low for the next few months and perhaps even negative. Yet I personally see virtually no evidence that prices for most things are doing anything but rising.

This is the main reason I don't put even more money into TIPS -- I don't trust that they keep up with the *real* inflation most of us will feel.

It's too bad there are no TIPS to track inflation in health care...

 

[swodo]

Exclusive of the possibly politically motivated CPI, what do you think relating to Tips MUTUAL FUNDS?

 

[ziggy29]

Exclusive of the possibly politically motivated CPI, what do you think relating to Tips MUTUAL FUNDS?

I suppose in the long run they'll be okay, but because they never "mature" there's always a chance they'll be worth less (or more) than you paid for them when you sell.

Plus, current income is less regular with a TIPS fund. VIPSX paid out almost nothing this quarter, as most of the real return was reflected in a higher NAV rather than income paid out. So if you need current income, individual TIPS with a fixed maturity date are far superior to a fund. But if current income isn't a concern, as long as you understand the funds never mature and could lose value when you sell, they could work as well.

 

[youbet]

This is the main reason I don't put even more money into TIPS -- I don't trust that they keep up with the *real* inflation most of us will feel.

I share those feelings but also struggle to feel confident in taking postions in other so-called inflation hedges. Have any suggestions on other investments that you feel are more likely to keep up with your own personal inflation rate?

 

[Notmuchlonger]

I share those feelings but also struggle to feel confident in taking postions in other so-called inflation hedges. Have any suggestions on other investments that you feel are more likely to keep up with your own personal inflation rate?

Yeah its called keep working Not a great outlook eh..

 

[Darryl]

A fund would be fine and I have used VIPSX in the past and will again in the future.
If you're not planning on as a longterm holding it would merit some study so you really have a grasp of what you're buying. As Ziggy said if you are depending on for a certain nominal yield they may not be a great choice.
I have been buying individual TIPS as a large part of my AA. I like the ER of zero and knowing I will get my real yield over time and a guarantee of at least X dollars on X date, regardless of what the market is doing that day.
If you can accumulate while offering a real yield of 2.5-3% and you only consume at a rate of 4% your pile of cash could last many years.

 

[youbet]

If you can accumulate while offering a real yield of 2.5-3% and you only consume at a rate of 4% your pile of cash could last many years.

I'm not seeing opportunities to accumulate at 2.5 - 3.0% TIPS lately. Am I missing something?

 

[Maurice]

The 20 year auction in January priced at 2.5% over CPI.

 

[Rich_by_the_Bay]

My perspective on a TIPS mutual fund (and I own some) is that they will respond to substantial inflation fairly quickly and in the right direction (up). I look at the mutual fund as a TIPs ladder. I do not trust them to keep up with my personal inflation rate, but at least they will soften the blow. Stocks also eventually tend to hedge inflation but over many months - they are my main defense long term.

So, TIPs mutual fund as a first line short-term (6-12 months) defense, waiting for stocks to respond, then stocks thereafter as my main inflation hedge.

I've tried to find research or modeling to support the strategy but admittedly came up short (as often is the case with these financial speculation questions). So this reflects my reading and personal opinion only. Maybe someone has a better perspective, which I'd welcome.

 

[youbet]

The 20 year auction in January priced at 2.5% over CPI.

Yep, and I picked up some of those in January. But, frankly, it was only a guess on my part that the auction would yield close to the 2.5% coupon. Now those bonds are trading at significantly lower yields (and higher price ) on the secondary market.

I'm just not seeing anything attractive today. VIPSX and TIP are up. TIPS yields are down. Guess it's time to just wait and watch.

 

[Maurice]

Yeah, they re-open the 20 year in July. I may buy some more if it looks like it'll price well.

But, frankly, it was only a guess on my part that the auction would yield close to the 2.5% coupon.

FWIW, the secondary trading in the closest maturity has been a good predictor of auction price, at least in the auctions I've paid attention to (the last couple of 20 yrs).