OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
OK, there may be something radically wrong with this thinking. So all you bond gurus can let me know:
(This is all in an IRA, so tax considerations do not apply.)
Just to have something concrete, I am looking at theoretically buying CUSIP 912810FH6. This is a 30 year 3.875% coupon TIPS with an index ratio of about 1.5. So, on $10,000 face value it is now paying about $580/year in interest.
Pricing right now gives me a YTM of about 0.875%, so the bond is priced at almost a 100% premium to face value.
If I am looking for current cash and buy this bond, my semiannual "interest" payments are some interest and, effectively, some return of principal. At maturity I'll receive only about half of what I paid. (Ignoring inflation adjustments for the moment.)
But ... getting less at maturity may be OK. After all, we will be ten years older and have less lifetime to be vulnerable to high inflation, which is our main reason for buying TIPS in the first place.
This is not a bet-the-farm strategy. Whatever we do with a TIPS scenario like this it will be less than 15% of our total portfolio and less than 50% of our fixed income bucket.
Stated more generally, the idea is to buy a high-coupon TIPS to generate current cash, accepting the fact that the TIPS is a wasting asset if YTM at purchase is substantially below the coupon. I guess one could do this with any bond, but we are interested in the inflation protection.
Thoughts?
(This is all in an IRA, so tax considerations do not apply.)
Just to have something concrete, I am looking at theoretically buying CUSIP 912810FH6. This is a 30 year 3.875% coupon TIPS with an index ratio of about 1.5. So, on $10,000 face value it is now paying about $580/year in interest.
Pricing right now gives me a YTM of about 0.875%, so the bond is priced at almost a 100% premium to face value.
If I am looking for current cash and buy this bond, my semiannual "interest" payments are some interest and, effectively, some return of principal. At maturity I'll receive only about half of what I paid. (Ignoring inflation adjustments for the moment.)
But ... getting less at maturity may be OK. After all, we will be ten years older and have less lifetime to be vulnerable to high inflation, which is our main reason for buying TIPS in the first place.
This is not a bet-the-farm strategy. Whatever we do with a TIPS scenario like this it will be less than 15% of our total portfolio and less than 50% of our fixed income bucket.
Stated more generally, the idea is to buy a high-coupon TIPS to generate current cash, accepting the fact that the TIPS is a wasting asset if YTM at purchase is substantially below the coupon. I guess one could do this with any bond, but we are interested in the inflation protection.
Thoughts?