Can someone explain TIPS to me please?

[Lsbcal]

I understand your reasoning, its just that you've compared apples to oranges. Five years is a little low on the range of intermediate term and you arent comparing 5 year tips to those.

I thought the last auction of 5 year tips was paying ~.625%?

Yes they are different maturities. What I'm saying is that I would not go longer in treasuries then 5yrs because of the inflation risk and historical return for the risk of extending out in nominal treasuries is not good. With TIPS you do not have that inflation risk so can extend out and capture the longer durations. So I'm comparing what is possible for me to invest in: shorter duration apples or longer duration oranges. Yep, they are different fruits but I need to buy some fruit for my basket . You could choose to buy some 5yr Treasuries and some 20yr TIPS too.

See Bloomberg for the current rates:
Bloomberg.com: Government Bonds

P.S. The coupon on the 5yr is 0.625 but the real rate today for this is 1.84%.

 

[cute fuzzy bunny]

You know that fruity basket thing is going to come back on you some day, hmm?

 

[Lsbcal]

Some people think I'm a little fruity already. This whole economic mess is making me fruitier.

 

[Gearhead Jim]

The yield curve graph on the link lsbcal posted, shows 20 yr Treasuries at about 4.03%, while 20 year TIPS are priced to yield 2.53%. Does that mean 20 yr TIPS will beat 20 yr Treasuries if the inflation rate averages above 1.50% (4.03 - 2.53 = 1.50) and you hold to maturity?
Sounds like a sure bet to me, if you are looking to add to your bond portfolio only.

 

[LOL!]

And another link with a great link on inflation-linked bonds: Bogleheads :: View topic - TC on TIPS

This links to the recent TIAA-CREF 3-page paper on the subject.

 

[haha]

And another link with a great link on inflation-linked bonds: Bogleheads :: View topic - TC on TIPS

This links to the recent TIAA-CREF 3-page paper on the subject.

I read this. Interesting factoid therein-in the ten years 1997-2007, the average TIPS return from coupon alone was 3.25%.

That gave a pretty good headstart, and allowed more than a little of that handsome market adjustment return to happen.

Another thing- I haven't tried to work this out rigorously, but it appears to me that if someone is willing and able to withdraw only the coupon (of 2.75% or whatever), then these are in fact AAA long term retiree investments. But any liquidating schemes present more than a few problems. Rising real interest rates would be one.

Ha

 

[cute fuzzy bunny]

That gave a pretty good headstart

Ding ding ding!

The high coupon rates that we'll likely never see again also gave a big boost to the NAV's for anyone who unloaded them on the secondary market.

 

[clifp]

Maybe my recollections of readings over at the bogleheads site are weak but I could have sworn I've seen several threads where they stated a threshold at ~2.5%...buy above and sell below. Havent read Swedroes book but I know he posts there.

That's my criteria also, when TIPs and EE bonds were paying above 3% I was happy buyer, when they dropped down to 1% I was happy seller. (Although, in hindsight buying banks stocks and ISM/OSM with the proceeds was really stupid).

At the 2.5% level I am sort of indifferent they don't really support a 4% withdrawal at that level, more like a 3-3.5% level. While I could survive at 3%, I think after this years market that means many years of additional work for the average young dreamer.

 

[Lsbcal]

...At the 2.5% level I am sort of indifferent they don't really support a 4% withdrawal at that level, more like a 3-3.5% level. While I could survive at 3%, I think after this years market that means many years of additional work for the average young dreamer.

The question is how are you going to get a real return of 3-3.5%. If you find a nice way with your FI allocation let me know! If you have, for instance, an AA that's 50/50 and your real returns are 2.5% bonds (guarenteed with TIPS) and 5.5% stocks (a bit dicey and time variable but possible) then doesn't that get you to your 4% real?

BTW, there is a good on-going thread at Bogleheads on TIPS (started by yours truely):
Bogleheads :: View topic - 20yr TIPS @ 2.3%, good deal?

 

[cute fuzzy bunny]

Smirk. I was going to tell you that this "Les" guy over there seemed to have plenty of good opinions about tips and when to buy.

 

[Lsbcal]

Smirk. I was going to tell you that this "Les" guy over there seemed to have plenty of good opinions about tips and when to buy.

Yes, he has some really good ideas doesn't he .

To give credit though, I just started the thread and there are plenty of good responses including some from Larry Swedroe.

 

[clifp]

The question is how are you going to get a real return of 3-3.5%. If you find a nice way with your FI allocation let me know!?

A few days ago I didn't have a good answer to that question.
Now I just need 50 billion or so, a reputation of a brilliant investor, and then I loan money to GE at 10% interest, with an upside equity kicker, like Warren Buffett.

Right now I am just chasing yield down the black hole of declining markets, while watching my "gee I thought there were pretty safe investments" like OSM/ISM with real yield of 4+% when I bought them, turn into toxic waste.

When I do find these 3.5% real return investments I let you know. Don't hold your breath

 

[oldman]

I'm in the pro Tips camp but I only buy individual Tips not funds.

The face value of the TIPS bond will not be reduced due to deflation, however any gains will disappear as deflation continues/increases. In a deflationary economy (very rare here, think 1930's) any money you do have is worth more so it could be a wash as far as purchasing power goes.

I would worry more about the government fudging the infaltion numbers more than deflation.

I went to Fidelity and checked for TIPS in fixed income. It brought up a number of bonds I have trouble understanding. But I'm more interested in individual bonds. So how do you select the bond other than by maturity? I selected one and the price was about $127.

 

[Lsbcal]

TIPS are very complex bonds in my opinion. To understand them you might start with the Bogleheads site. There may be a FAQ there or try the Treasury Direct site. You need to recognize the risks involved. Right now the real yields are very high versus historical averages and so they are probably excellent investments. Just my opinion though. If you don't understand the bond characteristics then buy a fund like VIPSX.