TIPS: Can they be hurt real bad?

[redduck]

I own a lot of TIPS (in an ETF TIP fund). And, I've been sort of taking it for granted they couldn't be badly hurt--like a 20-30% drop in value. Just how wrong am I? What could happen that would cause a major loss to the value of TIPS?

 

[daylatedollarshort]

My TIPS went up 20 - 40% the last few years. These are individual bonds and mostly 30 year. What goes up that amount could go down that amount or more.

I have been selling off gradually to lock in the profits. There isn't much room for yields to go down any more, but no upper limit on how much yields could go up, which would wipe out all my profits. I thought if I waited until rates actually started going up again to sell, everyone else would be selling then, too, and prices would dive. I have been buying CDs with the money from the TIPS.

I have also been gradually dumping the TIPS bond funds. I never owned any TIPS ETFs.

For fixed income, beside the CDs and I bonds, we have access to three stable value funds from our various 401ks. We also have some international, short term US, floating rate and a bit of junk for bond funds.

 

[redduck]

I thought TIPs were supposed to do best in a mild-medium inflation environment(what ever that may be) and that their yield and price would both increase. I do understand that other bonds/bond funds don't operate this way, but I thought TIPs did. Could I be wrong?

 

[MichaelB]

Vanguard TIPS fund dipped around 12% in 2009. Accrued interest can be subtracted from TIPS in a deflationary environment.

 

[daylatedollarshort]

What could happen that would cause a major loss to the value of TIPS?

Higher yields on new issue TIPS
Low inflation or deflation projections
Actual deflation so that the inflation factor turns negative
The government defaulting on its debts or looking like it might

 

[heeyy_joe]

I recently reduced my TIPS holdings by about 2/3rds.

 

[redduck]

I recently reduced my TIPS holdings by about 2/3rds.

Why

The edit:
Now, I have no idea how the little blue face showed up. I didn't put it there.

 

[FIREd]

The edit:
Now, I have no idea how the little blue face showed up. I didn't put it there.

It shows up automatically if you type 3 question marks in a row.

 

[redduck]

It shows up automatically if you type 3 question marks in a row.

OK, thanks.

By the way, do you have any idea why heeyy_joe sold about 2/3 of his TIPS holdings?

 

[FIREd]

OK, thanks.

By the way, do you have any idea why heeyy_joe sold about 2/3 of his TIPS holdings?

I don't know why heeyy-joe sold 2/3 of his TIPS, but I sold 100% of mine because the easy money had been made and I was looking at 25-30 years of guaranteed low returns from there on out.

 

[brewer12345]

In late 2008/early 2009 people freaked that deflation would set in hard. I bought TIPS that were originally issued as 10 year bonds with 5 years left to go with a 3% real yield to maturity.

Simply put, real yields demanded by new TIPS buyers could rise. At the moment, TIPS offer a negative real yield. That could change.

 

[daylatedollarshort]

In late 2008/early 2009 people freaked that deflation would set in hard. I bought TIPS that were originally issued as 10 year bonds with 5 years left to go with a 3% real yield to maturity.

Simply put, real yields demanded by new TIPS buyers could rise. At the moment, TIPS offer a negative real yield. That could change.

I have kicked myself for years for not going on a buying spree back then. I did buy what I could when the yields were still over 2% but hesitated at the 3% mark. I will not make that mistake again, if yields ever go back that high.