Bonds vs. Inflation

[clifp]

Personally, I am hoping to see a few years of 10% inflation and I imagine most of the policy makers won't mind it either. Frankly most of our economic problems would go away if we could wave a magic wand and increase the price of everything 20% (especially houses).

Conventional wisdom by most "smart" investors is for a period of future inflation, unfortunately CW has proven to be wrong a lot recently.

As for a period of hyper inflation 40% or so, I think it is very unlikely simply because, the government has shown it will do anything to prevent the system from getting out to extreme. We will see a WWII, or Nixon era wage and price controls long before we see 40% inflation.

 

[brewer12345]

I'm not betting on a less likely scenario. I'm covering my a$$ against a decent possibility. You aren't covering your a$$ against anything. My closer expectation ranges from 7% to 17% inflation. I mean do you realize that it is just as likely for you to be negative 10% in real dollars as it is for me to be underperforming your bonds by 5%(in this case I'm assuming 3% inflation). There is absolutely no validity to the notion that you're taking less risk with your corporate bonds. And reasonable assumptions put us about even or in my favor in the future. And by the way 40% inflation to you right now is about as likely as a 50% crash in the market was to someone 2.5 years ago. If there is a reason to believe they are possible, you at least need to acknowledge them.

But I'm starting to get bored of this. I'm just going to end up looking forward to the bragging rights in the future when inflation is in the double digits.

You assume (incorrectly) that all I have is corporates. Actually, my largest positions are levered owners of physical assets. An inflationary scenario would suit them just fine.

As for sustained 40% annual inflation being likely, well, I think I would happily bet that will not come to pass. I could be sold on a brief period of 5 to 8% inflation, but 40% is banana republic territory and I simply cannot see the powers that be in this country let that persist.

Its not real clear why you have become confrontational about this subject, but we each live in our own heads, I guess. Good luck with that.

 

[dshibb]

"sustained"
I wouldn't say it would be sustained if it happened, but I recognize the possibility that it could happen. The selling off TIPS positions, equities, etc. around a time like that for the purchase of bonds would me a very wealthy person.

Do I think it will happen? No. Do I think its a possibility? Yes. Do I think it would last more than a couple months? No.

 

[brewer12345]

"sustained"
I wouldn't say it would be sustained if it happened, but I recognize the possibility that it could happen. The selling off TIPS positions, equities, etc. around a time like that for the purchase of bonds would me a very wealthy person.

Do I think it will happen? No. Do I think its a possibility? Yes. Do I think it would last more than a couple months? No.

Good luck with that. Have a nice life.

 

[Lsbcal]

Interesting financial thoughts by several posters. I agree that future inflation is a worry, but it always has been for retirees. My investment in TIPS (tax advantaged accounts only) is based on their relative safety for the bond part of my portfolio and my need to earn a decent real rate of return in the non-equity part of the portfolio. I believe the following real historical rates for nominal Treasurys are a decent way to determine when TIPS are in the buy range:

1yr 1.7%
5yr 2.2%
10yr 2.3%
20yr 2.4%

Current TIPS real rates are at: U.S. Treasury - Daily Treasury Yield Curve

 

[ziggy29]

I believe the following real historical rates for nominal Treasurys are a decent way to determine when TIPS are in the buy range:

1yr 1.7%
5yr 2.2%
10yr 2.3%
20yr 2.4%

I decided to load up on TIPS for my IRA when they were in the tank last November. I bought $25K face of the 1/2025s when they had an expected real yield to maturity of 2.8% and another $20K of the 7/2016s at 2.6%. Since I have every intention of holding these to maturity, I'm not too concerned about day to day fluctuation in value, and a relatively sure-thing 2.6%+ over inflation for many years is pretty easy for me to live with for a large chunk of my fixed income stuff.