[cute fuzzy bunny]

Somebody correct me if i'm wrong on this. I know you shrinking violets and getting you to speak up is usually a big problem.

The total return on the tips fund includes increasing NAV's. Vanguards tips fund held a lot of those 3-4% coupon tips. The secondary market value of those high yield tips went through the roof, often selling for 20-30% higher than face value. Unless i'm mistaken, that was reflected in the NAV. Thats not going to happen again anytime soon, so if thats true, I believe the above thesis that the tips returns wont be anywhere near as good going forward.

The other thing (again, correct me if i'm wrong...please speak up) is that I believe the vanguard tips fund distributes the inflation adjustment of the tips bonds as a capital gain at the end of the year. This is a bit of a two edged sword...you're paying the taxes on this if you hold tips directly, but you normally dont get the money until you cash the bond. Last time I looked the yield was only something like 1.2-1.3%, but the gain distributed if factored in was giving you ~4.4-4.5% annual payout in total. Right about where the GNMA fund is sitting.

After watching some fed talking head on CNBC the other morning crowing about how great inflation is: "If you take out food, energy and clothing, inflation is nonexistant!" The manequin on the show made a point that most people do buy energy, food and clothing" which the guy waved off. "Well, energy is simply the current overpricing of oil, and clothing is all screwed up because the weather patterns have been off this year".

In other words, we'll take out anything thats shot up, bring it behind the barn and shoot it rather than recognize that something will ALWAYS be out of whack and contribute to higher inflation.

Thats what constantly nags me about tips...not that they wont be super stuff if inflation runs to high single or low double digits again. But that there is a concerted effort to pull down the inflation rate and with tips (and ibonds) that inflation index is the lions share of the return. That ~4.5% annual return from tips today could quickly turn into 3.5 or 2.5% next year.

I dont think the gnma fund will drop below its current rate. It may be slow to offer a higher yield as rates rise due to people digging in and sticking with the low current rates. So I think its a good place for bond holders short money but you may want to look for something else in a year or two or three.

I'm starting to look more fondly at vanguards junk fund. That 7% yield is pretty tempting and the lack of defaults is appealing. I cant easily see any economic changed that may take place over the next couple of years that might increase that default rate, especially given the less junky nature of the vanguard fund.