Zero coupon strips vs nominal bonds

[hotwired]

If I'm building a bond ladder with both nominal and TIPs, is there any reason I wouldn't put 100% of my nominal portion into STRIPs? It strikes me as the simplest way to go because it eliminates reinvestment risk and makes fewer moving parts. (I don't consider the phantom income thing a disadvantage in the least.)

Thanks. I'm just trying to suss out all the right questions as I move forward.

 

[Out-to-Lunch]

If I'm building a bond ladder with both nominal and TIPs, is there any reason I wouldn't put 100% of my nominal portion into STRIPs? It strikes me as the simplest way to go because it eliminates reinvestment risk and makes fewer moving parts. (I don't consider the phantom income thing a disadvantage in the least.)

Thanks. I'm just trying to suss out all the right questions as I move forward.

Michael Zwecher (https://www.amazon.com/Retirement-Portfolios-Theory-Construction-Management/dp/0470556811) agrees with you regarding STRIPS.

 

[gauss]

I agree. I moved 0.5M into STRIPS that will mature in the 1940 to 1948 time frame in order to lock in the high interest rates for the long term.

If I needed current income from these assets I might not have gone this route, but I have different rolling bond ladders for current income needs.

If they are in a taxable account, make sure you understand how to handle the OID "phantom" income on your tax return.

-gauss

 

[audreyh1]

Uh oh are you traveling in back in time?

 

[hotwired]

Same thought

I agree. I moved 0.5M into STRIPS that will mature in the 1940 to 1948 time frame in order to lock in the high interest rates for the long term.

If I needed current income from these assets I might not have gone this route, but I have different rolling bond ladders for current income needs.

If they are in a taxable account, make sure you understand how to handle the OID "phantom" income on your tax return.

-gauss

It's funny you say that, in addition to creating a 12 to 13-year ladder, I decided to plunk about 100K way out on the Spectrum 25 to 30 years out, figuring best case I get a nice capital gains pop if rates go down, worst case which isn't so bad, I get about 5% on 100 grand for the next 25 years. I know what the yield curve, inverted that is, long-term rates like that probably won't go down much so I'm probably looking at the ladder worst not so bad case.

 

[pb4uski]

But were you able to plunk that $100k retroactive back to before you were born?

 

[jim584672]

I hope you have them in a retirement account or the taxes are a problem...

"Investors are taxed on the interest that the Strips are accruing each year, even though this interest is not actually received until the security matures."

 

[sengsational]

The taxes on strips is a bit of a pain; you get a 1099-OID every year. Not the end of the world, but, meh.


I loved that my grandmother bought a stripped treasury when each of my kids was born that had a maturity date of when they were 18. But it did require reporting on my taxes, but I could take that nominee interest off, so grew tax-free. It hurt on the college financial aid formula, though.

If you're trying to simplify, it's not quite as easy as it seems.

 

[gauss]

The taxes on strips is a bit of a pain; you get a 1099-OID every year. Not the end of the world, but, meh.


I loved that my grandmother bought a stripped treasury when each of my kids was born that had a maturity date of when they were 18. But it did require reporting on my taxes, but I could take that nominee interest off, so grew tax-free. It hurt on the college financial aid formula, though.

If you're trying to simplify, it's not quite as easy as it seems.

Well in general it can be more complicated than that theoretically.

The IRS instructions say that you can't necessarily use the figure on the 1099-OID form directly, but rather may need to follow their formulas which may result in required adjustments to the 1099-OID value.

Fortunately, when I did receive my 1099-OID from Fidelity it was exactly the same as using the IRS formulas.

The reason for the difference is that the IRS instructions do allow multiple ways to calculate the actual OID. So if you used a different method than the one Fidelity did in the past, then you would continue to use the different method and not the straight 1099-OID value.

I was trying to understand how to do this before I actually received the 1099-OID and that is how I went down the rat-hole on this.

Probably won't apply to most folks, but this would have been good for me to know last fall when I was slugging through this.

-gauss

 

[gauss]

It's funny you say that, in addition to creating a 12 to 13-year ladder, I decided to plunk about 100K way out on the Spectrum 25 to 30 years out, figuring best case I get a nice capital gains pop if rates go down, worst case which isn't so bad, I get about 5% on 100 grand for the next 25 years. I know what the yield curve, inverted that is, long-term rates like that probably won't go down much so I'm probably looking at the ladder worst not so bad case.

+1 And remember the popular thread here titled "We are about to enter a Golden Age for fixed income investing".

Locking up high fixed income rates for the long term as a worse case scenario is okay with me



=====================================

Uh oh are you traveling in back in time?

LOL - Thanks for pointing out my date error. Hopefully my edit below moves this closer to the physics that we all accept.

I agree. I moved 0.5M into STRIPS that will mature in the [-]1940 to 1948 [/-] 2040 to 2048 time frame in order to lock in the high interest rates for the long term.

If I [-]needed[/-] were to need current income from these assets I might not have gone this route, but I have different rolling bond ladders for current income needs.

If they are in a taxable account, make sure you understand how to handle the OID "phantom" income on your tax return.

-gauss

-gauss

 

[hotwired]

I hope you have them in a retirement account or the taxes are a problem...

"Investors are taxed on the interest that the Strips are accruing each year, even though this interest is not actually received until the security matures."

Right. But that's the same for nominal bonds except you actually "get" the interest in hand. I don't see the disadvantage necessarily.