Buying 5-year TIPS at Monday's auction

[2B]

POLITICAL ASIDE
Lucky for me, GWB can't be elected a third time so I'm not as worried about a depression as I might otherwise be . (Gimme some Chuck Hagel & John Danforth, guys, maybe a little Lindsey Graham, instead of the current crew next time, eh? At least they can rub two neurons together without blowing something up.) /snark off

Don't confuse me with a Bush-ite, but I've seen nothing to impress me so far for "leadership" from the dems to replace him. I think the Democrats self-destructed in the last two elections by carefully finding the only unelectable candidates available. Even then, it was close.

I've always looked at Bush as an anti-abortion semi-liberal. He's spent like a drunken sailor (sorry Nords) and not been much in the way of controlling our border or associated social costs. I could continue my list but I hate to think who would start agreeing with me.

Also, I suspect he GW will get favorable "long term" historal evaluation because of his "rising to the occasion" with the "War on Terror." Lincoln is revered yet he suspended habeus corpous (SIC?), instituted income tax, created the first military draft, seized private property..... It shows you never know how it will get reviewed until long after they are dead.

 

[Mr._johngalt]

Don't confuse me with a Bush-ite, but I've seen nothing to impress me so far for "leadership" from the dems to replace him. I think the Democrats self-destructed in the last two elections by carefully finding the only unelectable candidates available. Even then, it was close.

I've always looked at Bush as an anti-abortion semi-liberal. He's spent like a drunken sailor (sorry Nords) and not been much in the way of controlling our border or associated social costs. I could continue my list but I hate to think who would start agreeing with me.

Also, I suspect he GW will get favorable "long term" historal evaluation because of his "rising to the occasion" with the "War on Terror." Lincoln is revered yet he suspended habeus corpous (SIC?), instituted income tax, created the first military draft, seized private property..... It shows you never know how it will get reviewed until long after they are dead.

Damn, 2B.....that is good. I'm not kidding folks.

JG

 

[donheff]

I wasn't following this thread until I saw that it degenerated into the same old, same old. How did TIPS turn into politics? Was Clinton somehow behind it?

 

[redduck]

I am confused (again). My IRA statement says my TIPs current yield (TIP ETF ) is 5.8. Some posts seem to be talking about yield (?) being 2.3 to 2.6 (or so). Am I actually earning 5.8 interest? I assume I'm missing something. Can you tell me what it is? (But let's keep the what-I'm-missing subject matter as to the TIP situation). Thanks.

 

[haha]

Your statement is giving you total or nominal yield. The posters here have been talking about real after inflation yield.

Ha

 

[redduck]

So, let's say that I would like to buy a bond fund for an IRA account. TIPs seem to be quite safe and higher yielding than most bond funds (that I'm aware of). Aren't safe and higher yielding two things that I should be looking for? So, what am I missing here?

 

[haha]

So, what am I missing here?

IMO, nothing.

Ha

 

[JohnEyles]

TIPs seem to be quite safe and higher yielding than most bond funds (that I'm aware of). Aren't safe and higher yielding two things that I should be looking for? So, what am I missing here?

I'm not quite sure where you get that TIPS yield higher than "most" bond funds.
Two of the broader bond funds, AGG ad VBTLX, both yield well over 4%, as opposed
to 2.375% for the recently sold TIPS. Of course, the principal of TIPS tends to
grow faster than a bond fund's share value, at least with static or rising interest
rates.

Not that I don't think TIPS are a fine thing. A simple spreadsheet shows that
an investment with steady total return equal to inflation+2.5% can sustain an
inflation-adjusted,40-year, 4% SWR. And the TIPS pretty much gives you that,
guaranteed. Of course, getting the return of principal needed to sustain the 4%
requires a disciplined approach where some money is pulled out when the TIPS
rolls over.

 

[redduck]

Well, I got the yield from my IRA statement which said the TIPs yield was 5.8. Barron's also has the yield about that high. However, I do often came across numbers like you've reported (2.4.-2.5 or so).

And, besides, HaHa says I'm missing nothing.

So, if I have $100 in TIPs, do I actually earn $5.80 or $2.40? (Here's hoping at least my math is right).

 

[brewer12345]

So, if I have $100 in TIPs, do I actually earn $5.80 or $2.40? (Here's hoping at least my math is right).

You earn $5.80, but you only get $2.40 paid out in cash, unless the fund actually sells off some bonds and pays out the extra to get it up to $5.80. If you actually held the bond directly, you would get $2.40 in cash, and the bond would increase in value from $100 to $103.40.

 

[redduck]

I think I might be pretty close to understanding this:

It sounds like I'm going to be $5.80 wealthier because of the cash dividend and the bond funds increase in value. Does it hold true for an ETF where 100% the interest is reinvested back into the bond fund? Am I still $5.80 ahead in my IRA account?


(and this is from a guy who has been investing for at least 20+ years).

 

[2B]

I believe that the IRS treats these bonds just like zero coupon bonds so taxes are due on the phantom interest. You have to pay taxes on money before you see it so I think they are better candidates for tax deferred accounts.

 

[wabmester]

I believe that the IRS treats these bonds just like zero coupon bonds so taxes are due on the phantom interest. You have to pay taxes on money before you see it so I think they are better candidates for tax deferred accounts.

The two TIPS funds I know of (TIP and VIPSX), both pay out the inflation adjustment as well as the real interest. TIP pays monthly. Vanguard pays quarterly. Since TIPS (and other treasuries) are state-tax free, it may be advantageous to hold these funds in your taxable account, depending on your tax situation, of couse.

 

[FIRE'd@51]

The two TIPS funds I know of (TIP and VIPSX), both pay out the inflation adjustment as well as the real interest.

Could you please clarify this? Do you mean pay out (as in a cash payout) or "pay out" (as in they report the phantom interest along with the real interest payout so the investor has to pay tax on both)?

 

[wabmester]

Could you please clarify this? Do you mean pay out (as in a cash payout) or "pay out" (as in they report the phantom interest along with the real interest payout so the investor has to pay tax on both)?

Pay out, as in distribute the inflation adjustment as part of the dividend. So, when you hold TIPS via such a fund, they are no different than any other treasury bond fund -- you pay taxes on what you receive as dividends.

I haven't been able to figure out exactly how they do this (well, I haven't actually asked them either). Obviously, they receive the inflation adjustment whenever they sell a bond or one matures, so it makes sense that they pay that out as part of the dividend. But I don't know if they try to "manage" their dividends. It looks like the TIP ETF might, since they report part of the distribution as return of capital.

 

[Jane_Doe]

Hi, all!

I am interested in using TIPS as a good chunk of our AA once we finally sell out on our RE holdings.

Can anyone give the pros and cons on holding TIP funds (the way I am leaning as of now) vs. actually holding the bonds directly (which sounds more complicated to me).

To further clarify, I like using Vanguard so that is the fund I would use (VAIPX) and would be using this as a good part of our income stream.

Thanks for the help!

Jane


Edit: I re-posted this question under a new topic (TIPS: Bond vs. Bond FUND? Pros/Cons)
Please respond there to this question. Thanks!