Upcoming TIPS auction

[wabmester]

I'm new to both TIPS and TreasuryDirect. Anybody planning to purchase TIPS at the January auction? I don't have a handle on how the Buy Direct process works. Can I place my order before the auction, after the auction, or do I have to place an order on the day of the auction?

Should I just avoid Buy Direct altogether and shop the secondary market? Are TIPS pretty liquid? What sort of spreads are typical?

And any thoughts on whether I should try to time the market for a better real rate of return, or just start building a 10-year ladder, for example?

 

[wabmester]

I'm going to attempt to answer my own questions after a little research.

I just tried the Buy Direct service, and it seems that you can make a purchase anytime between the auction announcement and the day of the auction. The order I placed today will be filled 1/15/04 at whatever yield the auction determines. I didn't see a way to cancel my order prior to the auction.

The treasury also offers a Sell Direct service, and they say you'll get a better spread and lower fees than by using a bank/broker, but that's yet to be seen as I haven't tried it.

I'm going to take the ladder approach and buy one 10-year TIPS each year for the next 10-years until my target allocation is made.

I'm going to try a little timing too by initially buying less than 10% of my target allocation and try to catch higher yields in subsequent auctions.

 

[sgeeeee]

Wabmester,

I have been buying the maximum allowed investment in I-bonds for several years now and have not used TIPS, so I don't have any information to offer you. But I am interested in what you find out. Now that I-bond credit card purchases are over, I expect TIPS to be an option I might wish to exercise.

Thanks.

 

[wabmester]

SG, if you want to buy TIPS at their next offering, you need to act soon. It requires opening a TreasuryDirect account specifically for bills, notes, and bonds (different than the account for savings bonds, and there is no TIPS equivalent to the soon-to-be-former savings bonds online store).

It took the treasury a couple weeks to open my account after sending in the application, and the next auction is Jan 8, 2004.

More information is available here:
http://www.publicdebt.treas.gov/sec/secbuydi.htm

 

[Cut-Throat]

wabmester,

I'll also be interested in your findings.

What is interest rate that TIPS are paying now and what denominations and length of maturity are they offered in?

 

[wabmester]

What is interest rate that TIPS are paying now and what denominations and length of maturity are they offered in?

As far as I can tell, they only offer 10-year notes.  I believe the yield is determined at auction.  My understanding is that TIPS are issued in July and then offered again in October and January.  The July notes had a coupon of 1.875% (ugh), but they were sold at a discount to par so the yield was 1.999% in July and 2.229% in October. Of course, this is the real yield on top of the inflation protection, so it's not a bad deal compared to 1.1% for i-bonds.

http://wwws.publicdebt.treas.gov/AI/OFNtebnd

As far as denominations, I think like most notes, they are offered in any multiple of $1000.

 

[Bob_Smith]

Cut-throat, I'm watching them on the secondary market.

2028 issue - offer yield is 2.302% this afternoon.
2029 is 2.292%.
2032 is 2.217%.
7/15/2013 is 1.926%.

I'm waiting for 2.5% on the 30 year. They quit issuing 30 year TIPS. The only place you can buy the long term TIPS is on the secondary market. The longest maturity now is about 28 years.

 

[wzd]

Bob -
What do you use for quotes on the secondary market? I lost my main source of that info when I closed my HarrisDirect account (by way of consolidating)

Wayne

 

[Bob_Smith]

Hi Wayne,

I use two sources:

1. My main source is my brokerage account at Vanguard. They list many issues and I can get exact quotes there.

2. A secondary source is Bloomberg. It's toward the bottom - underneath the yield curve:
http://www.bloomberg.com/markets/rates/index.html

 

[eytonxav]

What do you guys think of a tips mutual fund, I believe Vanguard has one?

Doug

 

[Jarhead*]

To Dfw m5:
Regarding your question on Vanguard Tips fund. I recently (about 3 weeks ago purchased this fund ).
I have never been a fan of bonds, but considering my age(66) decided to hedge a little more than I have done in the past.
I was about80% in stocks when it hit the fan (almost 4 years ago). I didn"t change my portfolio, and it has taken 4 years to get back to about where I was before the correction. (I promised myself that I would take enough off the table (equities), to get to 50/50 when the next up turn started.

I also purchased short term bond fund from Vanguard. Going long on bonds at this juncture would be a little too risky for my blood. Just a gut feeling, but do not believe Tips will take as big a hit as convential fonds, but no one really knows. I am comfortable at this time with my decision, and Vanguard is probably about the best that you can do at this time.
I hope this country doesn"t have to go through another period like we had in the late 60s through the 70s. but if so, Tips would give us a little piece of mind.
Good luck, and overall, when I see what is out there to hedge your bet a little bit, I think it probably makes pretty good sense to add some Tips to your portfolio

 

[wabmester]

The ticker for the vanguard fund of interest is VIPSX.  Expenses are 0.22% which is pricey for a fund with a yield of 1.60%.  Average maturity is slightly over 10 years, so I don't see any advantage over going with 10-year notes directly from the treasury with no management costs.

Since VG has to buy the same bonds we do, it seems that interest rate risk is the same, reinvestment risk is the same, only the fees are different.

 

[eridanus]

No reason to go to the secondary market unless you want a 30 year bond. Treasury Direct (now called "Electronic Services..." or something like that) charges no commissions except when selling and no spread.

Some of the auctions are re-issued notes. I believe the January TIPS auction is for notes issued last July, so you're getting a 9.5 year note rather than a 10 year note. I don't remember why this is done but it's explained somewhere on the treasury site.

Don't forget about the "phantom" income.

 

[wabmester]

Well, that was painless. I submitted my bid in December, and today a big chunk of 10-year TIPS showed up in my account with the treasury.

Their online system is not very informative. I couldn't cancel my bid or even see that it was pending. Nothing after the auction ended either.

The TIPS showed up on their issue date, which was a bit of a surprise since I thought I was bidding on a reissue from last July, but I got a new issue that matures on 1/15/2014. Yield for the 10-year was 2.019%.

 

[haha]

Well, that was painless. I got a new issue that matures on 1/15/2014.   Yield for the 10-year was 2.019%.

Given recent conditions, I think that is an excellent yield.

Mikey

 

[Ted]

The ticker for the vanguard fund of interest is VIPSX.  Expenses are 0.22% which is pricey for a fund with a yield of 1.60%.  

Vanguard is following standard (required) practice in stating the yield of the TIPs in this fund as 1.6%. But that is only the guaranteed INTEREST and does not include the INFLATION ADJUSTMENT, which will probably provide greater price appreciation than the interest, but cannot be stated because it depends on the actual inflation that occurs every six months in the future. And an expense ratio of 0.22% is very reasonable for any mutual fund.

There are slight advantages for some people to own TIPs directly, rather than through a mutual fund, but owning them through Vanguard's fund makes entirely good sense.

 

[wabmester]

The only arguments I've read in favor of holding TIPS via mutual funds are:

1) More liquid (but I don't plan to sell).
2) You get inflation income distributed rather than accrued through "phantom" income reinvestments (but I would just reinvest anyway)
3) It's easier to hold funds via an IRA (my IRA will be smaller than my TIPS holdings, so not a big concern)

So, for me, I really see no advantages, and the fund fees are an obvious disadvantage.