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Author: toomany100 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: Interest rate on TIPS Date: 4/28/2004 9:43 PM
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Could someone comment on the relationship between the yield on TIPS and standard treasury bonds. I am suprised that the yield on TIPS is so volatile. Is the yield on TIPS less volatile then the differential between inflation and the treasury yield?
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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10050 of 35345
Subject: Re: Interest rate on TIPS Date: 4/29/2004 9:40 AM
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"Could someone comment on the relationship between the yield on TIPS and standard treasury bonds. I am suprised that the yield on TIPS is so volatile. Is the yield on TIPS less volatile then the differential between inflation and the treasury yield?"

Not quite sure what you are seeing that is surprising you with TIPS yields.

http://www.federalreserve.gov/releases/h15/update/

The fixed rate component of TIPS yield more or less fluctuates daily by about the same change in basis points as an equivalent maturity Treasury. (If you look at this as a % change it will be higher, because the fixed rate component is less than the total yield on a Treasury, but in terms of the trading value of the bonds, the affect should be the same).

In general, the yield on TIPS varies in comparison to Treasuries in two ways: perceived future inflation (in the imagination of traders) and "real" yield (return above inflation, as represented by the fixed rate compnent of TIPS). If traders expectations of inflation change but not the "real" yield, you would should see more volatility in regular Treasuries than in the fixed-component of TIPS (e.g., if real yield on 10-years stayed at 2%, but inflation expectations went from 2.5% to 3%, the fixed component of TIPS would remain at 2%, but the yield on Treasuries would go from 4.5% to 5%). If the changes in yield are due to changes in "real" yield, then the volatility should be the same.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10054 of 35345
Subject: Re: Interest rate on TIPS Date: 4/29/2004 1:19 PM
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For the fun of it, here's some numbers from the Fed Web site (and links) posted earlier:

10-year TIPS (fixed-rate component)
01/2003 2.29
02/2003 1.99
03/2003 1.94
04/2003 2.18
05/2003 1.91
06/2003 1.72
07/2003 2.11
08/2003 2.32
09/2003 2.19
10/2003 2.08
11/2003 1.96
12/2003 1.98
01/2004 1.89
02/2004 1.76
03/2004 1.47
04/27/04 2.00

10-year Treasuries
01/2003 4.05
02/2003 3.90
03/2003 3.81
04/2003 3.96
05/2003 3.57
06/2003 3.33
07/2003 3.98
08/2003 4.45
09/2003 4.27
10/2003 4.29
11/2003 4.30
12/2003 4.27
01/2004 4.15
02/2004 4.08
03/2004 3.83
04/27/04 4.43

As can be seen, month to month changes (which are normally more dramatic than daily) reflect both changes in "real" yield and changes in trader perceptions of inflation: for example, over the last month, the real yield on Tips has gone up by 53 basis points, but since the yield on Treasuries has gone up by 60 basis points, traders are now factoring 2.43% inflation, while a month ago they were expecting 2.36%.

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Author: toomany100 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10055 of 35345
Subject: Re: Interest rate on TIPS Date: 4/29/2004 7:06 PM
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My perception (I do not have facts), that the change in yield of TIPS moves in reasonably close sync with the change in yield of Treasuries of the same duration is what suprises me. I would think that the real yield of treasuries would vary significantly more (twice as much?) as the yield of TIPS because of the variability in inflation and the associated risk assumed when buying Treasuries. This could be particularly true during this period when we are experiencing such huge deficits.

Is anyone aware of any papers written on this subject? I am trying to understand what to expect if I place all of my fixed income portion of my portfolio into TIPS which with my simple understanding, makes a lot of sense.
Thanks for your reply.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10056 of 35345
Subject: Re: Interest rate on TIPS Date: 4/29/2004 9:00 PM
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"My perception (I do not have facts), that the change in yield of TIPS moves in reasonably close sync with the change in yield of Treasuries of the same duration is what suprises me. I would think that the real yield of treasuries would vary significantly more (twice as much?) as the yield of TIPS because of the variability in inflation and the associated risk assumed when buying Treasuries. This could be particularly true during this period when we are experiencing such huge deficits.

Is anyone aware of any papers written on this subject? I am trying to understand what to expect if I place all of my fixed income portion of my portfolio into TIPS which with my simple understanding, makes a lot of sense.
Thanks for your reply."

It's probably too short a time since TIPS started to do a meaningful study (which might not have stopped everyone), but if yo look at the data from my prior post, although you will find a few month to month changes where TIPS fixed rate component yield changed more than treasuries, on the whole TIPS were less volatile, in some months strikingly so. It shouldn't be too hard to run a volatility measure from that data.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10057 of 35345
Subject: Re: Interest rate on TIPS Date: 4/30/2004 10:34 AM
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I never did figure out how to make a table work here, but here goes (maybe someone can ungarble it, if it doesn't work):

10 Year Treasuries 10 Year Tips Infl ~Treas ~TIPS
01/2003 4.05 01/2003 2.29 1.76
02/2003 3.90 02/2003 1.99 1.91 -.15 -.30
03/2003 3.81 03/2003 1.94 1.87 -.09 -.05
04/2003 3.96 04/2003 2.18 1.78 +.15 +.24
05/2003 3.57 05/2003 1.91 1.66 -.39 -.27
06/2003 3.33 06/2003 1.72 1.61 -.24 -.19
07/2003 3.98 07/2003 2.11 1.87 +.65 +.39
08/2003 4.45 08/2003 2.32 2.13 +.47 +.21
09/2003 4.27 09/2003 2.19 2.08 -.18 -.13
10/2003 4.29 10/2003 2.08 2.21 +.02 -.11
11/2003 4.30 11/2003 1.96 2.34 +.01 -.12
12/2003 4.27 12/2003 1.98 2.29 -.03 +.02
01/2004 4.15 01/2004 1.89 2.26 -.12 -.09
02/2004 4.08 02/2004 1.76 2.32 -.07 -.13
03/2004 3.83 03/2004 1.47 2.36 -.25 -.29
04/27/04 4.43 04/27/04 2.00 2.43 +.60 +.53

Pretty interesting with a close look. TIPS are less volatile overall, especially during dramatic upward shifts in perception of inflation, but more of the variation seems to be due to change in "real" yield than in inflation market adjustments. So, although I think the belief that TIPS provide more protection against rising interest rates is somewhat correct, but the hype that they provide enogh protection not to have to worry about interest rate risk is just hype.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10062 of 35345
Subject: Re: Interest rate on TIPS Date: 4/30/2004 8:47 PM
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I guess I'm the only one interested, but numbers are always pretty cool.

Anyway, a closer look at the more dramatic mood swings shows moodiness is not always the same. Between April and June 2003 (Iraq invasion),, Treasures dropped by 63 basis points, while TIPS fixed component dropped by only 46 basis points, the other 17 basis points being because of lowered expectations for inflation. On the return trip, between June and August, Treasuries went up by 112 basis points, compared with only 60 basis points for TIPS, there being a 52 basis point increase in expectation for inflation. In both these cases, especially the latter, the inflation component of TIPS did make a substantial difference in how much the underlying vallue of the bond changes (less of a gain in the first case, less of a loss in the second).

But if we look at the latest swing, which went down slowly, though back up quickly in last month, most of the change has been in the "real return," which for TIPS in March was actually 25 basis points below where it was at the bottom during the invasion (when ou expect flight to bonds). Meanwhile, inflation expectations have been faily stable (largest swing 17 basis points).

My hypothesis, given too short of a time frame to mean much, is that under most event/macro economic swings in the bond market, the inflation component in TIPS will strongly mitigate against the extreme in the swings (gain or loss), and this mitigating will be strongest when inflation gets high, and that the recent swing was the result of specific forces (Japanese banks aided and abetted by momentum traders) deliberately driving down "real return" yields.

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Author: toomany100 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10069 of 35345
Subject: Re: Interest rate on TIPS Date: 5/3/2004 9:52 PM
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I did try to post a simple analysis of the data that you presented earlier. This board does not allow graphs of anything but simple tables. Too bad. Anyway, the standard deviation of the rate on treasuries is about 30% greater than the variability of the real rate on TIPS in the data given. Also the standard deviation of the change in rates for TIPS is about 25% less. I guess this is all related to perception of inflation impact.

A plot of the TIPS rate against 10 year treasury rate might be more meaningful. It generally followed a straight line for the first half of the life of TIPS, then shifted down by about .2% and then continued to follow a straight line relationship but the shift might indicate that people have started to value the interest protection of tips more.

I may just be dreaming too.



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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10074 of 35345
Subject: Re: Interest rate on TIPS Date: 5/4/2004 3:03 PM
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10 Yr. Treas. 10 Yr. Tips Infl ~Treas ~TIPS
01/2003 4.05 01/2003 2.29 1.76
02/2003 3.90 02/2003 1.99 1.91 -.15 -.30
03/2003 3.81 03/2003 1.94 1.87 -.09 -.05
04/2003 3.96 04/2003 2.18 1.78 +.15 +.24
05/2003 3.57 05/2003 1.91 1.66 -.39 -.27
06/2003 3.33 06/2003 1.72 1.61 -.24 -.19
07/2003 3.98 07/2003 2.11 1.87 +.65 +.39
08/2003 4.45 08/2003 2.32 2.13 +.47 +.21
09/2003 4.27 09/2003 2.19 2.08 -.18 -.13
10/2003 4.29 10/2003 2.08 2.21 +.02 -.11
11/2003 4.30 11/2003 1.96 2.34 +.01 -.12
12/2003 4.27 12/2003 1.98 2.29 -.03 +.02
01/2004 4.15 01/2004 1.89 2.26 -.12 -.09
02/2004 4.08 02/2004 1.76 2.32 -.07 -.13
03/2004 3.83 03/2004 1.47 2.36 -.25 -.29
04/27/04 4.43 04/27/04 2.00 2.43 +.60 +.53

brucedoe


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