Gyroscopic Investing

If 30 year TIPS are yielding around the same a 30 year bond why wouldn't I just purchase them instead?

Maybe I am reading this recent auction chart wrong: http://www.treasurydirect.gov/RI/OFNtebnd but it looks like the yield on a 30 year TIP bond auctioned on 5/16/11 was 4.38%.

I must not be reading something right.

Good catch doodle, but I don't know... I have been meaning to look at TIPS just so I could mentally get my head around them.  This post will probably inspire my full understanding of them.  Regardless of actually wanting to invest in them, it's probably helpful to know how they work.

doodle wrote: I must not be reading something right.

It looks to me like that auction's Type is "BOND" which indicates a nominal bond, not a TIPS bond.

According to this site
http://www.treasury.gov/resource-center ... =realyield
the real yield on 30 year TIPS was 1.75% today, which seems reasonable when nominals are yielding 4.38%.

Resurrecting an ancient thread because of MMT.

When we have another recession, inflation expectations might nosedive, as they did in 2009, and as they did after the late 2015 "almost" recession, the one that all of the stimulus cancelled. But if MMT gets applied, "QE for the people", inflation will eventually pick up. Would it not be a good idea to rotate out of nominal bonds and into TIPS at that moment when inflation expectations are really low, before the MMT takes effect? There must be a long lag time; months, years. It was a decent thing to do in 2009 and 2016. This might happen again.

ochotona wrote: ↑Mon Apr 15, 2019 10:05 pm Resurrecting an ancient thread because of MMT.

When we have another recession, inflation expectations might nosedive, as they did in 2009, and as they did after the late 2015 "almost" recession, the one that all of the stimulus cancelled. But if MMT gets applied, "QE for the people", inflation will eventually pick up. Would it not be a good idea to rotate out of nominal bonds and into TIPS at that moment when inflation expectations are really low, before the MMT takes effect? There must be a long lag time; months, years. It was a decent thing to do in 2009 and 2016. This might happen again.

I don't know if it's a guarantee that MMT will get applied. I also think that if they did do some helicopter money that it would either be at a time when we were in a recession (like George W's tax rebates) where the stimulus would be welcome, or it would be through avenues like education, health care, or providing crappy minimum wage government jobs to the unemployed. In other words, I'm not totally sold on the fact that it would create anything more than at most a small temporary blip up in inflation in and of itself. And a small tick up in inflation would probably be a welcome sign at this point, as it would allow the Fed to move interest rates up to a healthier level that would give them some firepower to combat a recession without having to do massive QE and/or go negative on yields. Of course we don't know what else the other fiscal and monetary policies would be like along side it at the time and in combination that certainly could be highly inflationary. But all one has to do is look at QE, who would have thought we could have done so many rounds of QE with no inflation? So there's no guarantee that it will.

Also, don't forget about the problems in corporate debt that are going to be coming to a head over the next 5 years, corporations are going to have to deleverage at some point and that will be deflationary. We have had a decade of low interest rates, which is deflationary. We also have the boomers starting to retire, which will be deflationary. In other words, who knows? I could make a sound logical argument either for inflation or for deflation over the next 10 years. So I personally think it's best to be hedged against both possibilities.

Personally, I don't think TIPS serve much of a purpose in a portfolio diversified with long nominal bonds and gold. They cancel out the gains of long bonds in a deflation, and gold would be a better inflation hedge. So I'm just not sold. For someone like a typical boglehead that is violently opposed to both gold and long nominal bonds I can see a point in including some TIPS (and a healthy dose of international), but I just don't see it complimenting the assets already in the PP enough to warrant their inclusion. They're redundant at best (and weaker than the inflation protection already included), and harmful at worst. I also think trying to market time inflation with them is a gamble that is more likely to burn someone than actually work out.

iBonds are better except you can only buy 10k/year

TIPS depend on how the gov decides to define CPI. Use the market's forecast, nominal bond yields

Think of it this way:

When deflation strikes the economy, you want to be holding LTTs. EE bonds would respond too, but the problem with them is the limitation on purchase plus the long term liquidity dilemma they pose in order to capture the guaranteed interest rate doubling effect at 20 years. LTTs proved their value in the Great Recession’s asset deflation crisis of 2008-2009 when they demonstrated the classic flight-to-safety response.

We can argue until the cows all come home about the accuracy of the Bureau of Labor Statistics’ CPI-U index, but the responsiveness of TIPS in an actual high inflation crisis has yet to be demonstrated. That’s why we hold gold for the long run—and to budd’s continual despair, it could prove to be a very long run.