Vanguard Short Term Inflation Protected securities

[dm]

I moved some money from my money market fund that is basically earning nothing. Just dipping my toe in the water at this point, I also purchased some I-bonds.

I’ve been sitting on some cash and just looking for some place relatively safe that hopefully doesn’t lose to much to inflation.

My stock allocation is fine, I don’t want to add anymore to that side.

Has anyone else using the above fund as a place to park cash. It’s not cash I need anytime soon.

 

[OldShooter]

Why not just buy one or more TIPS directly next time there's an auction? They are highly liquid and with inflation heating up one might expect them to appreciate. (Not that my crystal ball is any better than anyone else's.)

I looked at short term TIPS one time and concluded that it is a trader's market. Prices are driven by the daily calendar: Announced and anticipated inflation plus by time before the next principal adjustment. Too many moving parts for me. A few years out in maturities is a much calmer sea.

 

[RunningBum]

Yes, starting last year I been buying and adding to VAIPX and VTAPX to replace bonds and MMs that were going nowhere. Some minor market timing of rising interest/inflation rates. It's certainly done well in that time. As bond yields rise I will start moving back into bonds. I'm not sure where my trigger point is.

 

[RunningBum]

On buying TIPS funds vs individual TIPS, I like the flexibility of buying whenever I want vs waiting for an auction, and ease of selling whenever I want with no extra fee. The fund fees are minor so I just didn't see a strong enough reason to buy individual TIPS from the treasury.

 

[dm]

The vanguard funds are in my IRA. Buying the vanguard fund just makes it easy.

 

[RunningBum]

It's also one less account to keep track of, for both myself and my heirs.

 

[OldShooter]

The vanguard funds are in my IRA. Buying the vanguard fund just makes it easy.

It's also one less account to keep track of, for both myself and my heirs.

There is no "extra account." Buying TIPS is no different than buying any other individual bond. Buy them into your IRA or cash account using the web interface or, my preference, call the Schwab bond desk. They'll recommend bonds on the secondary market or take an order for the next auction. IIRC there is a nominal fee, like $25 for talking to a human about a any trade, but they usually waive it for me. I think the auction purchases are done at no fee.

 

[Retireby45ish]

I see they also have an equivalent ETF called VTIP. This might be useful for some of the cash I have sitting on the sidelines as I wait to buy a house in the next 6 months or so (I’m willing to take the variance of losing on this since it means inflation is lower and probably correlated somewhat to housing prices).

Anyone see anything wrong with this thought?

This option is better than cash (which is the current bucket) since it’s a hedge with what the money would be used for.

 

[RunningBum]

There is no "extra account." Buying TIPS is no different than buying any other individual bond.

My misunderstanding. I see the option in my Vanguard account now.

There are 48 options for TIPS. I don't know how to figure out what to select, why one is better or different than another. Just a lack of education on my part. Maybe it doesn't really matter if the secondary market is efficient enough. I can buy the TIPS MF without understanding this. I have Harry Sit's Explore TIPS book but the light bulb hasn't fully lit for me yet.

I also do not own individual bonds, so saying it's as easy as buying them doesn't do much for me.

I'm not arguing at all against anyone buying individual bonds. I'm just saying that for me, buying the fund is quicker and easier, and the cost of doing so is not prohibitive.

 

[OldShooter]

My misunderstanding. I see the option in my Vanguard account now. ...

That seems to be a common misunderstanding. I think it comes from people thinking that TreasuryDirect is the only way to buy govvies and they must be bought on the auctions. Neither is true. Actually, IIRC the only thing TreasuryDirect has a monopoly on is I-bonds.

I suppose the idea of TreasuryDirect is to provide a way for unsophisticated people to buy government bonds. But is that even a good idea?

 

[Out-to-Lunch]

My misunderstanding. I see the option in my Vanguard account now.

There are 48 options for TIPS. I don't know how to figure out what to select, why one is better or different than another. Just a lack of education on my part. Maybe it doesn't really matter if the secondary market is efficient enough. I can buy the TIPS MF without understanding this. I have Harry Sit's Explore TIPS book but the light bulb hasn't fully lit for me yet.

I also do not own individual bonds, so saying it's as easy as buying them doesn't do much for me.

I'm not arguing at all against anyone buying individual bonds. I'm just saying that for me, buying the fund is quicker and easier, and the cost of doing so is not prohibitive.

If you are ever interested in constructing a ladder of TIPS, there is an excellent Excel sheet to do the math available here: Excel Downloads

Having said that, I do not object to holding the appropriate mutual funds.

 

[Retireby45ish]

Quick question: I don’t suppose ibonds are traded on the secondary market in brokerages? I wanted to buy more than the 10k per year (on the order of doing 10x that or more).

Google turned up nothing.

 

[JT90505]

Why not just buy one or more TIPS directly next time there's an auction? They are highly liquid and with inflation heating up one might expect them to appreciate.

Do some reading at Tipswatch.com. Excerpted notes from most recent 5 yr. auction...

...The U.S. Treasury’s auction of $19 billion in a new 5-year Treasury Inflation-Protected Security generated a real yield to maturity of -1.685%, the lowest ever recorded for any TIPS auction of any term...[investors] were willing to pay a 9% premium to par value to collect a 0.125% coupon rate plus five years of inflation accruals. To put this another way, official U.S. inflation will have to increase about 9% before investors reach a breakeven point on this investment.

My crystal ball is no better than shooters. I agree there are more moving parts in the short term TIPS funds than I understand, I prefer buying and holding TIPS to maturity than TIPS funds...but right now if you buy the actual TIPS be aware you are locking in a negative real interest rate.

All that said, I put some cash in ST TIPS mutual fund about a year ago and its done well (vs. MMF's, certainly not against stocks!)

 

[Out-to-Lunch]

Quick question: I don’t suppose ibonds are traded on the secondary market in brokerages? I wanted to buy more than the 10k per year (on the order of doing 10x that or more).

Google turned up nothing.

Correct, you cannot trade I-bonds on the secondary market. The are not marketable securities: https://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm

 

[OldShooter]

Do some reading at Tipswatch.com. Excerpted notes from most recent 5 yr. auction...

...The U.S. Treasury’s auction of $19 billion in a new 5-year Treasury Inflation-Protected Security generated a real yield to maturity of -1.685%, the lowest ever recorded for any TIPS auction of any term...[investors] were willing to pay a 9% premium to par value to collect a 0.125% coupon rate plus five years of inflation accruals. To put this another way, official U.S. inflation will have to increase about 9% before investors reach a breakeven point on this investment.

My crystal ball is no better than shooters. I agree there are more moving parts in the short term TIPS funds than I understand, I prefer buying and holding TIPS to maturity than TIPS funds...but right now if you buy the actual TIPS be aware you are locking in a negative real interest rate.

All that said, I put some cash in ST TIPS mutual fund about a year ago and its done well (vs. MMF's, certainly not against stocks!)

Thanks. I don't follow that closely, but the poorer YTM rate is more or less what I would expect as inflation starts to bite. TIPS get bid up, because the nominal yield is the YTM plus inflation, and there are people out there very paranoid about inflation. I looked at our TIPS to answer a questions in another thread and they were up 6.7% for the trailing 12 months to 9/30. These are the 2s of 2026, which we've held as inflation insurance since their birth.

Re short TIPS, I was talking about the ones that have a few months or maybe a year to live. I looked at them/secondary market once when I had some cash to park but their valuation is too complicated for me.

 

[OldShooter]

Quick question: I don’t suppose ibonds are traded on the secondary market in brokerages? I wanted to buy more than the 10k per year (on the order of doing 10x that or more). ...

So do we all.

 

[dm]

I bought some of these thinking they were for inflation protection.

I’m down a percent or two, not a lot, but I would have been better off leaving the money in a money market account.

Why aren’t these up when we are having record inflation?

 

[daylatedollarshort]

I bought some of these thinking they were for inflation protection.

I’m down a percent or two, not a lot, but I would have been better off leaving the money in a money market account.

Why aren’t these up when we are having record inflation?

Because TIPS funds have some of the same issues as other bond funds in a rising rate environment - no maturity dates, and they are holding on to bonds with lower real yields than current market rates, which they likely have to sell some at a loss.

 

[Golden sunsets]

Question about Tip individual bills: Does a Treasury inflation protected note showing on a secondary market screener, which shows a yield several basis points higher than a similar maturity treasury bill that is not inflation protected, (30 to 40 basis points higher), really pay out that much higher or is it in danger of decreasing in yield if inflation drops like a rock between buy date and maturity?

My guess is yes, but I wondered if it still made sense to purchase in short maturity situations (like 6 months).

 

[daylatedollarshort]

Question about Tip individual bills: Does a Treasury inflation protected note showing on a secondary market screener, which shows a yield several basis points higher than a similar maturity treasury bill that is not inflation protected, (30 to 40 basis points higher), really pay out that much higher or is it in danger of decreasing in yield if inflation drops like a rock between buy date and maturity?

My guess is yes, but I wondered if it still made sense to purchase in short maturity situations (like 6 months).

If you buy a TIPS with accumulated inflation, and we have deflation, then the price is adjusted downward, though never below par value. TIPS aren't a good deflation hedge. Nominals are better for deflation. On the plus side, when there are deflation fears, TIPS real yields can get in the 2 - 3% range, so it is a good buying opportunity, if you are more concerned about long term inflation than deflation.

 

[Koolau]

The vanguard funds are in my IRA. Buying the vanguard fund just makes it easy.

Yeah, I already know how to use my Vanguard account(s). I don't know how to use Treas.Direct or whatever. I'm trying to un-complicate my life as I get older. YMMV

 

[daylatedollarshort]

Yeah, I already know how to use my Vanguard account(s). I don't know how to use Treas.Direct or whatever. I'm trying to un-complicate my life as I get older. YMMV

We buy most of our TIPS through the Fidelity online site. If you know what you want to buy or are putting in an auction order, it only takes a couple of minutes to place the order.

 

[Koolau]

We buy most of our TIPS through the Fidelity online site. If you know what you want to buy or are putting in an auction order, it only takes a couple of minutes to place the order.

Yeah, it only takes 2 minutes to land a plane. Learning how to do that takes a bit longer but YMMV.

 

[daylatedollarshort]

Yeah, it only takes 2 minutes to land a plane. Learning how to do that takes a bit longer but YMMV.

Obviously it is your money and you can invest in what you want, but it isn't accurate to give others the impression buying TIPS is complicated. It doesn't take any longer to buy TIPS than it takes to by a CD on the Fidelity site. If you buy at auction, there isn't much of a decision process either. You just place an order by plugging in the number of bonds and the account to use if you have multiple accounts, and Fidelity does the rest.

Not everyone knows how to land a plane, but millions of small investors buy CDs, Treasuries, TIPS and other bonds every year.

 

[Montecfo]

I bought some of these thinking they were for inflation protection.

I’m down a percent or two, not a lot, but I would have been better off leaving the money in a money market account.

Why aren’t these up when we are having record inflation?

They protect you from inflation best if you buy them when inflation is muted or not expected. At other times, like now, people want to buy inflation protection and they bid up the price in a way that could offset much of the inflation protection.

They are not a no-brainer inflation hedge like i-bonds. You are making a bet on rates. And TIPs like all bonds carry interest rate risk. They have declined sharply in value this year in the face of rising inflation, which has no doubt surprised many TIPS investors.

They may be easy to buy but the investment decision is more complicated than it might appear, in my view.