How to read a TIPS Quote

[Closet_Gamer]

I'd like to ensure that I understand how to read a TIPS quote properly. Apologies if this has been covered ... if so, I couldn't find the right thread.

Specifically, I want to ensure I understand the quoted yield and how that plays alongside what happens with inflation.

This is a current TIPS quote from Schwab. Nothing special about this one, I just plucked it as an example:

CUSIP 91282CHP9
Issued 07/15/2023
Maturity 07/15/2033
Coupon 1.375%
Price $93.375
Current Yield: 1.473%
YTM: 2.239%

So ...

Current Yield = Cash distribution = $1.375/$93.375 = 1.473%
YTM = Annual cash distributions + $6.625 gain at maturity = 2.239%

Inflation is in addition to all of this, yes?

So ...
... if inflation runs 2% per year from here, the nominal yield on the bond will be 4.239% at maturity?
... with the inflation component realized as an increased face value repayment?

So ... again assuming 2% inflation all the way along, the principle repayment would be:
$100 * (1.02^10) = $121.89 + $6.625 discount = $128.52

The actual nominal cash returned on the bond would be:
8 years remaining * $1.375 = $11.00
Principle payment: $128.52
Total cash returned: $139.52

Is that how all of this would hang together?

Thanks for any insights!

 

[Closet_Gamer]

Hi ... bumping my own TIPS thread here as I never got any replies ... hoping someone can validate or correct my interpretation of how to read a TIPS quote.

Thanks!

 

[Lsbcal]

FWIW, our bond portfolio is heavy in TIPS. I don't pay much attention to the bond math so I cannot help on your main questions. You might try ChatGPT (or another AI app) to ask calculation questions. Another place to ask is the TIPS Watch site.

Here is one calculation example from ChatGPT:

My focus is on the real yield to maturity and at purchase time the inflation factor. If I can get near a 2% real YTM and a fairly low inflation factor at purchase then I'm good to go.

 

[Chuckanut]

Tipswatch has a few tutorials that explain how TIPS work. I would trust that site more than some guy on the internet.

 

[GenXguy]

Since ChatGPT was mentioned, just be cautioned that it and other AI models are often wrong, even with clearly formulated questions. I was getting one incorrect answer after another regarding deducting accrued interest paid on TIPS purchases in another thread. So, confirm what it's telling you. It was easy for me because I knew the rules in advance and was just testing.

Another TIPS question

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...

www.early-retirement.org

I mentioned a while back how ChatGPT incorrectly stated that the cost basis was stepped up on a non-qualified MYGA that was recently purchased when the owner dies.

Do you ask chatgpt questions? If so what kind?

Like most things, i think it’s a matter of the right tool for the right job. In that regard, it helps to know how they work. The latest AI systems are called “Generative AI” because they create new things rather than traditional AI which excels at discerning a from b and using that to...

www.early-retirement.org

 

[GenXguy]

Tipswatch has a few tutorials that explain how TIPS work. I would trust that site more than some guy on the internet.

Even if that "guy" is ChatGPT. lol

 

[Chuckanut]

Here is the linked for the Tipswatch site;

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

 

[Closet_Gamer]

Thanks all. Much appreciated.

 

[Closet_Gamer]

BTW ... I'm glad I asked for more information. Reading the Tipswatch site and doing some more research show that I definitely did not understand how to read a TIPS quote!

Its even more complicated than I thought. Particularly the bit about the market/evaluated price in quotes being different than the inflation adjusted price!

 

[audreyh1]

It gets quite tricky. Even the TIPSWatch blogger sometimes gets stumped, but fortunately comes back later to explain the details. For example one October auction the real rate seemed to come in a bit low compared to the April auction. But the bond traders had it right because you also have to take into account the annual trend of inflation. More future inflation is baked into the April issue versus the October issue (or was it the other way around?). Gets super complicated trying to predict the expected auction result. I guess this is old hat to the professional bond traders.

Example: A quick update on Thursday’s 5-year TIPS auction

 

[Chuckanut]

FWIW, I only buy TIPS in a tax advantaged IRA account, and only with money I won’t need until after the TIPS matures. You can lose money selling TIPS in mid-life if things temporarily go the wrong way. Ibonds never lose money, other than the 3 month interest penalty if you sell them before holding them for a minimum of 5 years.

I’ve soured on Ibonds thanks to the Treasury site that can be an unresponsive pain in the neck from time to time. I keep my emergency stash in Ibonds paying 1.3% plus inflation. That’s enough for me.

 

[tulak]

TIPSWatch is a great site. I went through the details of TIPS on that site and had a better under when I first started to buy them, but I’ve forgotten the details.

Like Chuckanut, I buy in a tax-deferred account and plan to hold to maturity. Keeps it simple. All of the TIPS I’ve bought are “losing money” if I were to sell them today.

 

[Closet_Gamer]

FWIW, I only buy TIPS in a tax advantaged IRA account, and only with money I won’t need until after the TIPS matures. You can lose money selling TIPS in mid-life if things temporarily go the wrong way. Ibonds never lose money, other than the 3 month interest penalty if you sell them before holding them for a minimum of 5 years.

I’ve soured on Ibonds thanks to the Treasury site that can be an unresponsive pain in the neck from time to time. I keep my emergency stash in Ibonds paying 1.3% plus inflation. That’s enough for me.

I’m planning to house all of my TIPS IRA accounts specifically for taxes.

I will likely post a different thread seeking comments on the overall financial plan I’m assembling for my post-work years. Learning more about TIPS has been an important part of assembling this, so thanks for the help!