Sorry for the pedestrian question but I was unable to determine an answer from the FAQ.July 2 there is another TIPS auction. I have never purchased any TIPS but am considering it this time. But, I would like to have at least a ballpark idea of what the base rate will be before going forward. It appears that the historical difference between TIPS and fixed 10 yr Treasuries is in the 2% range. Is there any way to get a little more precision on it in advance?Thanks for bearing with a newbie.ron
Atlantic or Pacific? Salmon. on flies? the Sixes or the Miramichi?anywho, I fish for both - but as to TIPS, you can peruse the secondary market and get a pretty good price as to what the auction will produce.These are 10 year (2July)and 20 year (22July) TIPS. the coupon rate and price will be determined at the auction, since I do not understand this, and I have spent considerable time studying these particulars, I leave if for others to fill in the blanks.You can go to your favorite bond pricing site and see what 10 and 20 year TIPS are priced at NOW. The new auction should replicate the current prices, however, I can not find how to deliver the change in principal (by CPI-U) to price.I own them, a huge bunch of them, in fact a third of my total portfolio, bought at the sell off in Nov and Dec, so they are ten per cent up if I were to sell them now, and this does not count the coupons they throw. I will not know if this was a good purchase till I sell them, hold them to maturity, or I won't know not'n if I die before either.I'd say they split two percent YTM, the ten years a hair bit lower, the twenty years a hair bit more. I have no order in, so my actions show that I project that they are not 'on sale'. However, as to whether they will be a reasonable trade, or hold, I don't know.We often have a big sand box argument here as to whether TIPS hold their own to your personal inflation/deflation rate ... I don't care, as I can not forecast the variables of the possibilities. I buy when I thunk that the position will buy more pizzas in the future then that position can buy right now.Ti (some energies and PMs, a bit of ags, mostly tips and MMF, was all energies and PMs, now trading and hiding to maintain goodness)
July 2 there is another TIPS auction. I have never purchased any TIPS but am considering it this time. But, I would like to have at least a ballpark idea of what the base rate will be before going forward. It appears that the historical difference between TIPS and fixed 10 yr Treasuries is in the 2% range. Is there any way to get a little more precision on it in advance?The announcement is July 2, the auction is on July 6, and the bond settlement is July 15'th (thus the maturity will be July 15'th, 2019).One way to estimate the rate is to look here on July 6 just before the auction closes -http://www.bloomberg.com/markets/rates/index.htmlYou can approximate what the rate might be, by looking at what the 9 1/2 year TIPS (maturity 1/15/2019) is trading at the the time.
As Mark said, the best way to approximate is to keep track of the current yield on the 10-year TIPS from the last issue (January). The new TIPS will have a coupon close to the yield (I think they decide that on the announcement day, a few days before the auction), given increments of .125 for coupons. The actual yield you will get at the auction will be somewhat different from the coupon, meaning you will have to pay more or less than $1000 for $1000 face value. You have a few days until the settlement date to make sure you have enough money to pay any difference (they usually try to set the coupon low enough so you pay less than face value, but they can't predict the trading).Despite complaints about Treasury Direct being awkward, I prefer it to using my brokerage account (for taxable account—T-Direct is not available for retirement accounts), because I can link to my bank without having any wait time for transfers. But I don't use my brokerage as my main banking account—some folks do.Currently 10-year TIPS are trading at 1.77%. That would probably mean a 1.75% coupon, but things could change. Personally I consider that too low to lock in for 10 years, although I cannot find a 5-year CD that is clearly a better alternative (at 4%).http://www.bloomberg.com/markets/rates/index.html
Thanks to all for the prompt replies and advice. I agree that the fixed rate seems too low for a 10 yr note. At least now I know how to determine in advance whether I want to play or not.ron
For historical TIPS and other bond rates, seehttp://www.federalreserve.gov/releases/h15/data.htmI recently did a study of the 10 year TIPS and Treasury yields. http://boards.fool.com/Message.asp?mid=27755993&sort=who...Today's 10 Y TIPS yield of 1.76% is below the average of 1.99%. Like all bonds, the value of TIPS will drop if interest rates rise.http://www.bloomberg.com/markets/rates/If you are new to TIPS, I suggest you read the FoolWiki that I wrote on the subject.http://wiki.fool.com/TIPSWendy
Like all bonds, the value of TIPS will drop if interest rates rise. Is that true? I thought if interest rates rise because of inflation, then TIPs should not sag lower like other bonds because their yield will rise automatically. Otherwise, why would one buy TIPs in preference to other bonds?Are you talking about any scenario where interest rates rise but inflation does not? If so, what would that be?
in the Tipswiki it says 'However, the principal of the TIPS can never decline below its issue-value.'.this is not true. TIPS principal can go below issue-value if the CPI-U measure goes down. On a new issue the principal can go below issue-value right away.It is only at maturity that the principal returned is never below issue-value.also, buying seasoned TIPS with above issue-value principal means the dividends are higher, so if (or as) CPI-U drops, and the principal drops, the owner, in a time of deflation, is receiving greater dividends than a TIPS with no inflated principal.Of course, you pay for that above issue-value principal when you make a tips purchase on the secondary market (if it has an above par principal). And if you sell it after the inflated principal drops, say, back to par, you loose that above par amount. And if it matures after dropping back to par, you again loose the above par amount.However, if the principal is below par at maturity, you get back par.Is it worth it to pay more for such a TIPS, one with above par principal?I don't know. My hunch is that the US Treasury secondary market is efficient at pricing in the OID. Mine have a nine and a thirteen percent index ratio (and rising).Here is the Treasury Direct tax tips on tips taxes: Interest payments from Treasury Inflation-Protected Securities (TIPS), and increases in the principal of TIPS, are subject to federal tax, but exempt from state and local income taxes.Two forms are used to report the taxable income earned from TIPS:Form 1099-INT shows the sum of the semiannual interest payments made in a given year.Form 1099-OID shows the amount by which the principal of your TIPS increased due to inflation or decreased due to deflation. Increases in principal are taxable for the year in which they occur, even if your TIPS hasn't matured, so you haven't yet received a payment of principal. end of snip.Ti -
<Are you talking about any scenario where interest rates rise but inflation does not? If so, what would that be? >TIPS are traded on the secondary market, like other bonds. If the supply of new TIPS exceeds the demand for TIPS (including old TIPS), the value of the bonds could drop.Interest rates and bond values move inversely.If the general level of real (after inflation) interest rates rises because debt issuance exceeds demand, TIPS values will drop.Wendy
I find these TIPS instruments fascinating to study. Here is a teeny snip from a March09 story: By MIN ZENG of the WSJThe Federal Reserve's planned purchases of government debt increases the appeal of bonds that offer investors protection against rising price pressures, says Mihir Worah, a senior fund manager from bond giant Pacific Investment Management Co., or Pimco.The Fed plans to buy as much as $300 billion of government bonds over the next six months as it ramps up measures to aid private credit markets and bolster economic growth. The Fed said the purchases, set to start next week, would include both nominal Treasurys and Treasury inflation-protected securities, or TIPS.By buying TIPS, Mr. Worah says the Fed wants to curb the risk of persistently falling consumer prices, or deflation, by putting a floor on the break-even rate, the yield spread between nominal Treasurys and TIPS. The gap is a gauge of investors' inflation expectations and is closely watched by the Fed."The Fed understands that they need to keep inflation expectations on the positive side," says Mr. Worah. "The Fed will step in to buy TIPS if it [the break-even rate] falls below a certain level, which makes investing in TIPS safer than it was." unsnip.and from another snip: NEW YORK, May 26 (Reuters) - The Federal Reserve was buying Treasury Inflation Protected Securities maturing from January 2010 to April 2032, the New York Fed said on Tuesday.unsnipTi-
the Fed wants to curb the risk of persistently falling consumer prices, or deflation, by putting a floor on the break-even rate, the yield spread between nominal Treasurys and TIPS. Fed. Sounds like TIPS investing should certainly be avoided for a while, as the FED is controlling the game. One can't get what 'main street' says they are worth, only what the FED will allow one to get. The gap is a gauge of investors' inflation expectations and is closely watched by the Fed. The gap is NOT a gauge of investor expectations, it is what the FED wants/says it will be. The game is totally 'rigged' going in.rk
Like all bonds, the value of TIPS will drop if interest rates rise. Is that true? I thought if interest rates rise because of inflation, then TIPs should not sag lower like other bonds because their yield will rise automatically. Otherwise, why would one buy TIPs in preference to other bonds?Are you talking about any scenario where interest rates rise but inflation does not? If so, what would that be?There is a lot about this in the FAQs."Interest rates" means many things, but no, rising inflation is not the only factor in rising interest rates, and different things happen to different interest rates.With TIPS, the tradable value is determined by the prevailing TIPS yield for analogous TIPS compared to the TIPS coupon (with adjustment for change in face value with CPI adjustments). Over the last year, we've seen swings on TIPS yields of almost 2% points and changes in tradable value of up to 12 or 15% on the upside if you bought when yields were high. Same thing can happen on the down side if you buy when yields are low. If you hold individual TIPS to maturity, tradable value is irrelevant. But with a fund, you can't escape tradable value.
If you hold individual TIPS to maturity, tradable value is irrelevant. But with a fund, you can't escape tradable value.If we are in a period of increasing inflation/interest rates however, by holding the indiv. bond, one might be 'forced' to hold to maturity, as selling would be very costly, and at the end the face value would be in 'inflated' dollars, so buying-power is lost. Whereas, with the fund (TIP) one can exit the position instantly, especially with a 'trailing-stop) for a tiny commission, and get 'current' dollars, instead of dollars 6-8-10 out. rk
>> If we are in a period of increasing inflation/interest rates however, by holding the indiv. bond, one might be 'forced' to hold to maturity, as selling would be very costly <<Would it? Experience with the TIPS market is fairly limited in time, but so far it looks like TIPS prices rise (and real yields fall) when the market perceives inflation ahead. Which makes some sense -- people are willing to pay more for inflation protection when they fear inflation the most.#29
I disagree with that thought rk, that those 'dollars 6-8-10' years out would be worth less. Your principal would build over that 6-8-10 year time period, so the amount returned at maturity of a TIPS would equal the CPI-U increase over that time period.the advantage of the TIP etf is that it can conveniently be held outside an IRA type holding with no hassle of tax reporting. Whoops, this is not true, Barclays sends you a 1099 and more, could even send long and short term capital gains. I do like the ease of ownership and the instant pricing, and the tinier 'spread' on buying and selling this TIPS holding etf.I looked up the income tax details in the ishares TIP prospectus and it gets even juicier, here is a snip: Adjustments for inflation to the principal amount of an inflation-protected U.S. Treasury bond held by the Fund may be included for tax purposes in the Fund’s gross income, even though no cash attributable to such gross income has been received by the Fund. In such event, the Fund may be required to make annual distributions to shareholders that exceed the cash it has otherwise received. In order to pay such distributions, the Fund may be required to raise cash by selling portfolio investments. The sale of suchinvestments could result in capital gains to the Fund and additional capital gain distributions to Fund shareholders. unsnip, there is a bunch more .... to me it means I will not be adding tips or TIP to my nonIRA accounts.http://us.ishares.com/content/stream.jsp?url=/content/reposi...Holding an actual TIPS in a non tax advantaged vessel means you get to pay tax on both the dividends (you get 1099) and the increase in principal (you get an OID statement). Depending on your tax bracket, the taxes could be higher than the cash you got in the dividend payouts, as you pay income taxes for the increase in the principal, but you don't get that increase in principal till maturity. And even at maturity, if the increase in principal that you paid taxes on has now decreased (because CPI-U went down), you could end up with having paid taxes on an income you never received.Ti
I still don't get this worry about paying taxes on "phantom" TIPS adjustments. Anyone who has ever had CDS compounding internally in a taxable account pays taxes on phantom interest. And with TIPS, if there is deflation following paying taxes on the increased value from previous inflation, you get to subtract the next year. There is a lot more to complain about in the tax system than this.As to getting out of funds quickly, market timing solves all problems if you do it successfully, and there are plenty of folks who can provide great schemes for perfect market timing.The issue with TIPS and TIPS funds, however, is that too many people are convinced there is no interest rate risks with TIPS, because the only factor that affects interest rates is changes in the inflation rate. This is a dangerous misconception. At some point we looked at the historical numbers (might even be in the FAQs) as to how much of the change in yields on TIPS (and historically intermediate Treasuries) was explained as response to inflation and how much broader supply and demand, and the inflation component was less than 50% of the change. The upshot is that it is likely interest rate risk on TIPS and TIPS funds will be less than for Treasuries of similar average maturities, but there still is interest rate risk, and in the case of TIPS funds, where maturities are typically longer than for an intermediate Treasury fund, the interest rate risk will be comparable to an intermediate Treasury fund.
Wendy: You are very well educated on TIPS, perhaps you can tell me something. I have a fixed annuity that is up for renewal, and is part of a traditional IRA. Can I cash in the annuity and roll over the money in to a TIPS, direct, and keep it in a traditional IRA.Thank you,Patrick
<I have a fixed annuity that is up for renewal, and is part of a traditional IRA. Can I cash in the annuity and roll over the money in to a TIPS, direct, and keep it in a traditional IRA.>Yes.If I understand you correctly, you will not be taking any money OUT of the IRA (which would trigger a taxable event), but just cashing out an annuity which is held in the IRA. Once it is cash, you can buy TIPS in the IRA and keep them in the IRA. I have several TIPS that I bought and hold in my IRA.Wendy
If I understand you correctly, you will not be taking any money OUT of the IRA (which would trigger a taxable event), but just cashing out an annuity which is held in the IRA. Once it is cash, you can buy TIPS in the IRA and keep them in the IRA. I have several TIPS that I bought and hold in my IRA.The difficulty may be who the custodian is for the IRA where the annuity now is. You may need to transfer the cash after the annuity matures to a different custodian through whom you can get TIPS at reasonable (or no) cost.
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