Inflation-linked bonds (TIPS) - experience?

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Totoro

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I finally found an inflation linked bond ETF in EUR, and likely will put both myself and DM in it shortly. It's all government (eurozone) issued, so similar to the US TIPS, but for us lowly Europeans. Expense ratio 0.25%. For the curious: IBCI is the ticker.

Before I pull that trigger, any experiences and/or insights to be had?

The average effective duration of the ETF is 8 years, but I figure if I hold them effectively infinity years (20+) the yield we'll get is the current YTM + inflation.

So if inflation goes up, no issue. And if interest rates go up initially the ETF would go down but catch up after a while since interest rates are higher.

Would especially be interested in what the inflation part of the TIPS has done the last few years in the US, any surprises (positive or negative)? Not looking for systemic (eurozone implosion) risks, we know about that :)
 
My portfolio is about 40% bonds.TIPS (index fund) make up a sizable portion of my asset holdings. Like you, I plan to hold for the long run. Similarly, if the US economy completely implodes, I'll fall back on my metals inventory - lead; specifically in .357, 9MM, .223, and 12 gage. :)

They have flat-lined recently, but I feel that, over time, they will help counter long term gradual inflation without the volatility of stocks. They might not generate the wealth that stocks can, but they help me sleep at night.
 
Thank you - did they behave as expected so far? e.g. with US inflation picking up a bit, did you see value increases?
 
in dollars even with the expectations of inflation being higher TIPS are still lagging a total bond fund .

the cpi's actually have to increase to have tips play out better . raising interest rates can cause tips to lose value while at the same time preventing inflation from increasing so you can get that index you need to go up .

so no tips for me at this stage .
 
Totoro said:
I finally found an inflation linked bond ETF in EUR, and likely will put both myself and DM in it shortly. It's all government (eurozone) issued, so similar to the US TIPS, but for us lowly Europeans. Expense ratio 0.25%. For the curious: IBCI is the ticker.

Before I pull that trigger, any experiences and/or insights to be had?

...
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I would look at the historical real rates of bond returns. Then consider how much you of your portfolio you are investing at one period of time. Real rates are really down a lot right now in the US (see the Fed data on this). 10 yr US TIPS are only at 0.57%. Why would I want to lock those in unless I was worried about runaway inflation?

Why not just go with short term bonds? They will move most quickly to compensate for inflation. When real rates move up some then lock in some decent real rates.
 
Lsbcal said:
I would look at the historical real rates of bond returns. Then consider how much you of your portfolio you are investing at one period of time. Real rates are really down a lot right now in the US (see the Fed data on this). 10 yr US TIPS are only at 0.57%. Why would I want to lock those in unless I was worried about runaway inflation?

Why not just go with short term bonds? They will move most quickly to compensate for inflation. When real rates move up some then lock in some decent real rates.
Click to expand...

Agreed. I use a stable value fund in place of short term bonds. It pays 2% right now. I can also immediately benefit from increasing interest rates with my TIAA-Traditional.
 
Do not confuse holding a fund as the same as holding an individual bond...

A fund will buy and sell... new money comes in and changes things... just holding a fund does NOT mean it will 'come back' as the bonds owned when you bought are probably going to be gone long before your 'end'...

With an individual bond you have a known maturity where even with interest rate changes etc. that it will eventually reach a value certain... a bond fund will never reach that point... and the difference can be a killer if you are expecting to recoup your money...
 
Though you might be interested in current return on IBonds purchased in 2001.
 

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Texas Proud said:
Do not confuse holding a fund as the same as holding an individual bond...

A fund will buy and sell... new money comes in and changes things... just holding a fund does NOT mean it will 'come back' as the bonds owned when you bought are probably going to be gone long before your 'end'...

With an individual bond you have a known maturity where even with interest rate changes etc. that it will eventually reach a value certain... a bond fund will never reach that point... and the difference can be a killer if you are expecting to recoup your money...
Click to expand...

as long as there is not to much credit risk in the bond fund like treasury's they will end up about the same .

a bond fund that pays 5% and sells for 10 bucks a share with a duration of 5 will fall to 9.50 if rates rise to 6% . but you will be getting increased interest payments as older bonds are replaced . over 5 years you will get an extra 5% interest which off sets the 5% drop in nav .

you are pretty close to the deal you signed on at which is a 5% return .

a bond paying 5% on the same day will mature at the same 5% .

in both cases you are behind the curve since in both cases you got 5% in a 6% world
 
There is a pretty good pros and cons write up on bonds vs bond funds in the Boglehead wiki:

https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

We have a mix of CD and TIPS ladders, stable value, I-bonds and funds for some of our former megacorp 401K plans where ladders are not an option. There are potential tax considerations that differ between the two as well. Matching strategies favor inflation adjusted individual bonds over funds, as future NAV of funds is always unknown.

Since TIPS do not require any expertise to buy at auction and have very low default risk since they are government backed, we avoid the expenses of the funds where we can.
 
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Thanks all for the replies so far. I can't buy TIPS in euros (eurozone inflation linked) directly as an individual investor as far as I can tell. DM will have plenty if we can achieve a real return of 0%, so we're not in it to 'keep playing', just want to make sure her game 'stays won'.

Gov. eurobonds with short duration however pay negative (that's negative nominal) around here or close to it, CDs around 0.5% - 1%, and some horrible taxation rules to boot. Inflation is around 2%.

Bulk of the portfolio is nevertheless still there and will remain so for a while, just looking to up the return a little bit by shifting 10% - 20% to not-horrible yielding bonds. 30% is in equities. So we'll still bleed slowly to death while waiting for better yields that may never come, but with a few wildcards to hopefully compensate.

Given inflation is the real enemy inflation-linked might be a partial solution, but only if they actually work as advertised ..
 
Not so much. I'm okay with that though. MY 401K options are limited and the TIPs are one of my index funds. I'll take the lower returns over the higher fees of stable value, other bond fund options.
 
My Roth is in TIPS and my husband's is in Wellington. At first they were neck and neck but now his is 1.5 times mine. The initial investments were the same.
 
Tadpole said:
My Roth is in TIPS and my husband's is in Wellington. At first they were neck and neck but now his is 1.5 times mine. The initial investments were the same.
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Since Wellington is about 65% equities, I would expect it to do better given a reasonable time frame.
 
Hello. New kid here. I just ran across this thread and wanted to contribute a somewhat different view.

When my wife and I retired we believed that we had significantly more money than we would ever need. (That situation is due both to the money and to keeping "need" under control.) The only thing, we believed, that could sink our boat would be a period of very high inflation in the USA, where we live.

So we bought our TIPs as insurance, not as an investment. We made a ballpark guess as to how much we would need in inflation-protected dollars and bought accordingly. We bought the longest TIPs we could get (2026 at the time) and the lowest coupon (2% at the time) to minimize reinvestment risk.

If we do get a period of high inflation we expect that the TIPs will be significantly more valuable than a simple inflation-protection formula would predict. First, the Treasury will stop issuing them to avoid pouring gas on a fire. Second, panic-stricken investors will bid them up, paying a premium for the inflation protection. If we don't get high inflation, fine. I am also happy to have insured my house even if it never burns down.

So, while I tally them as part of our portfolio, they are an insurance policy whose size is related to our anticipated needs irregardless of all the various formulas people offer for equity to fixed income ratios.

As an investment I guess they have been pretty good, too. We bought in 2006-2008 and have seen their value increase by as much as 50%. We did sell some because as we get older the inflation risk declines, but we'll be happy to ride the rest of our "insurance" back down as worldwide interest rates rise.
 
OldShooter said:
So we bought our TIPs as insurance, not as an investment.
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Hi, and thanks for pitching in!

My basic question is: does it work? It is advertised as inflation-protection, but in your experience has it actually behaved that way? Or are there gotchas.
 
Pretty much buying individual USA TIPS bonds (not in a fund) works like it says. In the US every year the bond values are adjusted for inflation. So if inflation in the first year is 5%, the face value of your $10,000 bond becomes $10,500. This goes on until the bond matures and you get paid. The only gotcha is that this is taxable income for us even though we don't get hold of the cash. So the best place to hold the TIPS is in an tax-sheltered retirement account. (You do get paid interest based on the adjusted face value, but that's probably not enough to cover the taxes on the face value increases.)

Re funds, in the US it makes absolutely no sense to pay a fund manager to do nothing unless you have a really tiny amount of money and cannot afford to buy individual bonds. Even just buying one bond you are ahead buying it vs a fund. There is no need to worry about diversification because the issuer for all the bonds is the US government anyway. In Europe, those bonds the funds buy have to come from somewhere. In the USA we just buy the individual bonds through our brokers just like we would buy the mutual fund. We can also buy directly from the Treasury Dept. but it is a bit of a hassle. Certainly it seems like that these options should be the case for you. Who is the issuer? Go there and ask.
 
OK, you got me interested and I found this:

"German Government bonds, Federal notes, Federal Treasury notes and inflation-linked bonds and notes are traded on European stock exchanges, numerous international electronic trading platforms and on the over-the-counter (OTC) market."
Deutsche Finanzagentur - Secondary market

So you can probably buy them through any big stock brokerage firm.

Other material I found indicates that there are other government issuers as well. If I were buying a bunch I would probably not buy from just one issuer and, completely unhampered by any actual expertise in European finance, I would probably not buy from troubled countries like the usual suspects in the south.
 
copyright1997reloaded said:
Yes, me also. Wish I could buy more.
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All of our EE's were bought back in the mid 80's to the early 90's the company my wife worked for did a 50% match for every bond each pay period, I forgot what the max amount they would contribute and we were not at the max but it is still a substantial amount. The company did not offer a 401k at the time.
The oldest bond comes due in June then one a month for the next 6 years.
Looks like our restaurant habit will be financed nicely for a while.
 
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