TIPS: I'm ignorant

[Spock]

I've been watching others chant about TIPS here for awhile, but whenever I go on Fido to poke at them, there is never any inventory. Secondary or Auction.
Today, there are 45 CUSIPs in secondary and I am flat out ignorant on what I'm looking at. (there has never been any new bonds in "auction")
To be specific, for those who want to follow along in the hymnal: CUSIP 912828NM8

Maturity date 7/15/2020
Bid Adjusted Price: 117.649137
Bid Price: 99.470
Ask Adjusted Price: 117.761499
Ask Price: 99.575

Its showing at Yield of 6.030%,
Yield to Worst of 5.118%
and Yield to Maturity of 5.118%
Is there a malfunction in here that says this TIP is going to have a yield north of 5% (even if on an annual basis)??

I'm so twisted I'm not even sure I can phrase my questions intelligently, so please be gentle...

The Fixed Income Analysis tool isn't helping much as the "cash distribution" section shows "no data available".
Total Market Value:$58,837.49
Average Maturity:0.12
Annual Interest:$739.38
Total Par Value: $50,000.00
Average Estimated Yield: 5.84621%
Average Coupon Rate: 1.25%
Average Price:$117.67
When this thing matures in July... do I lose money and get the 50K par value + 739.38 interest? I've read the 'principal' value goes up by the inflation factor each year... so I assume par value is no longer accurate for calculating return... but where do I find what the new par value is??

How do you use the Fido analysis tools with TIPS to evaluate the return?
Since there are never any new TIPS available, how does one evaluate and buy new TIPS issues at Fido? (Since I'm ignorant on these at Fido, I'm not ready to jump to Treasury Direct yet)

 

[OldShooter]

(I'm just going from what you posted/no independent research.)

... Is there a malfunction in here that says this TIP is going to have a yield north of 5% (even if on an annual basis)??

Probably not. Few professionals want to screw with something that close to maturity. For myself, I see no value in buying short TIPS. Inflation is not likely to go crazy over a period of a few months so the inflation-adjustment advantage is not likely to matter much.

... I'm so twisted I'm not even sure I can phrase my questions intelligently, so please be gentle...

No worries. TIPS can be very confusing. I think that's why they are not more popular. Too bad, really, IMO.

...When this thing matures in July... do I lose money and get the 50K par value + 739.38 interest? I've read the 'principal' value goes up by the inflation factor each year... so I assume par value is no longer accurate for calculating return... but where do I find what the new par value is??

With TIPS, par value is really not a useful concept. From your numbers, it appears that the current value is around $117. I am not a trader so you'll have to check, but I think there will be one more inflation adjustment in July before the interest is calculated and the total inflation-adjusted value of the TIPS is paid out. So around $117K plus $117K times 6 months of the coupon rate.

The amount of inflation adjustments is determined IIRC 3- or 6-months before the adjustment is made and it is a publicly available number.

...Since there are never any new TIPS available ...

Sure there are. Here is the auction schedule: https://www.treasurydirect.gov/instit/marketables/tips/tips.htm At Schwab, and I assume at Fido, you can just enter an order for whatever $$ you want. You'll be making a "noncompetitivie bid" and get the auction rate.

Actually, I would suggest that you call the bond desk and Fido and start asking questions. If they are like the Schwab guys, and I'd expect them to be, they will be very generous with their time. At Schwab the bond desk guys are not paid commissions. I don't know about Fido.

...how does one evaluate and buy new TIPS issues at Fido?

Aye, there's the rub. The conventional bond YTM calculation doesn't work for TIPS. Or to be exactly correct, it assumes a zero inflation rate. So in real-world terms it understates YTM.

Take an example: $100k 20 year TIPS bought on the auction, 50bps yield, and a constant 1.5% inflation rate over the period. They pay semi-annually but for simplicity let's assume annual payments. At the end of the first year, your interest payment is $508. That's because the TIPS have been adjusted for inflation and you get paid interest on the adjusted value. Fast forward through 20 years of inflation you'll get cashed out at $181K with a $907 interest payment.

Prices on used TIPS can be confusing, too, because of the semi-annual inflation adjustments. In December, for example, the prices will reflect the amount of the January adjustment. At the end of January, the July adjustment is a long ways away so will not affect the price so much. It is a little like dividend-payers before and after ex-dividend day.

Oh, and if held in a taxable account you pay income tax on the adjustment amounts even though you don't get any cash. ----- Are you having fun yet?

Personally the thought of trading TIPS gives me a headache. I am a B&H guy. The "Hold" part is in IRAs.

 

[daylatedollarshort]

I usually just buy some TIPS at every auction when the yields seem appealing. If I don't like the TIPS yields and have extra cash to invest I buy CDs.

 

[Spock]

I'm not looking to "actively trade" TIPS. I'm just trying to make the math work to prove I understand them before buying them. The first one of the list/shortest duration happened to have a surprisingly high interest rate is the one used in the example.
I also tend to dip my toe in with a really short duration issue when dealing with unfamiliar processes so that I get a shorter timeframe feedback on whether or not I did the math right.

I'll probably have to break down and call Fido. The auction section for new TIPS on Fido is always empty... so there is no security to check and click "buy" on.

I diddled with TIPS in a 401K fund before finding this board. Didn't like it for all the individual bonds vs. bond funds reasons discussed on this board.

Maybe I just have to drop these off my radar. Sounds like they were complicated before this mess started and now with negative interest rates showing on all of the secondary TIPS they are really twisted up. I'm just looking for an inflation shelter.

 

[OldShooter]

I'm not looking to "actively trade" TIPS.

Apologies. I didn't think you were and didn't mean to imply that.

I'm just looking for an inflation shelter.

Our objective exactly. Here is my thinking:

Buying a TIPS vs a note or bond, I will see a YTM number that is lower than the T-note or bond. I know TIPS YTM is understated as discussed above but probably if we don't see a lot of inflation during the holding period, I will have a yield penalty. That penalty is the cost of my inflation insurance. I think of it as being exactly like the fire insurance on my house. I carry the insurance and pay the premiums, but that does not mean that I want the house to burn down. And, if at the end of some period the house has not burned, that does not make me regret having paid for the insurance.

The bulk of our TIPS are the 2s of 26, bought during the winter of 2006/2007. These were the longest, lowest coupon TIPS we could get at the time. Longest because we saw them as long-term insurance, not so much as an investment. Lowest coupon to minimize getting money that we didn't need -- IOW leaving the value in the TIPS rather than getting it paid out. Then we basically forgot about them. A couple of years later, Lady Luck gave us near-zero interest rates and the TIPS were worth about 150% of what we paid. She has made us look like geniuses pretty much ever since. We have sold some along the way, more due to greed than to the our rationalization that as we get older we need less protection.

An implication of this strategy is that we have bought enough TIPS to make a difference. About 90% of our fixed income tranche currently. It seems to me that this is a "go big or go home" thing. Putting a few percent TIPS into a portfolio really isn't enough to make a difference.

So that's our story, working with the same goal you state.

 

[daylatedollarshort]

I'll probably have to break down and call Fido. The auction section for new TIPS on Fido is always empty... so there is no security to check and click "buy" on.

If you sign up for the Fido fixed income notices, you will get notified in advance of upcoming offerings, including TIPS auctions.

A general auction schedule may be found here -
https://www.treasurydirect.gov/instit/marketables/tips/tips.htm.

 

[gcgang]

https://www.treasury.gov/resource-c...rest-rates/Pages/TextView.aspx?data=realyield

I’m with the OP. I thought I used to understand TIPs. Now, I’m not sure.

I’ll bet dollars to donuts your yield isn’t 5%, or whatever that trade sheet showed.

Above links to Treasury info on Constant Real Yields. How do you interpret it? Can’t be as simple as you get -0.53% less than inflation over 7 years, is it?

Seems like 20 yeas ago you got more than 2% above inflation on occasion.

And what are current coupon rates on the TIPs? Probably close to 0%, and that rate is fixed for life of TIP, isn’t it?

 

[pb4uski]

My understanding is that you would get inflation less .53%... it is a mystery to me why that would be attractive to anyone. I would think that an online savings account would return more than inflation since online savings account interest rates ebb and flow with inflation.

 

[OldShooter]

... I’m with the OP. I thought I used to understand TIPs. Now, I’m not sure. ...

I certainly don't claim to understand all the trees, but my interest is in the forest. Buy and hold, no trading. Inflation insurance. All the rest of it is just intellectual curiosity for me. We have been holding the same TIPS for almost 15 years.

I’ll bet dollars to donuts your yield isn’t 5%, or whatever that trade sheet showed. ...

Well, without doing any research my guess is that the rate is correct. But the maturity date is only a few weeks out so we are talking pennies. Obviously there is a market in these very short term bonds but I'm not smart enough to know why. I am smart enough to not get involved, though.

... Above links to Treasury info on Constant Real Yields. How do you interpret it? Can’t be as simple as you get -0.53% less than inflation over 7 years, is it? ...

That is a very strange table. I think what they are doing is taking the inflation implied by the note/bond market, adding that to the TIPS payout, and showing that the TIPS pay less. Of course. Arbitrageurs will take care of that. But the key word is "implied." No one knows. Garbage in, gospel out, IMO.

... Seems like 20 yeas ago you got more than 2% above inflation on occasion. ...

20 years ago there were a lot of things that I got more of than I get today. .... and you?

...And what are current coupon rates on the TIPs? Probably close to 0%, and that rate is fixed for life of TIP, isn’t it?

Well one of the things that people don't seem to understand is that the coupon rate is fixed, but the payment is based on the current value of the TIPS. So, for example, if a TIPS with a 1% coupon has, after inflation, doubled in "value," then the payout is 2% of the original face. So YTM calculations are really bogus unless an inflation rate is stated. As the calculation is currently done, the (unstated) rate is zero, which is clearly also bogus.

My understanding is that you would get inflation less .53%... it is a mystery to me why that would be attractive to anyone. ...

On that calculation you are correct. But you are not considering that the insurance aspect of the TIPS has any value. You're not alone; that seems to be the way most people look at these.

... I would think that an online savings account would return more than inflation since online savings account interest rates ebb and flow with inflation.

I would think that I don't have the slightest idea how any of the rates will change if we get some high inflation, but I am certain than any changes will lag. The larger the inflation, the bigger the lag. Not interested in betting.

And with online savings you are taking a yield hit vs the alternatives like CDs, so in a sense you are paying that hit as an insurance premium to get inflation protection that you can only hope will be there.

 

[pb4uski]

I don't get the "yield hit".... online savings yields are typically better than 1-year CDs... so what are you referring to?

 

[OldShooter]

I don't get the "yield hit".... online savings yields are typically better than 1-year CDs... so what are you referring to?

Sorry, I don't deal with them. I thought they were more like the regular low-rate savings.

 

[pb4uski]

To give you an idea my current online savings accounts are paying 1.15% (there are some higher out there but I get tired of moving money around to chase them).

The best 1-year brokered CD that I can find on Vanguard or Fidelity is 0.2%

An easy-peasy 95 bps albeit with some risk that rates might decline further and the spread narrows.

Meanwhile, CPI for Dec 2019 to April 2020 was -0.23% and CPI for May 2019-Apr 2020 was +.12%.

 

[OldShooter]

... Meanwhile, CPI for Dec 2019 to April 2020 was -0.23% and CPI for May 2019-Apr 2020 was +.12%.

Century long CPI was IIRC 3.11%. Looking back 30 years you get 2.4% and looking back 40 years you get something over 4%. So you pick the number you like from your crystal ball number and you go from there.

Good article in this week's Economist: https://www.economist.com/leaders/2020/06/04/dont-worry-about-inflation-yet