Another TIPS question

[aja8888]

At age 81, and currently in good health, I am considering putting a chunk of my IRA funds into TIPS. Part of my existing collection of Treasury Bills are maturing and yields are down into the low 4% range for one year or less.

These are "does it make sense" type questions:

1. With say $250,000 available, does it make sense to buy, at auction, a 5 year TIPS in one purchase versus building a 5 year TIPS ladder?

2. Would the expected returns be the same for the 5 year period for the two purchases seeing they would be done in the same time period? I'm not sure if a ladder of these TIPS makes much sense versus just buying one lump at auction.

I don't need the cash from TIPS dividends in my IRA as there are also several CDs and treasuries maturing over the next 5 years in that account. Buying the TIPS is just for a small amount of inflation protection in the IRA, which is depleting at a 5% rate yearly due to RMDs.

I'm choosing a 5 year period because of my age and estimated time left on this side of the grass based on recent family and friends not making it beyond their mid to late 80's.

 

[pb4uski]

I think TIPS are unusually attractive these days at 1.85% - 2.05% real yields for 1-5 year maturities. I'd lean towards a 5-year ladder but I don't think it matters much.

 

[audreyh1]

A fantastic educational resource is the blog TIPSWatch Treasury Inflation-Protected Securities. He also compares relative values TIPS versus regular treasuries and gives his opinion.

 

[aja8888]

A fantastic educational resource is the blog TIPSWatch Treasury Inflation-Protected Securities. He also compares relative values TIPS versus regular treasuries and gives his opinion.

Thanks!

 

[Chuckanut]

Yes, we have a buying opportunity to acquire TIPS that offer a nice bump above inflation.

Personally, I think inflation in the foreseeable future will stay comfortably above the 2% goal. So adding TIPS in the range of 5-10 years seems like a good way to diversify my holdings as long as I can get the fixed rate in the area of 1.8% and higher. After taxes and inflation, they might yield a small positive return in real terms. YMMV

My biggest problem right now is that I don’t have any dry powder in my tax advantaged IRA where most of us like to keep our TIPS.

 

[Koolau]

I still don't feel like I understand TIPS well enough to invest in them. I know the basics but not the stuff like taxes, where to hold, how to buy, etc. I can see them as potentially attractive, but I also wonder "why" would I buy them. I already have "enough" (whatever that means.)

 

[Lsbcal]

I have always bought TIPS for our IRA's in the secondary market. It seems the current rates all along the curve are very good right now. At Vanguard (and probably other brokerages) one can have the rep do the purchase if you are uncomfortable with the info on the screens. Or you can follow along on your computer as the rep navigates a few screens to make the purchase and ask questions along the way.

If you hold to maturity you don't have to worry about the ups and downs of the real rates. You can see the history of the rates at: Treasury rates . Just select "Daily Treasury Par Real Yield Curve Rates" and your time frame.

Also one might want to know about the inflation factor at time of purchase. To read about this look up something like "Explain the TIPS bond inflation factor. Include what happens in inflationary periods and deflationary periods."

 

[GenXguy]

I invested in TIPS in my IRA a couple years ago. Biggest regret - missed out on all the great stock market returns.

I was having some fun with ChatGPT and Perplexity Pro yesterday to see if it could answer correctly regarding accrued interest income paid as part of TIPS purchase and later deducting it on tax returns (not in a retirement account). They didn't do so well. ChatGPT told me that it becomes part of the purchase price and isn't reported separately on taxes, Perplexity Pro told me you couldn't deduct it in the same year you purchase it, then it told me I could claim it even if I had OID from it (if any interest payments were less than accrued interest), then it told me that any accrued interest amount in excess of the interest income would have to be added to the cost basis (rather than carried forward to the next year). I finally got it straightened out stating I understood these things differently and provided a couple references along the way.

 

[audreyh1]

I have always bought TIPS for our IRA's in the secondary market. It seems the current rates all along the curve are very good right now. At Vanguard (and probably other brokerages) one can have the rep do the purchase if you are uncomfortable with the info on the screens. Or you can follow along on your computer as the rep navigates a few screens to make the purchase and ask questions along the way.

If you hold to maturity you don't have to worry about the ups and downs of the real rates. You can see the history of the rates at: Treasury rates . Just select "Daily Treasury Par Real Yield Curve Rates" and your time frame.

Also one might want to know about the inflation factor at time of purchase. To read about this look up something like "Explain the TIPS bond inflation factor. Include what happens in inflationary periods and deflationary periods."

Inflation factor is well explained over at TIPSWatch as well as what inflation factor and accrued interest you’ll be paying for at the next auction.

 

[Lsbcal]

Inflation factor is well explained over at TIPSWatch as well as what inflation factor and accrued interest you’ll be paying for at the next auction.

I went looking for the explanation but could not find it on that site. Do you have a link?

I think the association between inflation factor and your total TIPS current value is:

value = shares * price/100 * inflation_factor

 

[flyingaway]

I was looking at tips on auction at Fidelity, but did not find any.

 

[Chuckanut]

TIPS In-Depth

Let’s take a deep dive into the language of TIPS. By David Enna, updated June 24, 2023 Treasury Inflation-Protected Securities are a complicated investment, and it’s hard to find plain-…

tipswatch.com

Above also posting in another TIPS thread.

 

[Lsbcal]

One thing to be aware of is that in extreme periods TIPS could go way up in yields, i.e. existing TIPS could loose a lot but only temporarily. In October 2008 TIPS real yields spiked very high and TIPS did not create the offset to stocks in a balanced portfolio like nominal Treasuries.

Here is the chart:

This happened I think because investors holding more speculative assets looked around for something to sell and TIPS fit the bill. The TIPS market is not as deeply liquid as nominal Treasuries or perhaps it was shallower at that time. In any case, if you held to maturity it was not a problem.

 

[aja8888]

One thing to be aware of is that in extreme periods TIPS could go way up in yields, i.e. existing TIPS could loose a lot but only temporarily. In October 2008 TIPS real yields spiked very high and TIPS did not create the offset to stocks in a balanced portfolio like nominal Treasuries.

Here is the chart:
View attachment 53822

This happened I think because investors holding more speculative assets looked around for something to sell and TIPS fit the bill. The TIPS market is not as deeply liquid as nominal Treasuries or perhaps it was shallower at that time. In any case, if you held to maturity it was not a problem.

Ls, do you have a link to this chart? Is this yield the coupon yield at purchase/

 

[Lsbcal]

Ls, do you have a link to this chart? Is this yield the coupon yield at purchase/

The FRED site has several TIPS charts. Here is the one I referred to:

5yr FRED TIPS chart

 

[audreyh1]

I went looking for the explanation but could not find it on that site. Do you have a link?

I think the association between inflation factor and your total TIPS current value is:

value = shares * price/100 * inflation_factor

He usually discusses it in the context of a given blog. They always post a blog entry in anticipation of an upcoming auction,for example or after a recent one.

 

[aja8888]

The FRED site has several TIPS charts. Here is the one I referred to:

5yr FRED TIPS chart

Thanks!

 

[Koolau]

Does anyone have a site for a tutorial on Tips investing? What little I know about Tips has sorta turned me off to them until now. But I'm now thinking maybe I should learn more of the ins and outs of TIPS. Thanks.

 

[audreyh1]

Does anyone have a site for a tutorial on Tips investing? What little I know about Tips has sorta turned me off to them until now. But I'm now thinking maybe I should learn more of the ins and outs of TIPS. Thanks.

See link in post #12

 

[Koolau]

See link in post #12

Gaaaahhhhk! Missed it. Thanks.

 

[copyright1997reloaded]

TIPS are a way of doing an inflation hedge.

My reason for buying TIPS is that I believe our leaders will always try to take the easy way out - which is to run deficits and cause inflation.

As with all assets, they are subject to supply and demand. At 2.25A% real (plus inflation), I will buy some but not extreme amounts. If I ever see close to 4% real again, I will allocate much heavier into TIPS...because a 4% real return locked up is MORE than what I expect to do in equities/fixed for the rest of my life.

 

[audreyh1]

I just bought a couple of 5 year TIPS at auction in December 23 (reissue) and October 24 (original) in IRAs. I purchased because they were at multi-decade real yield highs. But that’s enough for me. They are very complex and I read quite a bit of TIPSWatch to grasp what was going on at auction. Fidelity tracks the current total value with the inflation index factor so at least I have a clue.

I use a sufficient equity exposure to keep up with inflation.

 

[OldShooter]

TIPS are a way of doing an inflation hedge.

Yahbut ... in many TIPS discussions here I see people talking about tiny positions, like 5% of a portfolio. IMO that is not an inflation hedge. We're holding more like three or four years' spending in TIPS. With that, we ought to be able to wait out the period it will take for our equities to start to provide inflation protection. The connection between equities and inflation is not IMO very fast at all.

My reason for buying TIPS is that I believe our leaders will always try to take the easy way out - which is to run deficits and cause inflation.

I don't even come at it from that angle. I view our TIPS just like I view the fire insurance on our house. I just want to be covered in case something bad happens, regardless of the cause. And, in the case of the TIPS, I'm getting protection against 2-digit inflation numbers which have happened in the past and will almost certainly happen again.

 

[Lsbcal]

The bond market predicts inflation better then anyone individual here.. even me, ha ha. If the Fed cannot get inflation predictions right with all their resources, we have little hope of getting it right.

I just buy TIPS because at the current rates we are at or near historically decent real bond market returns. So one does not have to guess right on the future rate path or on the future inflation path.

 

[tulak]

Most of my fixed income is TIPS. Looking to have around 6-8 years of base expenses covered, otherwise everything else is invested in equities.

I’ve said it before, but there’s no other investment you can make that will guarantee your return of inflation-adjusted principal. And you get a bit of real yield on top. That’s great insurance.