Ouch! Anyone notice the 10-yr TIPS auction results?

[Maurice]

Look like inflation expectations have changed quite a bit in the last year.

The 10 yr TIPS auction cleared at a yield of 1.655% !

Last year at this time the auction result was 2.449%.

Competitive bids were similar in both auctions (16B vs 15B) but non-competitive bids (from folks like us) increased from 57MM last year to 96MM this year.



I intend to buy the 20-yr TIPS at auction next week. I still will (since I'm starting a TIPS ladder) but I really was hoping for 2%. Given the results with the 10 year I'll be happy if it yields 1.4-1.5%.

 

[LOL!]

I don't think it makes sense to buy TIPS now. Demand is high and prices are low. I think demand is high because people see inflation happening (energy prices up!) and think that TIPS will protect them from inflation. I don't think people understand TIPS and how they can lose you money. Also TIPS were up more than 11% last year, so there is this recency bias as well.

Here is a link in the AA tutorial with useful links about TIPS to read:
http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-3.html#post581581

Also, someone else posted this graph on TIPS yields: St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity
The idea is to buy when the blue line is above 2.5% and sell when it is below 1.5%. What could be simpler?

 

[FIRE'd@51]

I think the reason TIPS rates are so low is because of a combination of flight to quality (US Treasuries) and fears of a slowdown of the US and world economies. The nominal 10-year Treasury is yielding about 3.8%, so the expected inflation embedded in the bond market (nominal rate - TIPS rate) is approximately the same as it was back in July when 10-year TIPS auctioned at 2.75%.

I would not be a buyer of TIPS at these rates. I bought some in July and sold them (too early) back in November when the yield went under 2% for about a 7% gain in 3 months. As LOL says, they are very volatile with respect to changes in real rates. At current rates, the duration of the 10-year TIPS is about 9, which means that a 1% increase in real rates will cause about a 9% decline in the price of the TIPS.

 

[mathjak107]

im still holding tips at this point, in fact bought more. they are a good trading vehicle along with longer term bonds lately.. as low as they maybe lets not forget that 40 years ago when a passbook savings account paid 5-1/4% we all scoffed at them as a joke getting higher interest elsewhere...... that would be a great deal today

lets not forget the early 2,000's and the less than 1% money market rates. the tips are more about capital gains then interest in my opinion.

 

[cute fuzzy bunny]

So its TIPS @ ~1.5% and gold at ~875 that are the good investments. Gotcha.

At these price points, I'd be looking for capital losses AND pitiful interest payments.

 

[twaddle]

I intend to buy the 20-yr TIPS at auction next week. I still will (since I'm starting a TIPS ladder) but I really was hoping for 2%. Given the results with the 10 year I'll be happy if it yields 1.4-1.5%.

You can predict the auction results by looking at the current yield curve. The 20-year is at 1.86% real right now. I've sold all my shorter-term TIPS, and I hope the 20-year yield will drop a bit more so I can sell those too.

For a benchmark, I use the 50-year average real yield on nominal long-term treasuries: 2.56% real. Buy TIPS when the yield is >= the long-term average.

 

[haha]

You can predict the auction results by looking at the current yield curve. The 20-year is at 1.86% real right now. I've sold all my shorter-term TIPS, and I hope the 20-year yield will drop a bit more so I can sell those too.

For a benchmark, I use the 50-year average real yield on nominal long-term treasuries: 2.56% real. Buy TIPS when the yield is >= the long-term average.

Good summary. I sold my 5 year TIPS already, and have re-deployed the proceeds into dividend yielding stocks. It is pleasing how much I 've made in TIPS and shorter term treasuries just from recent interest rate moves. In particular, TIPS last winter at ~2.75% real have really paid off, considering the low risk of the position.

I figure my absolute risk does go up with the switch to equities, but the yield should also go way up. (So far I am down slightly on what I have bought.) But some of these stocks look cheap to me. I think I am may be 75-80% equity by now; I should check. Right now I am looking at my fixed more as dry powder than as return producing investments, though as Big Ben pushes down interest rates the intermediate term nominal rate treasuries should continue to appreciate.

Also, if we get a huge bounce, most of the equity in the tax deferred account may get sold again. I do believe that the economic environment is challenging at best.

Ha

 

[mathjak107]

So its TIPS @ ~1.5% and gold at ~875 that are the good investments. Gotcha.

At these price points, I'd be looking for capital losses AND pitiful interest payments.

yep beautiful gains off both last year and so far this year. ill take these gains anyday of the week. 9% on the tips last year and so far going in and out of them this year about 5% in 3 weeks plus interest . gsg was up 31% last year and so far flat ytd.

in the econmic climate we are in now its not about the interest its about the capital gains you can see. while rates are low the perception of inflation drives the tips 1-1/2 % up or down in a day........

i agree though as a long time hold im not so sure i would want to do it at this low rate

 

[Mysto]

What about TIPS FUNDS. I think there was pretty much an agreement some time ago that bond funds over time revert to the (nominal?) yield.

What about TIPS funds. Right now they have a 1.x yield but in the future it might be 2.X. So if you were to buy TIPS funds now and hold them for a few years... What should one expect with TIPS funds over time?

 

[clifp]

I am wondering if I should sell my TIPs. I bought them just under par with a coupon of 3.875% back in 2000 but sadly they mature in Jan 2009. I assume there is a small premium for the above market return but I am having trouble figuring out how much the premium is.

I am right that for additonal 1 year until maturity should be the existing coupon 3.875 - the current rate 1.655 * the inflation factor?

They are in an IRA so no tax consquence. Of probably greater concern is that selling these will drop my asset allocation from just under 30% bonds/CDs to 20%. Yes I am being a dirty market timer but I like after Xmas sales.

 

[Dawg52]

What about TIPS FUNDS. I think there was pretty much an agreement some time ago that bond funds over time revert to the (nominal?) yield.

What about TIPS funds. Right now they have a 1.x yield but in the future it might be 2.X. So if you were to buy TIPS funds now and hold them for a few years... What should one expect with TIPS funds over time?

I own the TIP etf and have roughly a 6.5% appreciation gain since last April. Closer to 10% including distributions. I bought it to be part of my bond allocation and planned to just hold. Not going to buy anymore and might trim back a little to bring back in line.

The bond experts will have to answer your question as to what to expect over the long haul.

 

[FIRE'd@51]

.
I am right that for additonal 1 year until maturity should be the existing coupon 3.875 - the current rate 1.655 * the inflation factor?

In theory you are correct except for the fact that the YTM won't be 1.65% since your TIPS have only one year until maturity. Like all bonds, TIPS also have a yield curve. For example, the YTM on 5-year TIPS is currently near 0.85%. My guess is that your TIPS may be trading near 103.

You need to find the market price of your particular TIPS, which you can get from your broker. Vanguard has a bond trading page on its web site which will give you the bid/offer of any TIPS once you enter the CUSIP. I'm sure other brokers and mutual funds have similar pages. If not, just call your broker for a price. The price you obtain is then multiplied by the inflation factor. You will also receive any accrued interest.

 

[clifp]

In theory you are correct except for the fact that the YTM won't be 1.65% since your TIPS have only one year until maturity. Like all bonds, TIPS also have a yield curve. For example, the YTM on 5-year TIPS is currently near 0.85%. My guess is that your TIPS may be trading near 103.

You are right I wasn't taking into account the short maturity time. I just sold it or 103.32 so I guess that says that investors are willing to accept just .53% real return for a 1 year yield. I am amazed. Definitely the best fixed income investment of my life bought at 98.62 back in 2000, a 25% inflation increase, plus steadily increasing interest payments.

Best of all I now have lots of cash to buy beaten down stocks.

 

[Tiger]

25% of my portfolio (50% of the bonds) is VIPSX. Would it make sense for me to reduce that to 10% of the portfolio and put the difference into short term bond funds?

 

[twaddle]

If you wanted to try to time the market, moving some from VIPSX to VFSUX wouldn't be a bad idea.

I moved mine into muni CEFs with a tax-equivalent yield of around 6.5% (and those funds have gone up nearly 10% since I switched). Never thought bonds could be so much fun.