Brewer et al- Interest Rate Data?

[haha]

Hi

Brewer, I am getting into the CPI linked securities more. I want to get a long term look at real interest rates, at least for the post war period. Either a chart showing real rates or interest rate data that I can import and adjust with cpi data from Shiller's site.

I Googled away, but haven't found what I need.

Also, are you aware of any co-variance between real rates and S&P performance? Looking at incomplete data, it seems that the huge bull market of the 80s and 90s began with very high real rates, and continued mostly under conditions of high real rates. Since 2000, the stock market has been choppy, and real rates have been lower and at times negative. Also, periods during the 70s had low to negative real rates, and crappy stock market performance

As to TIPs, did they ever trade at 4% or above?

I'll appreciate any comments or links. 

Ha

 

[cute fuzzy bunny]

Feds forecast of CPI next year is 1.75-2%.

Worst talking head forecast i've seen was around 2.4%.

 

[d]

data that I can import

a very convenient data source is "freelunch.com" (you need to register, but as the name implies ... ) though it is generally restricted to the past 25 or 30 years.

 

[lazyday]

As to TIPs, did they ever trade at 4% or above?

I don't have links, but I think TIPS maxed out around 4 1/4 or so (probably a little higher) and UK inflation bonds significantly higher than that.

IIRC, you can find a 4.25% coupon TIPS note on the treasury website, not sure what the highest yield on it was.

 

[haha]

Thanks all- these are helpfull suggestions.

Ha

 

[wabmester]

I want to get a long term look at real interest rates, at least for the post war period. Either a chart showing real rates or interest rate data that I can import and adjust with cpi data from Shiller's site.

Some good charts here going back about 30 years:

Martin Capital

As to TIPs, did they ever trade at 4% or above?

Only when they were first introduced, and that has been attributed to novelty and relatively low liquidity.

 

[brewer12345]

Hmmm, if you dig around on the Bureau of Labor Stats site you will find CPI data, since they publish it.

As for real rates, I think data will be tough to come by simply because until the introduction of TIPS, you had to calculate real rates, which usually aren't known until after the fact. So if you buy a t-bill, it includes a real rate and an inflation component. The inflation rate isn't known when you buy the note: it is expected inflation that is embedded in the nominal rate. You won't actually find out what inflation is until after the fact. So there is a significant data problem. No doubt many acadmics (and the treasury eggheads) have studied this to death. I would look at the US treasury's site and maybe search the various local Fed webstites for research.

I am happy to accpet a 3+% real rate on some bonds with modest credit risk because A) I know that I get to FIRE by my mid-40s with about 4.5% plus CPI and B) Looking at the 4% SWR, 3+% is pretty darned close. Having said that, I would liquidate the position in a hurry if it ever traded up to par.

 

[lazyday]

[on TIPS over 4%] Only when they were first introduced, and that has been attributed to novelty and relatively low liquidity.

I'm not sure, but this might not be the case for the UK bonds. Maybe someone from across the pond can comment, or surely there's data and commentary online somewhere.

Ha, another source might be Ibbotson's Stocks Bonds Bills and Inflation. Book comes out yearly I believe, but I haven't had a chance to look at one yet. (Well, maybe around 10 years ago, but I don't remember anything about it )

 

[wabmester]

You're right -- it doesn't look like it was a liquidity premium.

Canada introduced their real-return bond (RRB) in 1991. I only found data going back to 1996, but it hit almost 5% real in April 1996, and yielded over 4% real several times prior to 2000.

data

 

[brewer12345]

You're right -- it doesn't look like it was a liquidity premium.

Canada introduced their real-return  bond (RRB) in 1991.   I only found data going back to 1996, but it hit almost 5% real in April 1996, and yielded over 4% real several times prior to 2000.

data

Interesting that real rates in canada are lower than for the US treasury. I suspect that the real rate depends on the requirements of the marginal buyer of gummint debt. I've no clue who it is for Canada. For the US, it is clearly foreignn central banks, many of which are already full-up with US treasuries, thank you very much.

 

[saluki9]

I have a fairly easy result for you.

1. Go to the federal reserve home page.
2. Use their Data Download Application (on the right side of the page)
3. Set up a data series using T-bills (data is from 1919 on)
4. This will create a XLS file with the monthly data
5. Go to www.BLS.gov and select inflation data
6. Use their Most Requested Stats tool to build a table on monthly CPI data (CPI-U)
7. Merge the data and it would seem that you have what you're looking for

 

[brewer12345]

8. Let us know what you think this shows you.

 

[saluki9]

8. Let us know what you think this shows you.

Hey, if spending countless hours compiling seemingly endless data actually had to lead you to a profitable conclusion there would be a lot more unemployed people on Wall St.

I thought this might have just been an academic discussion

 

[haha]

Thanks all.

There is a lot here to look at and massage.

Ha

 

[lazyday]

More on TIPS & real rates

http://socialize.morningstar.com/Ne...nv.asp?forumId=F100000015&convSeqNumber=50559

A quote from a quote from a quote of

the fixed income group head at Wellington management

,Paul Kaplan:

Yeah, but it's all during times of declining inflation. The first TIPS, the first securities came out in the U.K. in like 1980. Ever since then inflation's been going down. So suppose inflation is flat or goes up, what do I know? I don't know. That's my problem. I'm just not brave enough to try to figure out what that real yield is going to do. And I think it's important because if that real yield changes a lot it can kill you. Now, people will say, "Well, when they first came out, they were just mispriced, and the real yield was 4% and it really belongs at 2%." Uh huh, maybe. But that's my puzzle.

-I suppose one could have good sounding theories about how TIPS will behave, but until TIPS have been around a few market cycles (including inflation cycles) you can't find the holes in your theories.

-Interesting about the Tips yield dropping when inflation dropped. So, is there a theoretical explanatory guess? It's not like the disinflation was caused by economic decline, which might be expected to drive real rates down.

-The VG DH conversation linked above is pretty good, worth reading if this topic interests you. There's more quotes from Kaplan too.

 

[wabmester]

I agree with just about everything Swedroe said.   You need to compare TIPS to nominal bonds.   Both will lose value if real rates go up.   Historically, nominal bonds have returned around 2.5% real, so if your TIPS are getting something in that range, you're getting guaranteed average returns for the life of that bond.    For those who are looking to protect their principal, that's a good thing.

 

[haha]

I agree with just about everything Swedroe said.   You need to compare TIPS to nominal bonds.   Both will lose value if real rates go up.   Historically, nominal bonds have returned around 2.5% real, so if your TIPS are getting something in that range, you're getting guaranteed average returns for the life of that bond.    For those who are looking to protect their principal, that's a good thing.

Me too. Thanks LazyDay for linking this very interesting discussion. Kaplan was looking at what I was trying to get a handle on- how might these things behave going forward, in what many of us expect might be a less benign environment wrt inflation.

Since I at least don't want long term bonds, what are my choices in high quality fixed? Cds, Intermedidate govts or bills, and TIPs. Since Bernanke can directly influence bills, and thus to a large extent influence 2-5 year notes and bonds, I think the chances of getting a positive real return are likely better with TIPS. The TIPs owner would not ever suffer the fate of the bondholder or short duration fixed investor in the late 70s. He will get a pretax return >=CPI. And, if he buys now close to 2.5%, it will be 2.5%> CPI.

Also, if on average risk must be rewarded with higher return, then removing CPI risk as TIPs do should allow them to trade at a lower real yield than intermediate term bonds.

This may look awfully good in the not too distant future.

Ha

 

[wabmester]

This may look awfully good in the not too distant future.

[Queue scary music....]

 

[d]

Both will lose value if real rates go up

many mistakenly believe TIPS are a "sure thing" ... note the return YTD: -2% (vanguard); -2.24% (tiaa/cref).  even if holding and not liquidating, the value of TIPS can noneless fall.  that many have been surprised by this perhaps reinforces Kaplan's point.

 

[ats5g]

It's interesting that people seem to be focusing on the fluctuation in value of their assets, but aren't looking at the fluctuation in value of their liabilities.

While the increase in real yields has been decreasing the value of the TIPS [which is just the present value of the income stream from the TIPS], it has also been decreasing the present value of our future real liabilities.

So, if I own TIPS the affect of rising real interest rates can be offsetting.

- Alec

 

[haha]

It's interesting that people seem to be focusing on the fluctuation in value of their assets, but aren't looking at the fluctuation in value of their liabilities.

While the increase in real yields has been decreasing the value of the TIPS [which is just the present value of the income stream from the TIPS], it has also been decreasing the present value of our future real liabilities.

So, if I own TIPS the affect of rising real interest rates can be offsetting.

- Alec

Unless i misunderstand, few retired people have much in the way of fixed liabilities. Maybe a mortgage, but many or most ry to pay it off.

Ha

 

[ats5g]

Unless i misunderstand, few retired people have much in the way of fixed liabilities. Maybe a mortgage, but many or most ry to pay it off.

Ha

Hi Ha,

I was referring more to all of our future outlays/spending as future liabilities. For example, the present value of my gas bill payment for october 2010 falls as real interest rates rise [b/c the interest rate i'm using for discounting rises].

-Alec

 

[wabmester]

Alec, you're making my brain hurt. Thanks!

 

[MooreBonds]

-Interesting about the Tips yield dropping when inflation dropped. So, is there a theoretical explanatory guess? It's not like the disinflation was caused by economic decline, which might be expected to drive real rates down.

SWAG alert! SWAG alert!
The following message is merely an exercise in natural deduction.

I would suggest that the relationship between real/inflation rates could be viewed as the real rate not being overwhelming or underwhelmed by the inflation rate.

For instance..if inflation were 8-9%, how would you feel about getting a 1% real rate? Pretty crappy, right, since it's underwhelmed by the inflation coupon?

Conversely, if inflation is expected to be a miniscule 2%, then a real rate of 6% would overwhelm the inflation rate, and would weigh out the inflation rate too much.

You might look at the early I-bonds/TIPs with real yields of 3%-4 1/4% as being abnormally high due to both the stock market excesses at the time, as well as the new nature of the product not capturing as wide of an interest at the time.

I can't really think of any good analogy...perhaps think about cars. You wouldn't expect to see a 6.0L engine in a honda, and you wouldn't expect to see a Yugo engine in a Bentley. Or, consider real estate agent comissions - on a 20,000 house, you might agree to more than the 'standard' 6%, since 6% is merely $1,200 in total comissions. Conversely, on a $10 million estate, you could negotiate a much lower rate, since even 5% is still a hefty $250,000 in total comissions.

(note: Yes, I know that the whole real estate comission structure is finally opening up to some competition, and is based on an oligarchy of real estate firms keeping the price artificially high. I am merely using it as the only example I could think of).

 

[wabmester]

For instance..if inflation were 8-9%, how would you feel about getting a 1% real rate? Pretty crappy, right, since it's underwhelmed by the inflation coupon?

Something like this happened just six months ago.   i-bonds real rate was around 1%, annualized inflation was around 6%, and people *loved* that resulting 7% return because it was much higher than any nominal bonds.

That is the secret sauce.   People weigh investments relative to one another.   If inflation is held constant, and some other investment looks more attractive than nominal bonds, money will flow out of nominal bonds, and the lower demand will force the real yield back up until equilibrium is reestablished.    The real yield is all about supply and demand in the bond market.   (That's my story, and I'm sticking with it!)