Interpreting TIPS Market Data

[DaveLeeNC]

I am considering adding a substantial position in TIPS bonds (not a fund) to my tax deferred portfolio. I think that I understand how these vehicles work. I am NOT SURE that I understand the terminology that is often used. So I am going to pull some data from https://www.wsj.com/market-data/bonds/tips to frame my question.

Maturity - July 15, 2026
Coupon - 0.125
Bid/Asked - 99.24/99.27
Yield - 0.165
Accrued Principal - 1123

So what we have here is a original coupon (0.125) TIPS bond at $1000 initial par value. It matures (you get your inflation adjusted principal back) on 7/15/26.

The periodic payments (annualized I am assuming) in this case are .00125
x Adjusted_Principle_Value (whatever it is at the time)

The price to purchase this bond is .9927 x SOMETHING (I assume that it is the Accrued Principal).

The Accrued Principal is the inflation adjusted value of this bond on today's date.

The yield is just the (inflation adjusted) IRR if this bond is held to maturity.

But there must be something that I don't understand as I don't get a 'Yield' of .165 for the case of zero inflation from this point forward. Where am I confused - thanks.

dave

 

[DaveLeeNC]

I think that I have the answer to my own question. I am not experienced in the Bond World and a Bid/Asked of 99.24 and 99.27 is 99 + 24/32 and 99 + 27/32. I was using these as decimal #'s and that explains why I could not make the #'s come out. My error.

Another question related to this. If I buy a secondary market TIPS bond 3 months after the last coupon date, then the seller is owed 3 months of that interest (from me as I will be getting the entire 6 months). I assume that this adjustment is made during the transaction as a small adjustment to the transaction price in favor of the seller. Is that right?

Thanks.

dave

 

[walkinwood]

Explore Tips by Harry Sit was very useful to me in understanding TIPS and the terminology. It is available as an inexpensive ebook.

 

[DaveLeeNC]

Thanks for the response and suggestion. dave

 

[gcgang]

I am considering adding a substantial position in TIPS bonds (not a fund) to my tax deferred portfolio. I think that I understand how these vehicles work. I am NOT SURE that I understand the terminology that is often used. So I am going to pull some data from https://www.wsj.com/market-data/bonds/tips to frame my question.

Maturity - July 15, 2026
Coupon - 0.125
Bid/Asked - 99.24/99.27
Yield - 0.165
Accrued Principal - 1123

So what we have here is a original coupon (0.125) TIPS bond at $1000 initial par value. It matures (you get your inflation adjusted principal back) on 7/15/26.

The periodic payments (annualized I am assuming) in this case are .00125
x Adjusted_Principle_Value (whatever it is at the time)

The price to purchase this bond is .9927 x SOMETHING (I assume that it is the Accrued Principal).

The Accrued Principal is the inflation adjusted value of this bond on today's date.

The yield is just the (inflation adjusted) IRR if this bond is held to maturity.

But there must be something that I don't understand as I don't get a 'Yield' of .165 for the case of zero inflation from this point forward. Where am I confused - thanks.

dave

I haven’t dabbled in these for a long time, so take my comments with a large grain of salt.

I think your yield explanation is off. You DO get 0.165% Yield to Maturity (IRR) WITHOUT adjusting for inflation.

So, you will get a POSITIVE yield of about a crumb (0.165%, figuring the coupon plus the accretion of the discount) PLUS future inflation adjustments.

Years ago, you could get over a 2% IRR while you got the principal inflation adjusted. I think the IRR actually has been negative much of the past decade.

 

[DaveLeeNC]

I haven’t dabbled in these for a long time, so take my comments with a large grain of salt.

I think your yield explanation is off. You DO get 0.165% Yield to Maturity (IRR) WITHOUT adjusting for inflation.

So, you will get a POSITIVE yield of about a crumb (0.165%, figuring the coupon plus the accretion of the discount) PLUS future inflation adjustments.

Years ago, you could get over a 2% IRR while you got the principal inflation adjusted. I think the IRR actually has been negative much of the past decade.

I believe that the IRR calculation includes both the coupon and the inflation adjustment of the principle calculated for the case of holding a bond to maturity.

dave

 

[pb4uski]

I am considering adding a substantial position in TIPS bonds (not a fund) to my tax deferred portfolio. I think that I understand how these vehicles work. I am NOT SURE that I understand the terminology that is often used. So I am going to pull some data from https://www.wsj.com/market-data/bonds/tips to frame my question.

Maturity - July 15, 2026
Coupon - 0.125
Bid/Asked - 99.24/99.27
Yield - 0.165
Accrued Principal - 1123

So what we have here is a original coupon (0.125) TIPS bond at $1000 initial par value. It matures (you get your inflation adjusted principal back) on 7/15/26.

The periodic payments (annualized I am assuming) in this case are .00125
x Adjusted_Principle_Value (whatever it is at the time)

The price to purchase this bond is .9927 x SOMETHING (I assume that it is the Accrued Principal).

The Accrued Principal is the inflation adjusted value of this bond on today's date.

The yield is just the (inflation adjusted) IRR if this bond is held to maturity.

But there must be something that I don't understand as I don't get a 'Yield' of .165 for the case of zero inflation from this point forward. Where am I confused - thanks.

dave

I'm considering adding TIPs as well. My understanding is that one of the risks is that the 1123 of accrued principal could decline if we had deflation. I guess on the one hand it is then keeping pace with inflation... or deflation in that case... preserving the spending power of the investment, but it is still a littrd for me to accept.

 

[DaveLeeNC]

I'm considering adding TIPs as well. My understanding is that one of the risks is that the 1123 of accrued principal could decline if we had deflation. I guess on the one hand it is then keeping pace with inflation... or deflation in that case... preserving the spending power of the investment, but it is still a littrd for me to accept.

An alternative that partially addresses this is to only buy secondary market bonds that have very little accrued principle (you can still lose the acrrued principle that you gained in previous years). AFAIK, you cannot buy directly from Treasury Direct into an IRA/etc.

dave

 

[pb4uski]

An alternative that partially addresses this is to only buy secondary market bonds that have very little accrued principle (you can still lose the acrrued principle that you gained in previous years). AFAIK, you cannot buy directly from Treasury Direct into an IRA/etc.

dave

I've looked for low accrued principal TIPs but haven't been successful in finding any. I may look at new issues going forward.

 

[OldShooter]

Explore Tips by Harry Sit was very useful to me in understanding TIPS and the terminology. It is available as an inexpensive ebook.

Thanks. Ordered a copy. Always learning.

I believe that the IRR calculation includes both the coupon and the inflation adjustment of the principle calculated for the case of holding a bond to maturity. ...

The problem with those calculations is that they assume level principal and level interest payments going forward. IOW, zero inflation. So they really give an unrealistic lower bound, not a solid number. If you believe in future inflation, then the number is too low.

For TIPS it would be nice to have a Monte Carlo valuation calculator that included future inflation scenarios. I have not seen one, however.

... one of the risks is that the 1123 of accrued principal could decline if we had deflation. ... it is still a [little hard] for me to accept.

Yes, but for us anyway, significant future deflation is just not a worry. Nothing is impossible, of course, but that scenario is IMO close to impossible.

 

[DaveLeeNC]

Thanks. Ordered a copy. Always learning.

The problem with those calculations is that they assume level principal and level interest payments going forward. IOW, zero inflation. So they really give an unrealistic lower bound, not a solid number. If you believe in future inflation, then the number is too low.

For TIPS it would be nice to have a Monte Carlo valuation calculator that included future inflation scenarios. I have not seen one, however.

Yes, but for us anyway, significant future deflation is just not a worry. Nothing is impossible, of course, but that scenario is IMO close to impossible.

What they give you is the inflation adjusted yield to maturity. You may or may not find that useful. I find it more useful than 'simple unadjusted yield calculations', but that is due to my somewhat special circumstances.

dave

 

[DaveLeeNC]

I've looked for low accrued principal TIPs but haven't been successful in finding any. I may look at new issues going forward.

You can find the occasional secondary market offering where the net price that you pay is only a couple percent above the treasury guaranteed 'floor' ($1k) of the bond at maturity. I called that 'low', but low is in the eye of the beholder.

dave

 

[OldShooter]

What they give you is the inflation adjusted yield to maturity. You may or may not find that useful. I find it more useful than 'simple unadjusted yield calculations', but that is due to my somewhat special circumstances. ...

Yes. My point is that going forward, they necessarily assume zero inflation. I.e, the inflation adjusted value of the bond doesn't change any more and hence the future interest payments don't change either. To do anything else you would have to plug in a series of estimated inflation numbers.

We bought our TIPS in 2006/2007 so this is not a problem of great concern to me but it does lead to people making decisions based on numbers they really don't understand. It looks like a definitive calculation but it is really a not-very-good estimate.

 

[DaveLeeNC]

Yes. My point is that going forward, they necessarily assume zero inflation. I.e, the inflation adjusted value of the bond doesn't change any more and hence the future interest payments don't change either. To do anything else you would have to plug in a series of estimated inflation numbers.

We bought our TIPS in 2006/2007 so this is not a problem of great concern to me but it does lead to people making decisions based on numbers they really don't understand. It looks like a definitive calculation but it is really a not-very-good estimate.

Or in my case it is exactly the calculation that I need for my circumstances. But I understand your point of not everyone understanding what they are seeing. dave

 

[Turbo29]

An alternative that partially addresses this is to only buy secondary market bonds that have very little accrued principle (you can still lose the acrrued principle that you gained in previous years). AFAIK, you cannot buy directly from Treasury Direct into an IRA/etc.

dave

You can buy new TIPs at auction through your brokerage directly into your IRA.

 

[pb4uski]

^^^^ I'll probably be doing that.

 

[DaveLeeNC]

You can buy new TIPs at auction through your brokerage directly into your IRA.

I don't know how many places I have read where you cannot buy directly out of auctions from TD into your IRA (and that makes sense) and never once did I read that buying from an auction through a broker will allow you to place the purchase into your IRA. I was just assuming that you could not but I suspect that you are right and I am wrong.

Thanks.

dave

 

[Turbo29]

I don't know how many places I have read where you cannot buy directly out of auctions from TD into your IRA (and that makes sense) and never once did I read that buying from an auction through a broker will allow you to place the purchase into your IRA. I was just assuming that you could not but I suspect that you are right and I am wrong.

Thanks.

dave

I currently have TIPs in my IRA at E*Trade that I bought at auction through E*Trade. I assume you can do the same at Fidelity, Schwab, etc.

 

[OldShooter]

I currently have TIPs in my IRA at E*Trade that I bought at auction through E*Trade. I assume you can do the same at Fidelity, Schwab, etc.

Yup. BTDT at Schwab too. There is nothing special about TIPS as far as buying and selling. Same as any other security. I don't know why there seems to be some kind of mystery about it.

 

[daylatedollarshort]

We usually buy at auction and put them in our IRAs. Fidelity's fixed income email alerts have auction notices about a week out. There is also a tentative schedule at Treasury Direct. It only takes a few minutes to put in an order. Two of our 401Ks that have brokerage accounts also let us buy TIPS.

As for accumulated inflation being an issue if there is deflation, that is a risk that will happen to you if you keep buying TIPS, even at auction, sooner or later anyway. Like the TIPS you buy at auction now are likely to have accumulated inflation even 1 year from now. TIPS aren't the best investment if there is deflation. Nominal bonds are better for that. But deflation isn't what destroys most retirees' investment plans.