Another TIPS question

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.
I-bonds will do the same though in a very limited amount per year.
 
I-bonds will do the same though in a very limited amount per year.
But only apparently at 1.25% now for the fixed (real) rate.

We still have a lot of 3.4% iBonds purchased in 2001. In 2031 when they mature we will have a bit of a tax problem. Oh well.
 
But only apparently at 1.25% now for the fixed (real) rate.

We still have a lot of 3.4% iBonds purchased in 2001. In 2031 when they mature we will have a bit of a tax problem. Oh well.
Yeah tell me about it. Ours date to 2003, so I'm considering cashing some in earlier to spread out the taxes. I forget our rate, but think it was maybe 3+. Those were the days!
 
When will they auction the TIPS next time?
It depends on the TIPS maturity. For each maturity there are at least 2 auctions per year, initial offering and reopening. It’s complicated. How many of each depends on the maturity. When Auctions Happen (Schedules) — TreasuryDirect

You can find all treasury upcoming auctions here by type: Upcoming Auctions — TreasuryDirect. Looks like an initial offering auction for the 10-year TIPS will be announced today for the auction on 1/23.
 
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Read the TipsWatch site. Discussed with vanguard to try and get further education. Admittedly still far from a full understanding of the purchase process of TIPS.
But I’m struggling getting past the idea of paying over par. Paying $102k+ for a $100,000 par value. With a coupon that might only be less than a point? I saw some on the secondary market much worse than that. Hard to feel good about that unless you just think inflation is gonna go crazy. Feel free to tell me what I’m missing, cause I’m sure I probably am. These things aren’t simple.

As an aside, the vanguard bond rep they hooked me up with commented they haven’t seen many clients purchasing TIPS in the last couple years. Neither here nor there, but it surprised me some.
 
Read the TipsWatch site. Discussed with vanguard to try and get further education. Admittedly still far from a full understanding of the purchase process of TIPS.
But I’m struggling getting past the idea of paying over par. Paying $102k+ for a $100,000 par value. With a coupon that might only be less than a point? I saw some on the secondary market much worse than that. Hard to feel good about that unless you just think inflation is gonna go crazy. Feel free to tell me what I’m missing, cause I’m sure I probably am. These things aren’t simple.

As an aside, the vanguard bond rep they hooked me up with commented they haven’t seen many clients purchasing TIPS in the last couple years. Neither here nor there, but it surprised me some.
Most people wen't buying TIPS because regular T Bills were paying an immediate ~5%. With TIPS, you are buying a lower coupon and hoping you get an inflation bump over time to make up for the lower coupon %.
 
Most people wen't buying TIPS because regular T Bills were paying an immediate ~5%. With TIPS, you are buying a lower coupon and hoping you get an inflation bump over time to make up for the lower coupon %.
I don't see how you can compare say, 5 year TIPS, to T bills. The price in the secondary market is related to the inflation factor, so adjusted for past inflation since the issue date.
 
I don't see how you can compare say, 5 year TIPS, to T bills. The price in the secondary market is related to the inflation factor, so adjusted for past inflation since the issue date.
Not comparing them, just saying the quick 5% + interest payment took TIPS off the table for me and others. Plus, many people bought CD's at the same time. Inflation was dropping and buying long dated TIPS were not that popular.
 
I’m just not seeing why this is a good investment, unless one is betting on inflation rising a fair bit above current levels. That may happen. But my ability to predict inflation is about as poor as my ability to predict hot stocks, market downturns, interest rates, or many other things.
I have a mental block with paying more than par. If I invest $103,000 I want to know I’m going to get that $103,000 back. With hopefully some decent interest. Don’t want to invest $103,000 with the promise of only getting back $100,000 and the hope of more.
 
I’m just not seeing why this is a good investment, unless one is betting on inflation rising a fair bit above current levels. That may happen. But my ability to predict inflation is about as poor as my ability to predict hot stocks, market downturns, interest rates, or many other things.
I have a mental block with paying more than par. If I invest $103,000 I want to know I’m going to get that $103,000 back. With hopefully some decent interest. Don’t want to invest $103,000 with the promise of only getting back $100,000 and the hope of more.
TIPS are for preserving the purchasing power of today's dollars. Nothing more. In addition, as a cherry on top, you get around 2% interest paid out every 6 months.
If you invest $103,000 in a 10Y TIPS, you will surely get back more than 103K if the inflation is non zero for the next 10 years. The chances that inflation stays at zero year over year for the next 10 years is pretty slim..
 
TIPS are for preserving the purchasing power of today's dollars. Nothing more. In addition, as a cherry on top, you get around 2% interest paid out every 6 months.
If you invest $103,000 in a 10Y TIPS, you will surely get back more than 103K if the inflation is non zero for the next 10 years. The chances that inflation stays at zero year over year for the next 10 years is pretty slim..
Not quite right. Yes you get the coupon which needs to be reinvested at the current rates, but the real reason you invest in TIPS is because you get a REAL rate of return above inflation. If inflation runs 2.5% and the TIPS you buy have a yield to maturity of 2.0% then you should get 4.5% on your investment.

Not a get rich scheme but better then just mere preservation of purchasing power.
 
......

As an aside, the vanguard bond rep they hooked me up with commented they haven’t seen many clients purchasing TIPS in the last couple years. Neither here nor there, but it surprised me some.
Maybe they locked in the 0% real yield TIPs that were available couple of years ago :)
 
Not quite right. Yes you get the coupon which needs to be reinvested at the current rates, but the real reason you invest in TIPS is because you get a REAL rate of return above inflation. If inflation runs 2.5% and the TIPS you buy have a yield to maturity of 2.0% then you should get 4.5% on your investment.

Not a get rich scheme but better then just mere preservation of purchasing power.
If you buy a 10 year TIPS with 2% coupon for $1000 exactly at par today, the invested money returned to you at the end of 10 years is $1000 + inflation adjustment over 10 years. This is the purchasing power preservation I was talking about.
You also get periodic payments of the coupon rate applied to inflation adjusted principal, which is the icing on the cake.
The coupon rate determines the real yield and in this case the real yield would be exactly 2% since TIPS was purchased at par.
 
At auction
10-Year TIPS January 16, 2025
30-Year TIPS February 13, 2025
10-Year TIPS March 13, 2025
5-Year TIPS April 10, 2025
for the 10-year TIPS the announcement was today 1/16, the auction is on 1/23.

I don’t know about the rest.
 
At auction

for the 10-year TIPS the announcement was today 1/16, the auction is on 1/23.

I don’t know about the rest.
For folks that don't know, it means you can tell your brokerage you want to buy X amount between 1/16, and the early morning of the auction date on 1/23.

When I buy an auction treasury, I buy before the auction date, in case my brokerage closes taking orders early on the auction day.
 
Read the TipsWatch site. Discussed with vanguard to try and get further education. Admittedly still far from a full understanding of the purchase process of TIPS.
But I’m struggling getting past the idea of paying over par. Paying $102k+ for a $100,000 par value. With a coupon that might only be less than a point? I saw some on the secondary market much worse than that. Hard to feel good about that unless you just think inflation is gonna go crazy. Feel free to tell me what I’m missing, cause I’m sure I probably am. These things aren’t simple.

As an aside, the vanguard bond rep they hooked me up with commented they haven’t seen many clients purchasing TIPS in the last couple years. Neither here nor there, but it surprised me some.
I buy at auction so I don't pay above par value.
Because at redemption it will pay out par value plus the interest earned, paying above par means losing the above par amount upon maturity.
 
I buy at auction so I don't pay above par value.
Because at redemption it will pay out par value plus the interest earned, paying above par means losing the above par amount upon maturity.

That’s not right.

For TIPS bought on the secondary market, you can easily pay more than par due to the inflation adjustment. You will get this back, assuming there is no deflation.

For example, if the inflation adjustment is 1.1 and you buy a par 1k TIPS, you’ll pay 1.1k and will receive that amount back if the inflation adjustment stays at 1.1 until maturity. That would be the scenario with no inflation. If there’s inflation, then the inflation adjustment goes up, and the inflation adjustment goes down if there is deflation.

Deflation is the only risk you have if you pay above par, since TIPS will always return a minimum of par at maturity.
 
That’s not right.

For TIPS bought on the secondary market, you can easily pay more than par due to the inflation adjustment. You will get this back, assuming there is no deflation.

For example, if the inflation adjustment is 1.1 and you buy a par 1k TIPS, you’ll pay 1.1k and will receive that amount back if the inflation adjustment stays at 1.1 until maturity. That would be the scenario with no inflation. If there’s inflation, then the inflation adjustment goes up, and the inflation adjustment goes down if there is deflation.

Deflation is the only risk you have if you pay above par, since TIPS will always return a minimum of par at maturity.
Another thing about TIPS even at auction is that:
  1. The TIPS mature mid month and that is also when any coupon is paid every 6 months.
  2. The auction occurs 3rd week.
  3. The TIPS are issued on the last day of the month.
  4. Between the auction and the issue there is (usually) some increase in inflation and some accrued interest back-dated to the 15th. You have to pay for this upfront when paying for the TIPS but you get any accrued interest paid back at the first coupon payment because you get paid interest for the full 6 months even though you have only held the TIPS for 5 1/2 months.
  5. The inflation factor is known at auction because TIPS use prior recent inflation stats, not guess the future. I think there is a 3 month lag.
  6. By the time the TIPS is issued at the end of the month you have already earned whatever inflation factor you had to pay for at auction.
The bidding at auction has to take all of this into account! :facepalm:

And for a reopening TIPS auction the coupon has already been set from the original auction, so depending on conditions you may well pay slightly above par. This is not unusual and not a sign of a bad deal.

Also for the reopening auction, you will still be paid the coupon and mature at the same time as the original issue, so now you are paying for a few more months of accrued interest as well as inflation change over that longer time period. Again the bidders at auction take all of this into account.
 
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If you buy a 10 year TIPS with 2% coupon for $1000 exactly at par today, the invested money returned to you at the end of 10 years is $1000 + inflation adjustment over 10 years. This is the purchasing power preservation I was talking about.
You also get periodic payments of the coupon rate applied to inflation adjusted principal, which is the icing on the cake.
The coupon rate determines the real yield and in this case the real yield would be exactly 2% since TIPS was purchased at par.
Suppose I buy TIPS on the secondary market and they are listed as a yield to maturity of 2%. The coupon could be some other value like 0.5%. That real 2% yield then does not just come from the coupon, no?

EDIT: I just happened now to be looking up a TIPS maturing in Jan 2030. It was issued in Jan 2020 and has a yield to maturity of 1.94%. The coupon is only 0.125.

P.S. I do not consider myself a TIPS expert and don't mind admitting it. If I make mistakes in posts I want to hear from you. I think humility in these matters is good. :)
 
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