EZ money on Wall St

[Dtail]

I think it was 3.65 less than one week ago. I noticed yesterday that it dropped a bit back to 3.60

Ah could be correct there.
So theoretically if the number of rate hikes are now presumed to be less next year, but nevertheless there are still rate hikes, shouldn't the rates still go up next year?

 

[OldShooter]

The comment was mine and my exact words were that I wanted to outpace inflation. Their yields are less than cash.

Not sure about your arithmetic. Mine says that any new TIPS bought at par is guaranteed to outpace inflation by the coupon rate. As to yielding less than cash that is possible but unlikely as the total yield is the coupon rate plus the inflation rate.

Bought at prices other than par the arithmetic is a little more complicated but the result is the same.

Finally, assuming you consider the full faith and credit of the US government to be a guarantee, TIPS are guaranteed to outpace inflation. It's certainly possible to roll the dice with riskier schemes that might beat inflation, but TIPS AFIK offer the only actual guarantee.

 

[COcheesehead]

Not sure about your arithmetic. Mine says that any new TIPS bought at par is guaranteed to outpace inflation by the coupon rate. As to yielding less than cash that is possible but unlikely as the total yield is the coupon rate plus the inflation rate.

Bought at prices other than par the arithmetic is a little more complicated but the result is the same.

Finally, assuming you consider the full faith and credit of the US government to be a guarantee, TIPS are guaranteed to outpace inflation. It's certainly possible to roll the dice with riskier schemes that might beat inflation, but TIPS AFIK offer the only actual guarantee.

Just using TIPS etf for an example. 1.12% distribution yield.

 

[foxfirev5]

Ah could be correct there.
So theoretically if the number of rate hikes are now presumed to be less next year, but nevertheless there are still rate hikes, shouldn't the rates still go up next year?

If you're looking at longer term CD's the rates probably won't be moved by small rate increases next year. However if the market perceives weakness in the economy these rates could fall and the curve invert. Or all the short term holders see the end and go long. Same result.

I certainly hope I'm wrong as I've been waiting for my next rung on my ladder to mature and am looking to go out 5-7 years to preserve the rate. Since I have a big chunk to roll over in the next 60 days you can bet Mr Murphy will come to the party.

 

[OldShooter]

Just using TIPS etf for an example. 1.12% distribution yield.

I never look at any bond funds, but govvie bond funds seem to me to be a particularly brain-dead idea. So I can't comment on your number.

But you do not seem to understand how TIPS work. In addition to paying interest at the coupon rate based on the bond's value, the bond's value increases with inflation. So, for example, if you bought a new issue at par with a coupon of 1% in a 2% inflation environment, you would be paid the 1% and in the second year the bond value would be increased by 2%. Then in that second year you would get 1% times the bond value, which has become 102% of face. So your face value compounds. With 20 years of 2% inflation you would find your bond to be worth 148% of face and that's what your coupon rate would be calculated against.

So that 1%/2% scenario is actually better than a vanilla T-bond yielding 3% because you have less reinvestment risk. And, of course, you are guaranteed to beat inflation. (Should there be deflation, the bond value will not be reduced so there is another little frill.)

 

[RenoJay]

I expect basically a flat decade going forward at least for US equities.

 

[firedata]

In my spreadsheet, I've always run a conservative scenario with 5% nominal constant returns. However, that doesn't take into account sequence of return risk with a 5% average return.

 

[jazz4cash]

...So, for example, if you bought a new issue at par with a coupon of 1% in a 2% inflation environment, you would be paid the 1% and in the second year the bond value would be increased by 2%. Then in that second year you would get 1% times the bond value, which has become 102% of face. So your face value compounds. With 20 years of 2% inflation you would find your bond to be worth 148% of face and that's what your coupon rate would be calculated against.

/QUOTE]

So the value at maturity would be 148 or is that increased value only used to calculate the coupon?

 

[pb4uski]

The value at maturity would be $148.

 

[OldShooter]

... So the value at maturity would be 148 or is that increased value only used to calculate the coupon?

Yes; if the bond matured that year you get the 148%. Basically what is happening is that the bond value is constant in purchasing power but increasing in nominal dollars, but you don't get paid the increasing nominal dollars until the end. The coupon determines what you get paid along the way, an amount that looks puny until you realize what is happening to the TIPS value.

There is one negative subtlety: Each annual increase in the face value is taxable income, so if you hold TIPS in a taxable account you have to pay the income taxes even though you aren't getting any cash. Best to hold them in tax-sheltered accounts.

 

[jazz4cash]

Thanks for the detailed explanation.

Edit: So you lose the state tax exemption if you hold in tax deferred, right?

 

[jazz4cash]

I think it was 3.65 less than one week ago. I noticed yesterday that it dropped a bit back to 3.60

And today it is back up to 3.65. I thought prices were up/yields down after Powell's speech yesterday ( or maybe it was the other way around).

 

[Dtail]

And today it is back up to 3.65. I thought prices were up/yields down after Powell's speech yesterday ( or maybe it was the other way around).

Yeah the 10 yr Treasury is down 2 bps today, but looking to make a 5 year CD investment by year end as part of the rebalancing.

 

[sengsational]

The comment was mine and my exact words were that I wanted to outpace inflation. Their yields are less than cash.

You did say outpace. I thought that's what TIPS were supposed to do with their base rate plus CPI adjustment.



But it sounds like you're saying if you and I took the same amount of cash, you put it in a box under your bed, and I bought TIPS at the next auction, that after 5 years, your box of cash would buy more than the proceeds of my bond? That's just kind of a weird concept that I'm having trouble with.

 

[OldShooter]

You did say outpace. I thought that's what TIPS were supposed to do with their base rate plus CPI adjustment. ...

Not "supposed to do," it is what they do.

I think @COCheeseHead did not understand how TIPS work. He has not been back since my explanation in post #55.

 

[futuretrust]

I've been investing in stocks for around 30 years now and I just love it. I will be the first to say that I, or nobody, can tell you what the future will hold but even today there is no better way to grow your capital than investing in stocks imo. Having said that, I have never seen the balance of power so tilted toward shareholders as of right now. The following seems to be in play:

- Workers and union lack of power to get wage increases
- Low corporate taxes
- Tools and processes to wring out efficiencies going straight to the bottom line
- Low borrowing costs and stock buybacks leading to raking it in and not risking new capital
- An incredible culture of shareholders first over all other stakeholders
- Technology, AI and productivity improvements to allow shareholders even more power over labor
- A very disturbing wealth inequality between the 10% vs 90%

So, no, I don't think 13% is likely long term. I am using 4-6% in my models. With really good investments, a great stretch goal may be 8%. My current 30 year return is around 12%. I feel very fortunate and lucky to have gotten this.

 

[Free bird]

12%. That is a nice number. Really appreciate your observations. Were out of balance is my take away. The last 10 years match your 12% number. But if you do 20 years you get half of that. The next 10 years might be light on return. Who knows.

 

[FIREarly]

Invest in Microsoft (MSFT). It is 1 of 2 AAA rated stocks and does very well vs SP500.



While it sounds great to get the big winners, they are risky. The key is investing and not losing money. 2 AAA rated stocks make two great options!