Buy TIPS now or wait (No Inflation Data)

[SJhawkins]

I'm building out my 10 year TIPS ladder, link to my previous thread Link Here.

I was planning on banging out the ladder but after reading the latest article by David Enna at Tipswatch Link to Article its giving me a little pause.

As I noted in my previous thread TIPS are a new animal to me. My gut is telling me the secondary market probably has baked in enough to know better but then again what do I know as is does not sound like they have ever had an auction without the inflation data.

I don't have an issue waiting to January for all this to get flushed out if that makes sense.

What say you?

Below are some snips from the article:

The U.S. Treasury on Thursday will auction $19 billion in a reopened 10-year Treasury Inflation-Protected Security, CUSIP 91282CNS6, creating a 9-year, 8-month TIPS. This will be especially interesting because it will be the first-ever TIPS auction with an initial month of inflation accruals based on uncertain statistics.

The uncertainty is the direct result of the 43-day U.S. government shutdown, which furloughed all but one employee of the Bureau of Labor Statistics. No inflation data were collected in October, and at this point no inflation index has been set for non-seasonally adjusted inflation in October. That index will be the basis of December inflation accruals for all TIPS.

The secondary market is already pricing in the “October inflation uncertainty” so it should be a fairly good indicator of Thursday’s auction result. But a lot can change before Thursday, and $19 billion in an auction offering could be a lot for a shaky market to absorb.

I’ve been hearing from a lot of readers who intend to sit out TIPS investments until we get some certainty on accurate inflation numbers. That won’t come this week. Investors are going to have to accept at least one month (December) of iffy inflation accruals. It’s not a huge deal, but it is still a deal.

Some people may want to dip into this auction with the theory that the current uncertainty could result in weak demand and a strong real yield. That’s a possibility, but impossible to predict.

 

[tulak]

I buy TIPS as insurance against inflation, a guaranteed return of inflation adjusted principal at maturity. The interest is a bonus, which I reinvest in equities.

I don’t spend much (any) time thinking if TIPS are an optimal investment. I suspect it’ll perform close to treasuries of the same duration, +/- 1-2%. That’s a small difference. I take my risk with equities.

 

[Chuckanut]

I regard TIPS as a way to diversify the bond/CD part of my AA. I am leery of the USA hitting the 2% inflation target anytime soon. Thus the need to add some TIPS.

Sadly, my skepticism regarding inflation has proven correct so far. I wish I was wrong.

 

[jblack]

Agree with both of the above comments.

It's been (very) easy for me to get wrapped around optimization of 0.1-1.0% in fixed income rates as you may be experiencing, but it's when I've had to remind myself it's primary purpose in my portfolio is to create ballast vs the much larger equity mix. TIPS held to maturity protect against unexpected inflation even in the secondary market.

By all means do your research to feel confident in your decision, but I'd advise to first circle back on your bigger portfolio goals and then don't let perfect be the enemy of good

 

[Fermion]

I could see how robotics and AI could lead to deflation, but who knows?

 

[tulak]

I could see how robotics and AI could lead to deflation, but who knows?

And even if that happens, I get the full principal back from TIPS.

Not a bad deal!

 

[SJhawkins]

I may have not worded the question very well, I do plan on buying TIPS but the with the government shut down that we had they/we are missing some data to support what the rate "should" be.

I'm not clear if it would make sense to build the ladder today or wait for this to flush out for a month or two, below is a quote from the article that gives me a little pause. Maybe its nothing, or maybe it could be a good thing!

This will be especially interesting because it will be the first-ever TIPS auction with an initial month of inflation accruals based on uncertain statistics.

 

[Chuckanut]

The 10 Year TIPS had a real return of about 1.8%. Not bad, though I admit the previous returns over 2% spoiled me.

 

[OldShooter]

Taylor Larimore's market timing quotes: https://www.bogleheads.org/wiki/Taylor_Larimore's_market_timing_quotes

One of my favorites: "The Market Timers' Hall of Fame" is an empty room." from Jane Bryant Quinn

 

[Spock]

I quit buying TIPS. My measured inflation rate is way above what the CPI claims so I see no "inflation protection" in inflation protected securities.

 

[Fermion]

I quit buying TIPS. My measured inflation rate is way above what the CPI claims so I see no "inflation protection" in inflation protected securities.

This is somewhat the problem I have. TIPS don't track enough of the expense areas that you might need money to pay. They certainly don't track medical inflation.

 

[Trailwalker]

I quit buying TIPS also, but it's because we have enough of them in our asset allocation to accomplish the goals we set for SORR. When we put together our ladder, the fixed rate was well above 2%.

 

[OldShooter]

This is somewhat the problem I have. TIPS don't track enough of the expense areas that you might need money to pay. They certainly don't track medical inflation.

I quit buying TIPS. My measured inflation rate is way above what the CPI claims so I see no "inflation protection" in inflation protected securities.

Agreed. There is a lot about TIPS that is irritating or worse. What superior inflation protection security have you found? Better is the enemy of good. TIPS are good; I know of nothing better.

 

[Chuckanut]

I quit buying TIPS. My measured inflation rate is way above what the CPI claims so I see no "inflation protection" in inflation protected securities.

What is your alternative? Stocks, rental property, gold, etc?

 

[audreyh1]

So October CPI report was skipped, and November CPI report will be released on December 18. The numbers are cumulative, so it will be interesting to see how they present it. There is a PPI release scheduled for Nov 25, but that’s for September.

Also the next Fed meeting on interest rates will be December 10, before the Nov CPI report. They have other sources of economic and inflation measurement.

 

[hotwired]

And even if that happens, I get the full principal back from TIPS.

Not a bad deal!

Unless you bought on secondary market with some inflation factor already baked in (forgive my terminology), in other words you buy a tips that's already had some appreciation due to inflation factor. THAT part is not immune to deflation. I tend to roll the dice in this regard. I've chosen to buy TIPs with the lowest coupon available, so that most of my projected return comes from inflation factor. This (sorta kinda) gives me a STRIP/ZERO coupon experience where it reduces reinvestment risk along the way.

 

[tulak]

Good point. A good reason to buy TIPS at auction if you can make that work.

 

[rkser]

We have a aggressive AA of 86/14,
and carry VGSH a short term bond ETF & few MYGAs in our IRAs.

Would the Stocks in VTI & VXUS in Taxable accounts help us with the Inflation issues without buying the TIPs in the Pretax IRAs ?

Thanks

 

[Trailwalker]

Stocks should help you in the long term with the inflation issues, but will add volatility and uncertainty over the short and perhaps medium term. I'm invested in a TIPS ladder to reduce volatility, add certainty, and to provide inflation protection over the short and medium term. If the stock market takes a big leap in the next 7 years, I will not do as well with my TIPS. I'm okay with that because you know....uncertainty in the market.

 

[Chuckanut]

Stocks should help you in the long term with the inflation issues, but will add volatility and uncertainty over the short and perhaps medium term. I'm invested in a TIPS ladder to reduce volatility, add certainty, and to provide inflation protection over the short and medium term. If the stock market takes a big leap in the next 7 years, I will not do as well with my TIPS. I'm okay with that because you know....uncertainty in the market.

You make a lot of sense. Buying TIPS or most bonds and expecting them to act like common stocks do is not a good plan.

One tip on TIPS - You can lose money on them if you sell them at the wrong time before they mature. I buy TIPS in a tax deferred account and I expect to hold them to maturity.

A recent WSJ article on the dangers of TIPS, left out the part about how holding them to maturity insures full return of principle along with interest. A latter update to that article includes a correction to that error.

 

[Lorenzo]

Stocks should help you in the long term with the inflation issues, but will add volatility and uncertainty over the short and perhaps medium term. I'm invested in a TIPS ladder to reduce volatility, add certainty, and to provide inflation protection over the short and medium term. If the stock market takes a big leap in the next 7 years, I will not do as well with my TIPS. I'm okay with that because you know....uncertainty in the market.

One tip on TIPS, you can lose money on them if you sell them at the wrong time before they mature. I buy TIPS in a tax deferred account and I expect to hold them to maturity.

Do you plan to roll over your ladder rungs as each matures, so you maintain the ladder over many years? I'm unsure whether to ladder only as a bridge to SS, or whether to build a longer ladder. I see some here speaking of 30-year TIPS ladders. The rationale of providing inflation protection over the short-medium term would seem to apply for many years, as at any point in the future you will still see a short-medium term ahead of you.

 

[tulak]

Not Chuckanut, but I’ve thought about how I will handle maturing TIPS when collecting SS.

I’m not sure if I’ll keep buying TIPS, but I suspect it’s more likely than not. If I do, I may decrease the amount by what I’d receive with SS. So if I need 100/year and get 40k SS, then I’d only buy a 60k TIPS for that year.

 

[Trailwalker]

Do you plan to roll over your ladder rungs as each matures, so you maintain the ladder over many years? I'm unsure whether to ladder only as a bridge to SS, or whether to build a longer ladder. I see some here speaking of 30-year TIPS ladders. The rationale of providing inflation protection over the short-medium term would seem to apply for many years, as at any point in the future you will still see a short-medium term ahead of you.

I do not plan to continue adding to the rungs. My ladder gets us to age 70 and is in our IRA. Each rung is approximately 100k plus the inflation adjustment and coupon. It will be for spending that year. By 70, I will feel comfortable that we are beyond SORR and will be collecting Social Security. We do not have pensions and will not collect Social Security until at least age 67. TIPS are a tool that helps us to sleep well at night. I bought my ladder in one week on the secondary market when coupons were above 2%. Our ladder has some risk of losing money if there is deflation, due secondary market buying. We're ok with that also. I wanted to lock in the relatively high coupon.

Our funds for after age 70 are more aggressively invested in the market at 80/20. A 30 year TIPS ladder is interesting to me, but I still want to participate in the likely gains in the stock market over the long term.

 

[OldShooter]

... THAT part is not immune to deflation. ...

Maybe I missed the memo. When, in recent history, has deflation of the US$ been an issue or a concern?

 

[Lorenzo]

I do not plan to continue adding to the rungs. My ladder gets us to age 70 and is in our IRA. Each rung is approximately 100k plus the inflation adjustment and coupon. It will be for spending that year. By 70, I will feel comfortable that we are beyond SORR and will be collecting Social Security. We do not have pensions and will not collect Social Security until at least age 67. TIPS are a tool that helps us to sleep well at night. I bought my ladder in one week on the secondary market when coupons were above 2%. Our ladder has some risk of losing money if there is deflation, due secondary market buying. We're ok with that also. I wanted to lock in the relatively high coupon.

Our funds for after age 70 are more aggressively invested in the market at 80/20. A 30 year TIPS ladder is interesting to me, but I still want to participate in the likely gains in the stock market over the long term.

Thanks. I have no pension, either, and my thinking is along the lines you stated.