real interest rates hit 2.5%

[wabmester]

I just took a look at the real yield curve for today and noticed we hit 2.5% on the 20-year TIPS. That's the rate at which I start thinking about buying TIPS since that's the historical average real yield for long-term treasuries.

But rates seem to still be trending up, so I'm not buying yet. I wonder how high we'll go. I'd be happy to lock in some 3% TIPS, and I'd be jumping for joy if we hit 4% again.

 

[Nords]

I just took a look at the real yield curve for today and noticed we hit 2.5% on the 20-year TIPS.   That's the rate at which I start thinking about buying TIPS since that's the historical average real yield for long-term treasuries.

I read over on the Vanguard Diehard board that Larry Swedroe's been buying TIPS every 25 bp since they went over, I believe, 2.00%. You guys are probably bidding up the auction!

 

[Gone4Good]

I'm probably a buyer above 3% . . . that way I can lock in my expected withdrawal rate on the fixed income portfolio.

I hate the way these things are taxed though, so I'm not rushing in to buy. I'm hoping (most likely futilely) that Ibonds will reset to an equivalently high real yield in May.

 

[wabmester]

Oh, yeah, the tax thing.... Well, if you don't like being taxed on the reinvested inflation adjustment, then you can buy Vanguard's TIPS fund which distributes the adjustment as capital gains. Then it doesn't look much different than any other bond. But if you reinvest dividends and hold till maturity, then the bond makes more sense.

 

[GTM]

What do you think about the 5 or 10 year TIP as opposed to the 20.
There is a 5 year auction this month and a 10 year auction in July.

Do you think it is best to buy at Treasury Direct's auction or in the aftermarket?
No way of know what rate you will recive at the auction.

 

[wabmester]

There's almost no TIPS term premium these days, so the only reason to go longer term is if you think the rate is wonderful and want to lock it in for the long-term.

I like buying at auction since there's no transaction fee or spread to pay. You're guaranteed to get the current market rate (i.e., the auction determines the market rate), so I wouldn't worry about the "unknown rate" aspect.

Check the real yield curve just before the auction to get a sense of what you'll get:

real yield curve

 

[GTM]

Real curves below

04/13/06 2.31%  2.41%  2.48%  2.50% 

Would you think the April 5 year auction will offer a real return of appx 2.31%?

 

[Gone4Good]

Oh, yeah, the tax thing....   Well, if you don't like being taxed on the reinvested inflation adjustment, then you can buy Vanguard's TIPS fund which distributes the adjustment as capital gains.    Then it doesn't look much different than any other bond.   But if you reinvest dividends and hold till maturity, then the bond makes more sense.

I asked how Vanguard's TIPS fund was taxed in an earlier thread but didn't get an answer.  So you're saying they somehow distribute out the accreation as a capital gain distribution . . . I assume it is not a "qualified" distribution for tax purposes.

 

[wabmester]

Would you think the April 5 year auction will offer a real return of appx 2.31%?

The yields change daily, but it'll be pretty close, I bet.

So you're saying they somehow distribute out the accreation as a capital gain distribution . . . I assume it is not a "qualified" distribution for tax purposes.

Hmm, just checked and they do a cap gain distribution, but I think those are real cap gains on bonds sold. Looks like they distribute the inflation adjustment twice per year as an ordinary (non-qualified) dividend.