individual tip bonds

[Stevewc]

There's been some discussion on whether to sell tip bonds that were bought back in 2008 over at bogleheads. Some of us could sell them with a long term capital gain. These thoughts came to me so I posted at the heads site and now here. What are your thoughts on this?

I too bought individual tip bonds when it was the (Swedroe) craze in 2008. No offence to Larry, I'm happy with the purchase so far.
I've noticed several threads about tips and whether to sell them now that there is a capital gain possibility. I could make about 14K on the ones I have now.
So I thought of this:
You guys help me turn this rock over and look at the other side.
If I decided to sell them, Who would buy them?
Why would they buy them?
Whats the thinking on this?
If a buyer thinks they are worth having then why should anyone sell?
Help me and others see/examine this other side of the rock/coin.
Thank You in Advance,
Steve

 

[Darryl]

Why did you buy them?

 

[haha]

The fact that you would have a capital gain is either neutral, or negative if the TIPS are in a taxable account.

Selling is a market timing decision. Assuming that you are not exiting TIPS forever, you would be betting that you can sell them today and buy them(or other TIPS) back later at a meaningfully lower price.

Do you feel lucky?

Ha

 

[Stevewc]

They are in a tax advantaged account.
My original intention was to hold until maturity.
Not sure how lucky I'm feeling.
Trying to get some balance as to why to sell or not and why someone else would want them.
The largest amount of money is in a 5 year tip.
Steve

 

[FIREd]

Personally I would not be interested in buying your 5-year TIPS because I think it's unlikely inflation will be a big problem between now and 2013 when your bonds mature. If I had 5-year TIPS and I could sell them for a gain, I'd probably sell them.

My individual TIPS will mature in 15-20 years and I think they could become handy over that time frame, so I'm not selling.

 

[Stevewc]

Personally I would not be interested in buying your 5-year TIPS because I think it's unlikely inflation will be a big problem between now and 2013 when your bonds mature. If I had 5-year TIPS and I could sell them for a gain, I'd probably sell them.

My individual TIPS will mature in 15-20 years and I think they could become handy over that time frame, so I'm not selling.

So, may be I should hold the longer ones and sell the 5 year?
That does seem to make good sense.
Is there any way to weigh the odds of me making 13k in the future if I hold them all?
This was my first tip auctions and I was uneasy about tying up the money for very long time frames. I realize now I should have gone longer. You live and learn. But still a profitable investment at this time.
I appreciate the thoughts from the group.
Steve

 

[Stevewc]

Just looked them up at my brokerage.
I bought at 89.11 each for them (5 yr. only) and today worth 103.586 according to the site.
Need to edit post to say that today the bonds show selling (would sell) at a gain of 14k.
Steve

 

[Darryl]

I did sell a few that I bought above par with some exposure if we have deflation when the 30yr was yielding 1.5 with a plan to buy back in when the yield is 2.25%+ it has now fallen to 1.35 making me look less than bright. Thankfully it was a very small part of my TIPS assortment. Months later it is still in cash waiting, waiting, waiting... Note to self the plan is to buy and hold to maturity. Makes it a lot easier to leave the stash alone when I notice the nice run up and know historically TIPS yields tend to bounce around. I am holding the rest though I am waiting to buy more.
If yours were purchased as a quick flip I'd sell if they were a buy and hold I'd hold. etc...

 

[Stevewc]

Months later it is still in cash waiting, waiting, waiting... Note to self the plan is to buy and hold to maturity.

I know a lot about the timing and waiting game.
I have cash I was waiting to buy muni bonds with.
I thought I would wait until the 10 yr. treasury bonds hit 4% and jump right in. I thought that would be a great time to get into the muni bonds since they seemed to move along with the other bond markets.
Oh, I'm still waiting all right, guess I'll be doing that for a while longer.
Oh Well, I ended up in CD's that are OK.
But that's all I can say about them.
Steve
PS. I've heard it said that trying to time the market is a loser's game.
I'm now a believer but its a little late.
Put a big "L" on my forehead !!

 

[Gone4Good]

I punted most of my TIPS because I think there are better options available, namely CDs.

Here's the state of the market:
1) 5 yr TIPS yield (0.5%) real
2) 5 yr Treasuries yield 1.12% nominal
3) 5 yr market inflation expectations are 1.62%
4) 5 CDs, with a 60 day early withdrawal penalty, yield 2.5%

What happens in the future:
1) Deflation/low inflation: In a deflationary environment TIPS perform poorly. With a negative real yield, 5-yr TIPS lose real purchasing power when inflation is flat or negative. Meanwhile a positive nominal yield results in a positive real yield.

2) High Inflation If inflation rages, 5 yr TIPS still lose real purchasing power but will perform far better than 5-yr treasuries. But if inflation picks up, interest rates will also rise, and I'll be able to withdraw my CD deposits at the nominal cost of 40bp and reinvest them at higher prevailing market rates.

3) ~3% inflation: 3% is the break-even inflation rate where I'm indifferent between 5-yr TIPS and 5-yr CDs. Anything below that, I'm better off with the CDS. Anything above that, I'm better off with TIPS. I'll be marginally worse off at a 3.5% inflation rate, because I probably won't get compensated for cashing out my CDs, but the pain is limited to tens of basis points. Anything materially above that, I'll probably be better off swapping out of my CDs into higher market rates.

In short, I think I'm either better off, or not materially harmed, in nearly all market environments by owning 5-yr CDS, rather than with 5-yr TIPS. I still own some 30 yr TIPS, because I can't replicate 30 inflation protection in any other way. The key to the story is the relatively low cost put option embedded in some, but not all, CDs and their still higher than market interest rates (2.5% vs. 1.12% for essentially the same US Government credit risk).

 

[bamsphd]

They are in a tax advantaged account.
My original intention was to hold until maturity.
Not sure how lucky I'm feeling.
Trying to get some balance as to why to sell or not and why someone else would want them.
The largest amount of money is in a 5 year tip.
Steve

Your intent was to hold until maturity, but what was the purpose of your investment? Sell if your purpose has changed, has been satisfied, or you have found a better way to satisfy your purpose, otherwise continue to hold.

I own a five year TIPS ladder, all bonds purchased at issue. Each purchase in the ladder represented roughly 4% of my portfolio's market value when purchased. Their purpose in my portfolio is to act as basically a five year emergency fund capable of covering most scenarios short of a collapse where only guns, food, and ammo are useful. There is no alternative investment I'm aware of that is as secure for a US investor with this purpose. My purpose has not changed, and I don't have a better alternative investment for my purpose, so I will continue to hold my TIPS ladder.

Your paranoia may vary.

Note that I actually expect the future to be much closer to typical, than to a great depression with hyperinflation. If the future is closer to typical, then most of my other investments will probably greatly out perform my TIPS ladder. However, none of my other investments will as safely satisfy the emergency fund purpose that prompted me to create the ladder. Having a TIPS ladder is basically a form of insurance against both bear markets, and a bunch of lower probability financial scenarios. I could purchase similar, but slightly less comprehensive, insurance by using a ladder of bonds or CDs that were not inflation indexed. Using TIPS costs a little bit in expected return, but I opted to pay for the hyperinflation rider.

 

[haha]

Your intent was to hold until maturity, but what was the purpose of your investment? Sell if your purpose has changed, has been satisfied, or you have found a better way to satisfy your purpose, otherwise continue to hold.

I own a five year TIPS ladder, all bonds purchased at issue. Each purchase in the ladder represented roughly 4% of my portfolio's market value when purchased. Their purpose in my portfolio is to act as basically a five year emergency fund capable of covering most scenarios short of a collapse where only guns, food, and ammo are useful. There is no alternative investment I'm aware of that is as secure for a US investor with this purpose. My purpose has not changed, and I don't have a better alternative investment for my purpose, so I will continue to hold my TIPS ladder.

Your paranoia may vary.

Note that I actually expect the future to be much closer to typical, than to a great depression with hyperinflation. If the future is closer to typical, then most of my other investments will probably greatly out perform my TIPS ladder. However, none of my other investments will as safely satisfy the emergency fund purpose that prompted me to create the ladder. Having a TIPS ladder is basically a form of insurance against both bear markets, and a bunch of lower probability financial scenarios. I could purchase similar, but slightly less comprehensive, insurance by using a ladder of bonds or CDs that were not inflation indexed. Using TIPS costs a little bit in expected return, but I opted to pay for the hyperinflation rider.

I see the issue this way also. BTW, Ii your ladder constructed of an annual purchase of 4% of your portfolio, or more frequent purchases, say quarterly, but still on a 5 year ladder construction?

Ha

 

[jebmke]

I sold my 2018s but I am holding 2025s to see what happens with QE2. It is probably priced in but the longer maturity is better match for my plans. Took a 25% gain on the 2018s.

 

[bamsphd]

I see the issue this way also. BTW, Ii your ladder constructed of an annual purchase of 4% of your portfolio, or more frequent purchases, say quarterly, but still on a 5 year ladder construction?
Ha

Annual purchases for a few reasons.

1. Lately only one of the annual 5 year TIPS auctions has been a new issue per year. The others have been re-openings rather than new issues. That is not the end of the world, but does diminish the benefits of spreading out the purchases.
2. Way back when I didn't have much money, I bought smaller Treasury lots through Treasury Direct, trying for more diversification. Then one time I needed to sell one entire lot, plus part of another lot to raise the cash for something. I don't recall what I needed the cash for, but I do still recall being really annoyed that I had to pay TWO commissions to sell bonds just because I was selling from TWO lots. Since then, I've preferred larger lots! If I used dryer sheets at all, I'd try to get them used!
3. Holding only 5 blocks of TIPS is simpler to deal with on my taxes than holding say the 20 blocks of TIPS using a quarterly ladder would require.

There are some downsides to using bigger blocks.

1. You need a larger short-term liquidity reserve. My short-term reserve is usually a little more than 4% of my portfolio, so it is not a big issue, but it can be an issue when rolling over a ladder rung.
2. You are a little more vulnerable to fluctuations in interest rates. I actually did defer my normal April purchase during the crash until the fall reopening because I just could not bring myself to purchase TIPS at what was then a new extremely low real yield that April. If I was using quarterly rungs, I might have found it easier to hold my nose. I was hardly happy with the yield that fall, but it was somewhat improved, and I didn't want my ladder to be missing a rung, so I held my nose and purchased the rung during the final reopening of the year. On the bright side, since it was a reopening, the maturities of the bonds in my ladder maintained their nice even one year spacing.

Note: My annual income required to retire has grown faster than my portfolio over the past five years, so I'm still pulling in a salary. I don't know if I'll tweak my ladder system when I retire or not. I'm tempted to make it a little longer, but 10 years seems a bit too long.

 

[haha]

Thank you, that is a very helpful response.

Ha

 

[brewer12345]

For OP, I think it is largely useless to speculate on the motivations of buyers and sellers of such bonds. Many transactions are driven by things that do not apply to you or I ( either they are nuts or trying to hedge a liability, in which case the buyers don't care about relative value). Do what makes sense for you.

One thing that is certain about bonds: absent default, they go to par at maturity. So if you have a sizable capital gain, it frequently makes a lot of sense to sell to the willing buyers and take your capital elsewhere. Admitedly, with TIPS it gets a little "weird" in determining what par is, but the principal is the same. How much farther could your TIPS feasibly appreciate? How many standard deviations off the mean would it require to generate a further capital gain? When you start getting out on the probability curve, it is probably time to take profits.

Earlier this year I sold a whole pile of bonds at a significant cap gain. Was I sure that they would not appreciate further? Nope, and most of them rallied another 5 points. But the downside outweighed the upside, so it was time to collect my winnings and go elsewhere. You always wanting to be shooting the fish in the barrel, not trying to prove that you have the biggest brass ones by shooting the eye out of a fly on the wing.

 

[Stevewc]

Thanks to everyone that read or responded to my thread.
Now a couple more dumb ?'s

I'm very new/green when it comes to buying & selling individual bonds.
If I do decide to put my 5 year bonds up for auction, do you think they will sell?
They are held by vanguard brokerage services in an IRA.
Wondering if all auctions of this type end with positive results and the bonds sell?
I assume I would not pay a fee if by chance they did not sell and the auction ended?
These may be stupid questions, if so easy to answer.
Thanks,
Steve

 

[haha]

Thanks to everyone that read or responded to my thread.
Now a couple more dumb ?'s

I'm very new/green when it comes to buying & selling individual bonds.
If I do decide to put my 5 year bonds up for auction, do you think they will sell?
They are held by vanguard brokerage services in an IRA.
Wondering if all auctions of this type end with positive results and the bonds sell?
I assume I would not pay a fee if by chance they did not sell and the auction ended?
These may be stupid questions, if so easy to answer.
Thanks,
Steve

You cannot put your bonds up for auction. Your broker can sell them for you in the secondary market.

Ha

 

[FIREd]

Thanks to everyone that read or responded to my thread.
Now a couple more dumb ?'s

I'm very new/green when it comes to buying & selling individual bonds.
If I do decide to put my 5 year bonds up for auction, do you think they will sell?
They are held by vanguard brokerage services in an IRA.
Wondering if all auctions of this type end with positive results and the bonds sell?
I assume I would not pay a fee if by chance they did not sell and the auction ended?
These may be stupid questions, if so easy to answer.
Thanks,
Steve

The auction process is for newly issued TIPS. Vanguard Brokerage will try to sell your existing TIPS on the secondary market. You can check the approximate price they will fetch by looking at the bid price for those particular bonds (go to Vanguard's online bond desk during business hours and check out the secondary treasury/TIPS section. The bid price will be the red number). The bid price can jump around quite a bit intraday, so you'll have to wait until your order executes to know for sure what price you received.

 

[Stevewc]

Maybe the word auction is the wrong term to use.
I understand that the brokerage will do the selling.
I see the price seems to be around 103 for the 5 year tips in the secondary market as of last week.

Will I be charged any type brokerage fee's if the bonds do not sell?
Is the bond market such that I can move/sell these things any time I want to?
Opinions? Thoughts?
I mean "FD" has already said he would not want to buy the 5 year tips.
Thanks,
Steve

 

[keegs]

Thanks for this insightful/informative discussion on the machinations of bonds and bond trading.

 

[FIREd]

Maybe the word auction is the wrong term to use.
I understand that the brokerage will do the selling.
I see the price seems to be around 103 for the 5 year tips in the secondary market as of last week.

Will I be charged any type brokerage fee's if the bonds do not sell?
Is the bond market such that I can move/sell these things any time I want to?
Opinions? Thoughts?
I mean "FD" has already said he would not want to buy the 5 year tips.
Thanks,
Steve

I can't imagine that your TIPS would not sell, it's a pretty liquid market. If your TIPS were not in demand, the price would go down until they would become attractive again. If Vanguard say the bid price for your bonds is 103, that's what the dealer is willing to pay you right now, so it seems there are buyers of 5-year TIPS out there (just not me ).

You will be charged a brokerage fee only when the order executes. You can sell them whenever the bond market is open.

Since you are new to trading TIPS on the secondary market, also note that the bid quotes provided by most brokerage firms (VG included) are not as straight forward as they might appear. That's because, unlike nominal bonds, TIPS are quoted in real dollars but traded in nominal dollars.

The bid price quoted by Vanguard is expressed as a percentage of inflation adjusted principal and not as a percentage of face value.

Each one of your bonds has a face value of $1,000.
Your 5-year TIPS maturing in 2013 currently have an index ratio (also called bond factor rate or inflation factor) of ~1.033 according to treasury direct.
Therefore your bonds' inflation adjusted principal is $1,033.
So, if Vanguard's quoted bid price is 103, you will receive (103 x $1,033) / 100 = $1,063.99 for each one of your bonds.

You will also receive the interests accrued by the bond since the last interest payment.

 

[haha]

OP, do yourself a big favor and just stand pat.

 

[Stevewc]

OP, do yourself a big favor and just stand pat.

Ha,
I'm open to your suggestion as well.
Could you enlighten me as to your thinking on this?
Private message or open forum is OK with me.
A big Thank You goes out to everyone,
Steve

 

[Stevewc]

FD,
How are things going in retirement and N.A.these days?
If L.A. is lower alabama then I guess you are in N.A., right?
Hope all is well,
Steve