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runchman · 12-01-2022, 10:34 AM

Venturing into the world of tips and confused about this on the secondary market. Looking at one maturing in about a year, price is quoted as 98.298 but total cost (I believe) includes the inflation adjustment (see attached screenshot).

My question is, suppose we have rampant deflation, at maturity would I receive the par value of $1000 and therefore have lost a bunch given my initial cost of ~$1250?

I thought tips bought at origination would, worst-case, return par value + the stated yield. Is this not the case on the secondary market, or am I just understanding things wrong (most likely).

Thanks,

John

gauss · 12-01-2022, 11:22 AM

Quote:

Originally Posted by runchman

Venturing into the world of tips and confused about this on the secondary market. Looking at one maturing in about a year, price is quoted as 98.298 but total cost (I believe) includes the inflation adjustment (see attached screenshot).

My question is, suppose we have rampant deflation, at maturity would I receive the par value of $1000 and therefore have lost a bunch given my initial cost of ~$1250?

I thought tips bought at origination would, worst-case, return par value + the stated yield. Is this not the case on the secondary market, or am I just understanding things wrong (most likely).

Thanks,

John

If you buy a TIPS in the secondary market with positive inflation adjustments already baked into the price, then you are indeed exposed to "defalation risk" where your principal either redeemed at maturity OR sold on the secondary market could be less than what you paid.

I believe that your understanding and summary are spot on.

That being said, the way that I look at this is that I use TIPS as an inflation HEDGE. As such, if I do loose some money on TIPS principal, it should be somewhat offset by an increase of the purchasing power of my other dollars compared to where they were at when the TIPS were purchased.

-gauss

lostcowboy · 12-02-2022, 04:57 AM

I saw this article on TIPS https://www.schwab.com/learn/story/t...aqs-about-tips it looks like both principal and annual coupon payment can very over the lifetime of the TIP. Based on the article the principal paid back at maturity will not be less than the initial principal value. But you are buying them on the secondary market if the price is less than the initial principal value, and you plan on holding them to maturity then you should get a profit, I would think. I had a friend who would buy church bonds on the secondary market at a 50% discount and keep them to maturity. It all depends on what your long term plans are, are you going to hold until maturity, or are you going to be trading them, or are you buying a fund where the price is based on what the secondary market is doing.