Buying 5-year TIPS at Monday's auction

well, are ya, punk?

  • Yes

    Votes: 2 6.1%

  • No

    Votes: 18 54.5%

  • Maybe

    Votes: 3 9.1%

  • Already own my allocation of TIPS/I-Bonds

    Votes: 10 30.3%
  • Total voters
    33
2B said:
You can almost always get better rates on FDIC insured CDs. If you spread it around you can easily cover a few hundred thousand with the insurance and still get a nominal 1/2% over 5 yr Treasuries.
Click to expand...

Yeah, except the Treasury interest is state tax exempt, which I figure just about
buys me that 1/2% in my state where marginal state tax is 7%:

Treasury yield 5% * (1-0.25) = 3.75%
CD yield 5.5% * (1-0.25-0.07) = 3.74%
 
JohnEyles said:
Please help me to understand how it is that we refer to the return on this current
TIPS as 2.65% ?? I see it at Bloomberg the same as you do; but how is it calculated ?
I realize the price of the bond is $98.27 per $100 of par value, but I see that
2.375% * (100/98.27) is only about 2.417%. Maybe because the principal at
maturity is based on the par value and not the price, but I still cannot make the
number work out.
Click to expand...

The math is tedious (which is why I keep referring you to that same YTM page/calc), but the concept is pretty simple: the market yield changes all the time, so prices of bonds change to reflect the current market yield. When you buy a bond below par, you're getting both the remaining coupons and the principal at a discount. If you do the calculation for a 4.5 year maturity with a 2.375 coupon at 98.27, you should get the same YTM Bloomberg is showing you: 2.65%.

BTW, the treasury also tracks the real yield curve on a daily basis, including historical information:

linky
 
JohnEyles said:
Yeah, except the Treasury interest is state tax exempt, which I figure just about
buys me that 1/2% in my state where marginal state tax is 7%:

Treasury yield 5% * (1-0.25) = 3.75%
CD yield 5.5% * (1-0.25-0.07) = 3.74%
Click to expand...

Ah, the joy of not having a state income tax. :D
 
2B said:
Ah, the joy of not having a state income tax. :D
Click to expand...

Yeah, but I get free health insurance at 53yo (as a state retiree, if I start
annuitizing TIAA-CREF).

And one of the top few public university systems in the country to
work at, send kids to, and raise the general quality of life.
 
JohnEyles said:
Please help me to understand how it is that we refer to the return on this current
TIPS as 2.65% ?? I see it at Bloomberg the same as you do; but how is it calculated ?
I realize the price of the bond is $98.27 per $100 of par value.................
Click to expand...

Actually, bond prices are quoted in 32nds, so the price shown on Bloomberg is 98 and 27/32. Thus, the price of the TIPS is 98.84375, not 98.27. You can calculate the YTM on a financial calculator by using:

PV = 98.84375

FV = 100

N = 9

PMT = 2.375/2 = 1.1875 (since payments are semi-annual)

My HP12C gives a semi-annual YTM of 1.3246% which when doubled gives 2.65% as shown on Bloomberg
 
My calculations show that inflation would have to be over 3% (around 3.1%) to yield the same interest as a 6% CD does. If you assume a 5% state income tax on a 6% CD (5% pf $6000) and you subtract the $300 for State income tax, you have an effective yield of about 5.74% now.

So in order to do better than a CD at this time, inflation would have to be reported at about 3.10%. Am I correct in this thinking?

Of course, you are pressed to find 6% CD's right now. There are very few, mostly from credit unions offering to certain groups of people.

Then again. Who do you trust more in safety right now. The banks or our government with over 8 trillion debt and still counting.

Rememver past performance in no guarantee to future performance (or safety)
 
modhatter said:
If you assume a 5% state income tax on a 6% CD (5% pf $6000) and you subtract the $300 for State income tax, you have an effective yield of about 5.74% now.

Of course, you are pressed to find 6% CD's right now. There are very few, mostly from credit unions offering to certain groups of people.
Click to expand...

I have no idea what other states have as marginal rates, but 5% sounds low.
Plus you have to subtract the state rate from unity minus the federal marginal
rate, so it's not quite the same. It's moot anyhow, if you believe the conventional
wisdom that TIPS should be held in IRA-type accounts to avoid the "phantom
interest" - although I partially buy the argument that the phantom interest is
no different than DRIPs.

I ain't seen a CD anywhere near 6% recently. If I saw one for 6%, I might
very well cancel the TIPS order I have in now.

Coincidentally, I have a lottery application in to get a Grand Canyon river
rafting permit - so the next few days are gonna be real exciting for me,
although I guess there's no huge mystery about what the TIPS will sell at.
 
I bought 3, 6% CDs earlier this year (Pentagon Federal Credit Union seems to have semi-annual deals in Feb/Mar and Sep/Oct). If inflation spikes sometime during the next 5 years, I'll be glad I got the TIPS, though--they're a hedge. Else they'll do about as well as my MM accounts.
 
Yeah, those 6% penfed CD's were a bargain. More than 100bp over market. I bought a slug. (Oh, and I bought some CD's too. :))
 
Last week, I went through a list of AZ CUs and found one with a branch in Tucson offering 1 year CDs @ 6% APY. I loaded the truck up.
 
So, what do people make of the auction result ? Looks like
they sold for $101.365114 per $100 according to the Treasury
website; I believe it for sure when I see check Schwab in a couple
days. I was expecting $98'ish, silly me, but I guess if you divide
the 101+ by the inflation factor since last April (1.02688 according
to Schwab) you get about 98.775, so still selling at a discount.
 
Okay, I'll admit it, I'm dense. :p Can someone explain why one would want to invest in TIPS? Please explain in a nutshell or high level. There's way too much information here for me to digest.
 
cube_rat said:
Okay, I'll admit it, I'm dense. :p Can someone explain why one would want to invest in TIPS? Please explain in a nutshell or high level. There's way too much information here for me to digest.
Click to expand...

I will leave the "explanation" to others, but can tell you why I do not.
You touched on it......."way too much information". I have no interest in wading through it and parsing each .00001 % of yield change. There
are many many places to invest without straining your brain over TIPS,
IMHO.

JG
 
cube_rat said:
Okay, I'll admit it, I'm dense. :p Can someone explain why one would want to invest in TIPS? Please explain in a nutshell or high level. There's way too much information here for me to digest.
Click to expand...

Two words: inflation protection. :)
 
No matter how high inflation goes (for the next 4.5 years anyway--), my TIPS will yield inflation (as measured by CPI) plus 2.691%.

-- Say CPI is 2.5% for the first 6 months. My TIPS will yield 5.12% annualized.
-- Say CPI is 3.5% for the next 6 months. My TIPS will yield 6.12%.
-- @CPI 4.5%, I get 7.12%
-- EDIT @CPI 2%, I get 4.691
-- EDIT @CPI 1%, I get 3.691%.

Pretty good for fixed income, and a nice inflation hedge.

EDIT If inflation is low, eh--I lose this bet. But I don;t lose any money (just "opportunity cost"). I like that.
 
Very interesting... thanks for the information.
 
cube_rat said:
Okay, I'll admit it, I'm dense. :p Can someone explain why one would want to invest in TIPS? Please explain in a nutshell or high level. There's way too much information here for me to digest.
Click to expand...

Hopefully this is simple and still makes sense. You can buy a 5 year fixed treasury, or a 5 year TIPS. With the fixed bond, you lock in a yield of X% and over the next 5 years, you will earn X% minus the ravages of inflation. With the TIPS, you get a lower coupon, but inflation is automatically compensated for in the bond. So over the next 5 years, the TIPS earns its coupon and you don't have to worry about the ravages of inflation.
 
astromeria said:
No matter how high inflation goes (for the next 4.5 years anyway--), my TIPS will yield inflation (as measured by CPI) plus 2.691%.

-- Say CPI is 2.5% for the first 6 months. My TIPS will yield 5.12% annualized.
-- Say CPI is 3.5% for the next 6 months. My TIPS will yield 6.12%.
-- @CPI 4.5%, I get 7.12%
-- EDIT @CPI 2%, I get 4.691
-- EDIT @CPI 1%, I get 3.691%.

Pretty good for fixed income, and a nice inflation hedge.

EDIT If inflation is low, eh--I lose this bet. But I don;t lose any money (just "opportunity cost"). I like that.
Click to expand...

And the best part is if we go into a "Greater Depression" and the inflation rate falls to less than zero (deflation), the return on the TIPS could go negative!!!! :D

If you had a plain old Treasury, it would skyrocket in value.
 
When I said I liked TIPS, I didn't mean to the exclusion of all else. I have 3 times as much in CDs as TIPS, in corporate bonds as in TIPS, and in MMAs as in TIPS--i.e., my other fixed income dwarfs my position in TIPS. And never fear, I will be buying other types of treasuries!
 
astromeria said:
EDIT If inflation is low, eh--I lose this bet. But I don;t lose any money (just "opportunity cost"). I like that.
Click to expand...

I think Hell will freeze over before we have to worry about this.

I look upon deflation concerns as "head fake" done by the Fed or by anyone else who wants to get or eyes off where they belong-on what is actually going going on.

Ha
 
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