Vanguard Short Term Inflation Protected securities

[OldShooter]

Yeah, it only takes 2 minutes to land a plane. Learning how to do that takes a bit longer but YMMV.

From the perspective of a couple thousand landings, about 130 airports in my logbook and a decade and a half owning TIPS, I think this is a really silly statement.

For complexity of buying, TIPS are no different than any govvies, which is to say trivially easy.

For complexity of understanding, I would put them at the middle school level -- basically only one new variable to consider and predict. I'd put corporate bonds at the junior high school level, since there are many more variables. Analyzing stocks like Ben Graham or the various crackpot technical schemes starts to approach the high school and undergraduate college level.

 

[OldShooter]

Question about Tip individual bills ... in danger of decreasing in yield if inflation drops like a rock between buy date and maturity? ...

Treasury increases the principal value of TIPS based on monthly inflation numbers. As long as inflation is there at any level, the TIPS will always be increasing in nominal value. If future inflation slows down from current levels, the increases will be smaller but they will still be there.

As has been said, the only way the nominal value will materially decrease is if there is extended deflation. Serious deflation is, IMO, such an unlikely scenario that I don't worry a bit about it. https://en.wikipedia.org/wiki/Deflation#United_States

 

[Montecfo]

Treasury increases the principal value of TIPS based on monthly inflation numbers. As long as inflation is there at any level, the TIPS will always be increasing in nominal value. If future inflation slows down from current levels, the increases will be smaller but they will still be there.

As has been said, the only way the nominal value will materially decrease is if there is extended deflation.

TIPS have lost money on a total return basis this year despite rising inflation. You seem to be saying this did not and cannot happen unless I misunderstand.

Perhaps you could clarify?

 

[OldShooter]

TIPS have lost money on a total return basis this year despite rising inflation. You seem to be saying this did not and cannot happen unless I misunderstand.

Perhaps you could clarify?

You misunderstand, possibly deliberately. I said nothing -- zero, nada -- about total return. That is a totally different issue.

Roughly: If the increases due to inflation are outstripped by the loss in value due to interest rate increases, then the return for the period can be negative.

We get it that for some reason you don't like TIPS, but you are getting to be a little boring on the subject IMO.

 

[daylatedollarshort]

TIPS have lost money on a total return basis this year despite rising inflation. You seem to be saying this did not and cannot happen unless I misunderstand.

Perhaps you could clarify?

TIPS prices on the secondary market have decreased because the yields have gone up. If you hold to maturity and never plan to sell on the secondary market, this doesn't change what you can redeem them for at maturity. This is the same issue with nominal bonds and bond funds. Bond funds don't have a maturity date so you never know if your NAV is going to be more or less than your original purchase. In a rising rate environment, it is likely to be much less, as explained in this Forbes article - https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309.

As Freedom56 has pointed out many times recently, bond funds introduce an element of market risk into products that normally have none. TIPS held to maturity have not lost money on a total return basis. That is simply not true. Older 2% TIPS have returned 10%. If you have a $10K car you bought from the government and they guarantee you they will buy it back for $10K plus inflation in 5 years, and someone offers you $8K plus inflation for it before the 5 years are up, you only lose money if you sell it for the $8K. But that would be stupid so most intelligent people would not do it, unless they were desperate for cash. Would you say you lost money on the car because the $8K offer existed? Even if you didn't plan to sell for $8K, but were going to stick to your original $10K offer?

Current TIPS yields are around 1% or more over CPI inflation. This is something that can easily be looked up here - United States Rates & Bonds - Bloomberg. TIPS real yields have recently been increasing, not decreasing, as you have posted. They currently have higher real yields than I bonds and no annual limits.

 

[Koolau]

From the perspective of a couple thousand landings, about 130 airports in my logbook and a decade and a half owning TIPS, I think this is a really silly statement.

For complexity of buying, TIPS are no different than any govvies, which is to say trivially easy.

For complexity of understanding, I would put them at the middle school level -- basically only one new variable to consider and predict. I'd put corporate bonds at the junior high school level, since there are many more variables. Analyzing stocks like Ben Graham or the various crackpot technical schemes starts to approach the high school and undergraduate college level.

Yeah, but I've never bought Tips or ANY govvies other than I-bonds (at a bank) while I have landed aircraft. "Easy" as it is to buy tips (according to you and those commenting) I wouldn't know where to start - hence my analogy. I'm betting your first landing wasn't easy.

You don't have to like the analogy since you know how to land AND buy tips but I would disagree that it is "silly" for someone who has never purchased tips before. Describing someone or their actions or statements as "silly" is disrespectful and more likely shuts down learning rather than enhancing it.

 

[OldShooter]

Sorry to insult. If you don't have a brokerage account, open one at Schwab or Fido and ask for the telephone number of the bond desk. The people there will take care of you, no dumb questions, etc. In five minutes they'll bring you up to speed on how to place orders on their web site or directly with them. It really is nothing like learning to land an airplane. More like buying a ticket to a play.

To really understand the tradeoffs and options in selecting and buying govvies is the slightly bigger hurdle and then to understand how TIPS are specialized bonds is another slightly bigger hurdle, but neither is a huge obstacle. You might want to check out Explore TIPS: A Practical Guide to Investing in Treasury Inflation-Protected Securities Paperback I just bought a copy based on a recommendation on a thread here. It's very basic, but it did answer for me a question that I couldn't find answered via Google. So I'm keeping it.

 

[Koolau]

Sorry to insult. If you don't have a brokerage account, open one at Schwab or Fido and ask for the telephone number of the bond desk. The people there will take care of you, no dumb questions, etc. In five minutes they'll bring you up to speed on how to place orders on their web site or directly with them. It really is nothing like learning to land an airplane. More like buying a ticket to a play.

To really understand the tradeoffs and options in selecting and buying govvies is the slightly bigger hurdle and then to understand how TIPS are specialized bonds is another slightly bigger hurdle, but neither is a huge obstacle. You might want to check out Explore TIPS: A Practical Guide to Investing in Treasury Inflation-Protected Securities Paperback I just bought a copy based on a recommendation on a thread here. It's very basic, but it did answer for me a question that I couldn't find answered via Google. So I'm keeping it.

Thank you. Very good info to start on.

 

[Montecfo]

You misunderstand, possibly deliberately. I said nothing -- zero, nada -- about total return. That is a totally different issue.

Roughly: If the increases due to inflation are outstripped by the loss in value due to interest rate increases, then the return for the period can be negative.

We get it that for some reason you don't like TIPS, but you are getting to be a little boring on the subject IMO.

Oldshooter,

You said,

"As long as inflation is there at any level, the TIPS will always be increasing in nominal value. "

And

"As has been said, the only way the nominal value will materially decrease is if there is extended deflation."

And now

"I said nothing--zero, nada about total return."

Ok. Well I wonder how total return goes down as it has this year while "nominal value" is always increasing?

Example: I-shares TIPs bond ETF performance (TIP):

YTD -9.18 pct daily total return

https://finance.yahoo.com/quote/TIP/performance/

I found that misleading at best and was not sure what you were looking at to say that, or what exactly it was supposed to mean. I am still not sure.

Your response was a bit over the top don't you think?

 

[daylatedollarshort]

TIPS ETFs are not TIPS. TIPS ETF are sold by brokerages, not the government. Stock funds mimic owning individual stocks. This is not true for bonds and bond funds without maturity dates, inflation adjusted or nominal.

 

[Montecfo]

TIPS prices on the secondary market have decreased because the yields have gone up. If you hold to maturity and never plan to sell on the secondary market, this doesn't change what you can redeem them for at maturity. This is the same issue with nominal bonds and bond funds. Bond funds don't have a maturity date so you never know if your NAV is going to be more or less than your original purchase. In a rising rate environment, it is likely to be much less, as explained in this Forbes article - https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309.

As Freedom56 has pointed out many times recently, bond funds introduce an element of market risk into products that normally have none. TIPS held to maturity have not lost money on a total return basis. That is simply not true. Older 2% TIPS have returned 10%. If you have a $10K car you bought from the government and they guarantee you they will buy it back for $10K plus inflation in 5 years, and someone offers you $8K plus inflation for it before the 5 years are up, you only lose money if you sell it for the $8K. But that would be stupid so most intelligent people would not do it, unless they were desperate for cash. Would you say you lost money on the car because the $8K offer existed? Even if you didn't plan to sell for $8K, but were going to stick to your original $10K offer?

Current TIPS yields are around 1% or more over CPI inflation. This is something that can easily be looked up here - United States Rates & Bonds - Bloomberg. TIPS real yields have recently been increasing, not decreasing, as you have posted. They currently have higher real yields than I bonds and no annual limits.

TIPS prices on the secondary market have decreased because the yields have gone up. If you hold to maturity and never plan to sell on the secondary market, this doesn't change what you can redeem them for at maturity.

The OP's question was about buying a fund, not buying at issue and holding to maturity.

Even individual TIPs bonds bought at issue have a negative total return this year. They are subject to interest rate risk. This can be mitigated to some extent as you point out if held to maturity, but everyone does not plan to do that, especially if they need to rebalance, for example.

TIPS are unique securities and a lot of folks are just learning about them. For that reason I think a detailed discussion such as this is useful.

Thanks.

 

[daylatedollarshort]

The OP's question was about buying a fund, not buying at issue and holding to maturity.

Even individual TIPs bonds bought at issue have a negative total return this year. They are subject to interest rate risk. This can be mitigated to some extent as you point out if held to maturity, but everyone does not plan to do that, especially if they need to rebalance, for example.

TIPS are unique securities and a lot of folks are just learning about them. For that reason I think a detailed discussion such as this is useful.

Thanks.

Holding to maturity is not "mitigated to some extent", for people who have bonds, it is the whole point of buying individual bonds - the maturity date. You don't "rebalance" individual bonds or a ladder. You are mixing up issues and strategies with bond funds and individual bonds, which in real life do not exist, and I don't know why. If an investor needs money in 5 years, then a 30 year bond to be sold in 5 years would not be a good idea. That is just common sense.


ETA: Do you own any TIPS? It doesn't seem like you do, yet you keep posting issues with them that are not real problems for investors who actually have them in their portfolios and have been buying them for years, both at auction and in the secondary markets.

 

[OldShooter]

... Ok. Well I wonder how total return goes down as it has this year while "nominal value" is always increasing? ...

If you understood what "nominal value" meant you would understand my post. But understanding is not your objective. I get that.

... Your response was a bit over the top don't you think?

Not at all. You tire me out with your argumentative nonsense. I won't be responding any more.

 

[Aerides]

As someone who is not really aware of what TIPS are, and has a lot to learn, like many of us, I'd like to note that sniping and one-upping and dismissing the intelligence levels of other forum members is exactly the kind of behavior that leads other members to refrain from engaging or asking questions.

No one here should be called silly or anything close, so knock it off.

 

[Montecfo]

Holding to maturity is not "mitigated to some extent", for people who have bonds, it is the whole point of buying individual bonds - the maturity date. You don't "rebalance" individual bonds or a ladder. You are mixing up issues and strategies with bond funds and individual bonds, which in real life do not exist, and I don't know why. If an investor needs money in 5 years, then a 30 year bond to be sold in 5 years would not be a good idea. That is just common sense.


ETA: Do you own any TIPS? It doesn't seem like you do, yet you keep posting issues with them that are not real problems for investors who actually have them in their portfolios and have been buying them for years, both at auction and in the secondary markets.

I am not mixing up anything.TIPS held in funds and directly both carry interest rate risk. Most people rebalance. If their bonds are held directly, they have to sell those bonds to rebalance and not hold them to maturity.

You may not know why people sell them before maturity but they do, all the time. Same with bond funds, people buy them and sell them. The thread topic was about a TIPs fund.

Pointing out that TIPS have lost money this year is just stating facts, not indicating a problem with TIPS. Most bonds have lost money. I have owned TIPS and probably will again soon.

 

[daylatedollarshort]

I am not mixing up anything.TIPS held in funds and directly both carry interest rate risk. Most people rebalance. If their bonds are held directly, they have to sell those bonds to rebalance and not hold them to maturity.

You may not know why people sell them before maturity but they do, all the time. Same with bond funds, people buy them and sell them. The thread topic was about a TIPs fund.

Pointing out that TIPS have lost money this year is just stating facts, not indicating a problem with TIPS. Most bonds have lost money. I have owned TIPS and probably will again soon.

TIPS held to maturity do not lose money and are not subject to market risk. They are guaranteed to be redeemed at par plus accumulated inflation: "At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation." Individual - TIPS In Depth (treasurydirect.gov)

Sites like Fidelity list TIPS bonds in a portfolio at the value as if you were going to sell them on the secondary market. If you want to see what your TIPS are really worth held to maturity, you have to put them in a spreadsheet and look up the accumulated inflation factors from Treasury Direct and compute your own values.

If you plan to sell TIPS prior to maturity, then you are subject to market risk and may not get your original investment back. Or if you buy on the secondary market and there is deflation risk you could lose money. Or you can lose money by investing in a TIPS fund without a maturity date. I don't recommend doing any of that, but if you do, that isn't an inherent defect in individual TIPS bonds as an asset class or the same as holding a TIPS ladder.

An investor can buy a $30K car and then sell it to their neighbors the next week for $15K, and lose money, too, but that would not be a defect on the part of the car, just poor decision making of the original owner.

 

[Montecfo]

Sites like Fidelity list TIPS bonds in a portfolio at the value as if you were going to sell them on the secondary market.

They do that because that reflects the value of the bonds at that time. And all bonds are treated this way, for good reason.

That value can be the same, higher or lower than what you paid or expect to get at maturity. This reflects interest rate risk, a characteristic of virtually all bonds.

 

[daylatedollarshort]

They do that because that reflects the value of the bonds at that time. And all bonds are treated this way, for good reason.

That value can be the same, higher or lower than what you paid or expect to get at maturity. This reflects interest rate risk, a characteristic of virtually all bonds.

How can you get more or less than what you paid for at maturity for a nominal bond if you bought it at par? If you buy a $1K nominal bond, and pay $1K, you get $1K at maturity. If you buy a $1K TIPS bond for $1K, and there is deflation or no inflation, you get $1K at maturity. If you buy a $1K TIPS bond, and there is inflation, you get $1K plus the accumulated inflation at maturity. If you buy a zero coupon Treasury for $1K, you pay less than $1K in lieu of interest payments, and get exactly $1K back at maturity.

Bond funds, without maturity dates, have varying NAVs, so you never know when you redeem them if your NAV values will be higher or lower than when you originally bought your shares. In a rising rate environment, those NAVS are likely to be lower. Bond funds are not bonds, and the attributes in your post describe bond funds.

If you buy a $1K CD or Treasury, you will get exactly that back at maturity, not more or less. Which is why most people don't sell them prior to maturity, unless they can make a profit. YMMV.

From investopedia - "Unlike individual bond securities, bond funds do not have a maturity date for the repayment of principal, so the principal amount invested may fluctuate from time to time." - https://www.investopedia.com/terms/b/bondfund.asp