Is anyone else buying TIPS?

Discussion of the Bond portion of the Permanent Portfolio

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barrett
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Is anyone else buying TIPS?

Post by barrett » Wed May 24, 2023 1:05 pm

I know TIPS are not really part of the PP but I have been buying some in my tax-deferred account as a sort of liability matching/planned withdrawal strategy between now and when I start taking SS at age 70 in 2028. I am curious if anyone else here has been buying them with the real yields currently being positive. So far I just have 2024 - 2028 (1/15/24, 1/15/25, etc.) rungs but I may extend that out another 2-3 years.

The US Treasuries in that account are now about 50% nominals (one-year ladder) and 50% TIPS.
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Re: Is anyone else buying TIPS?

Post by vnatale » Wed May 24, 2023 2:14 pm

barrett wrote:
Wed May 24, 2023 1:05 pm

I know TIPS are not really part of the PP but I have been buying some in my tax-deferred account as a sort of liability matching/planned withdrawal strategy between now and when I start taking SS at age 70 in 2028. I am curious if anyone else here has been buying them with the real yields currently being positive. So far I just have 2024 - 2028 (1/15/24, 1/15/25, etc.) rungs but I may extend that out another 2-3 years.

The US Treasuries in that account are now about 50% nominals (one-year ladder) and 50% TIPS.


Not yet. But I'm strongly open to it and considering it.
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Re: Is anyone else buying TIPS?

Post by vnatale » Thu May 25, 2023 3:26 pm

The latest from this web site on the topic:

https://tipswatch.com/2023/05/25/lookin ... a-problem/

Looking to invest in longer-term TIPS? There’s a problem.

Posted on May 25, 2023 by Tipswatch
By David Enna, Tipswatch.com
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Dieter
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Re: Is anyone else buying TIPS?

Post by Dieter » Fri May 26, 2023 12:52 am

I own some of the Vanguard short-term TIPS fund, but, not increasing my allocation
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Re: Is anyone else buying TIPS?

Post by vnatale » Fri May 26, 2023 8:29 am

Dieter wrote:
Fri May 26, 2023 12:52 am

I own some of the Vanguard short-term TIPS fund, but, not increasing my allocation


Isn't that a totally different investment from actually holding the TIPS and holding them to maturity?
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Is anyone else buying TIPS?

Post by mathjak107 » Sat May 27, 2023 5:12 am

i found interpreting the tips yields. on tips funds confusing so i wrote fidelity insight for a better explanation back in april .

jack bowers replied


When the SEC implemented a bunch of rules for reporting yield-to-maturity a few decades ago, inflation-protected bond funds didn’t exist. These funds don’t work like regular bond funds, and depending on the mix of issues and their payment schedules, the SEC’s mandate produces some downright crazy figures that are essentially meaningless. You have to look at the distribution yield to see what’s really going in: less than 0.1% income over the last 12 months.

author eric deslauriers in his book about the permanent portfolio , investing equanimity , expressed his views on tips


Numbers in a spreadsheet do not tell you about political risk that often comes with high inflation. You have to use some intuition and historical extrapolation to guess what results from high inflation and why you don't want to use TIPS.

1) High inflation is a political problem in almost every case. The people causing the inflation know they are doing it.
2) Because high inflation is unpopular with the masses, the people in charge are always going to lie about it as long as possible to deflect blame.
3) Then when lying doesn't work, they will implement policies like price controls to make it look like they are doing something. This always makes it worse.
4) Along the way, they will manipulate economic numbers to try to trick the markets. However the markets are much smarter than the typical politician, who is usually an idiot based on my experience.

But these things are not going to show up in Excel. There is no ("IDIOT POLITICIAN ) function you can call. There is no way for you to anticipate what actions they will take to lie about the situation. And, there is no way for you to know how the markets are going to react to the mess.

I will only suggest that the markets will figure out the right thing to do and that right thing usually is not relying on government numbers about inflation.

so tips are like buying fire insurance from an arsonist

Or you can simply go back and read Nixon's, Ford's and Carter's speeches about inflation in the 1970s. It was lie after lie after lie. A decade of lies.
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Re: Is anyone else buying TIPS?

Post by barrett » Sat May 27, 2023 3:01 pm

And yet about half of the time TIPS held to maturity are going to beat nominal treasuries of the same maturity, right? Not sure how the government manipulating inflation figures changes that. As kbg pointed out a while back, we don't seem to talk as much about government manipulation of inflation data when it comes to I-Bonds and nominal treasuries.

I'm just looking at TIPS as a way to diversify my fixed-income holdings. Ditto for I-Bonds.
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Re: Is anyone else buying TIPS?

Post by mathjak107 » Sat May 27, 2023 3:07 pm

barrett wrote:
Sat May 27, 2023 3:01 pm
And yet about half of the time TIPS held to maturity are going to beat nominal treasuries of the same maturity, right? Not sure how the government manipulating inflation figures changes that. As kbg pointed out a while back, we don't seem to talk as much about government manipulation of inflation data when it comes to I-Bonds and nominal treasuries.

I'm just looking at TIPS as a way to diversify my fixed-income holdings. Ditto for I-Bonds.
i am not so sure for most of history that tips have been better. that may be only including the last 2 years or so.

i show the long treasury bond beating tips up to 2021 for most of the last few decades
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Re: Is anyone else buying TIPS?

Post by Dieter » Sat May 27, 2023 3:21 pm

vnatale wrote:
Fri May 26, 2023 8:29 am
Dieter wrote:
Fri May 26, 2023 12:52 am
I own some of the Vanguard short-term TIPS fund, but, not increasing my allocation
Isn't that a totally different investment from actually holding the TIPS and holding them to maturity?
I wouldn’t say “totally”, but yeah, different
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Re: Is anyone else buying TIPS?

Post by mathjak107 » Sat May 27, 2023 3:24 pm

i bonds have a different structure then tips , i bonds base rate doesn’t fall like tips does when rates go higher .

tips barely beat out regular treasuries during this bought of inflation

2. Why have TIPS performed so poorly when inflation is so high?
TIPS prices have fallen more than the principal has adjusted higher, resulting in negative total returns for the year. TIPS are still bonds, meaning their prices and yields move in opposite directions. Like most fixed income investments this year, TIPS yields have surged, pulling their prices lower.



6. How can I compare TIPS to traditional Treasuries?
Breakeven inflation rates. The breakeven rate is the difference between the yield of a nominal Treasury and the yield of a TIPS with a similar maturity. For TIPS investors, the breakeven rate can be considered a hurdle rate—it's what inflation would need to average over the life of the TIPS for it to outperform the nominal Treasury.
Breakeven rates are well off their recent highs. At 2.5%, the five-year TIPS breakeven rate is well off its recent high of 3.7% hit the past March. If the CPI were to average more than 2.5% over the next five years, the five-year TIPS would outperform a five-year nominal Treasury. (Likewise, if inflation averaged less than 2.5%, the nominal Treasury would outperform.)

TIPS breakeven rates are relatively low given the high current rate of inflation
Chart shows the breakeven inflation rate for 10-year and 5-year TIPS from 2009 to October 2022. As of October 18, 2022, the breakeven inflation rate for a 10-year TIPS was 2.4%, and for a 5-year TIPS was 2.5%.
Source: Bloomberg using daily data as of 10/18/2022.

US Breakeven 5 Year (USGGBE05 Index) and US Breakeven 10 Year (USGGBE10 Index). Past performance is no guarantee of future results.
While the current breakeven rates are elevated relative to the last 20 years, they are still well below the current rate of inflation. Considering that the CPI rose by 8.2% during the 12 months ending September 2022, a 2.5% breakeven rate seems relatively low.


https://www.schwab.com/learn/story/trea ... about-tips
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mathjak107
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Re: Is anyone else buying TIPS?

Post by mathjak107 » Sat May 27, 2023 3:39 pm

boglerdude
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Re: Is anyone else buying TIPS?

Post by boglerdude » Sat May 27, 2023 6:10 pm

That conspiratorial rant would be deleted from bogleheads

Gov sets CPI but then markets set TIPS price, rite

iBonds morlike iCash
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Re: Is anyone else buying TIPS?

Post by barrett » Sat May 27, 2023 6:11 pm

mathjak107 wrote:
Sat May 27, 2023 3:39 pm
tyler looked in to them too

https://portfoliocharts.com/2022/09/27/ ... ectations/
And, as usual, it's an excellent article looking at all of the pros and cons of the asset class. Remember that I am not going all in on TIPS, but I do think it's smart to hold some of them. My ladder is a five-year ladder with all five positions to be held to maturity in a tax-deferred account. Either the nominals are going to perform better over my time horizon or the TIPS are. My approach is to not pick a favorite and be satisfied with whatever the results are.
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Re: Is anyone else buying TIPS?

Post by mathjak107 » Sun May 28, 2023 4:32 am

my personal feeling is that if one wants TIPS and is a PP user i would not make them part of the PP bond holdings as they would suck in a recession or depression in comparison .. but nothing wrong holding them in the VP just like holding commodities on the side and not diluting the gold budget.

unfortunately tips are not like i bonds where what you see is what you get …tips are two moving targets with one going up and one going down and you are somewhere in between.

you can see on morningstar that VTIP has lost 1.68% the last year despite this inflation so the perception of where inflation is headed weighs in more then where inflation is or what it has done

in the other hand shy which has a similar duration is down just .48% the last year
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Re: Is anyone else buying TIPS?

Post by barrett » Mon May 29, 2023 4:57 am

mathjak107 wrote:
Sun May 28, 2023 4:32 am
my personal feeling is that if one wants TIPS and is a PP user i would not make them part of the PP bond holdings as they would suck in a recession or depression in comparison .. but nothing wrong holding them in the VP just like holding commodities on the side and not diluting the gold budget.
Agreed, and I probably should have stated up front that I haven't been running a PP for several years now. Current holdings are probably closest to the Desert Portfolio, although our large chunk of "fixed income" is mostly short duration (the aforementioned TIPS not included).

Speaking of Desert, I wish he were still posting here as I'd be curious what he is doing on the fixed income side. I don't remember him discussing TIPS but I do remember that he would grab some CDs if they were paying significantly more than treasuries. Right now uncallable CDs in the two-year to five-year range are paying roughly 30 to 45 basis points higher than treasuries. And, yes, I realize the limitations of even callable CDs when compared to treasuries.

It will be interesting to see what happens to these treasury/CD spreads if the "agreement in principle" on the debt ceiling actually goes through this week.
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Re: Is anyone else buying TIPS?

Post by mathjak107 » Mon May 29, 2023 5:00 am

well we can’t predict what bonds will do but gold is now showing it is down monday because with the deal the thinking is the chances of rates rising just increased.

so bonds can go either way tomorrow when we open …i thought the deal would be a good thing for them but after seeing gold this morning i am not so sure
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Re: Is anyone else buying TIPS?

Post by jhogue » Mon May 29, 2023 7:55 am

Cash investors should consider taxation as well as inflation. I-bonds have superior tax treatment compared to TIPS:

I-bonds come with 30 years tax deferral, interest compounded semi-annually. TIPS do not.

I-bonds create extra tax deferred space. TIPS in tax-advantage accounts take up that space.

I-bonds in taxable accounts are not subject to RMDs. TIPS in T-IRAs are subject to RMDs.

I-bonds are completely tax free for higher ed. (income qualification required)

I would only consider TIPS if I had already filled up all my tax advantaged accounts and bought my annual I-bond quota.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Is anyone else buying TIPS?

Post by vnatale » Mon May 29, 2023 9:45 am

jhogue wrote:
Mon May 29, 2023 7:55 am

Cash investors should consider taxation as well as inflation. I-bonds have superior tax treatment compared to TIPS:

I-bonds come with 30 years tax deferral, interest compounded semi-annually. TIPS do not.

I-bonds create extra tax deferred space. TIPS in tax-advantage accounts take up that space.

I-bonds in taxable accounts are not subject to RMDs. TIPS in T-IRAs are subject to RMDs.

I-bonds are completely tax free for higher ed. (income qualification required)

I would only consider TIPS if I had already filled up all my tax advantaged accounts and bought my annual I-bond quota.


Your last line is key. Is there any other investment aside from iBonds that restrict how much you can invest annually? Particularly at small low annual amounts and with all the problems attempting to do the additional $5,000 via one's tax return.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Is anyone else buying TIPS?

Post by barrett » Mon May 29, 2023 10:53 am

Hey jhogue,

Appreciate your take. Here is a good David Enna article (alas, from November of 2022 when the I-Bond fixed rate was only 0.4%) that has two lists. One of them gives the advantages of I-bonds over TIPS and the other the advantages of TIPS over I-Bonds.

https://tipswatch.com/2022/11/20/i-bond ... tage-tips/

One thing that I always come back to is that I-Bonds can only be purchased outside of "tax-advantaged" accounts while TIPS, due to their tax treatment, are best to hold only in tax-deferred or Roth. So it's not necessarily an either or choice. And, to be clear, I LOVE my I-Bonds because they are the only drama-free asset.
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Re: Is anyone else buying TIPS?

Post by mathjak107 » Mon May 29, 2023 11:54 am

personally i wouldn’t take up valuable tax deferred space with bonds unless i thought i was going see capital gains from selling that may be high..

flipping or rebalancing tlt would warrant it .

at 3-4% interest ,not worth it to me taking up space
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Re: Is anyone else buying TIPS?

Post by barrett » Mon May 29, 2023 12:52 pm

mathjak107 wrote:
Mon May 29, 2023 11:54 am
personally i wouldn’t take up valuable tax deferred space with bonds unless i thought i was going see capital gains from selling that may be high..

flipping or rebalancing tlt would warrant it .

at 3-4% interest ,not worth it to me taking up space
Fair enough, but I think much depends on what one wants as an asset allocation and what percentage of assets are in taxable, tax-deferred & Roth accounts. In our case we hold stocks & gold in every account. We no longer want to the volatility of LTTs. So, not wanting to devote more than, say, 35% to stocks and about 15% to gold, one has to choose something, right?

So far for that roughly 50% of fixed income, we've gone with nominal treasuries and have only this year started adding some TIPS. Might purchase uncallable CDs as well depending what premiums they are offering for different maturities. The current premiums on CDs seem like they could make sense in tax-advantaged accounts but the spreads are not yet great enough for us to justify buying them in taxable (due to the state tax-free aspect of treasuries).

But to each their own.
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Re: Is anyone else buying TIPS?

Post by ochotona » Tue Jun 06, 2023 12:39 pm

I won't use TIPS because my tax-advantaged space is all used up by tactical asset allocation and the phantom income thing is nonsense. I might use them if losses weren't capped to $3000 in a tax year, but because they are gated, no.
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Re: Is anyone else buying TIPS?

Post by Smith1776 » Thu Jun 08, 2023 3:06 pm

I'm not buying TIPS because I'm Canadian. ;D
I still find the James Rickards portfolio fascinating.
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Re: Is anyone else buying TIPS?

Post by boglerdude » Thu Jun 08, 2023 6:13 pm

U get tenants for the rental?
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Re: Is anyone else buying TIPS?

Post by vnatale » Tue Jul 04, 2023 8:18 am

barrett wrote:
Wed May 24, 2023 1:05 pm

I know TIPS are not really part of the PP but I have been buying some in my tax-deferred account as a sort of liability matching/planned withdrawal strategy between now and when I start taking SS at age 70 in 2028. I am curious if anyone else here has been buying them with the real yields currently being positive. So far I just have 2024 - 2028 (1/15/24, 1/15/25, etc.) rungs but I may extend that out another 2-3 years.

The US Treasuries in that account are now about 50% nominals (one-year ladder) and 50% TIPS.


Double underline that buying TIPS are not part of the Permanent Portfolio philosophy.

One of the main reasons cited is that the government can rig the CPI that controls their returns.

That has never been a reason that has resonated with me.

During the past week I've read several books on investing.

There is a group of books authors who I highly respect who are major proponents of TIPS. These authors are:

William Bernstein (on my personal Mt. Rushmore of personal finance. Michael Kitces would be a second)

Larry Kotlikoff (his latest book is superb and most likely am going to buy his software for at least a year: https://kotlikoff.net/)

Zvi Bodie (https://en.wikipedia.org/wiki/Zvi_Bodie)

I thought four years ago today I was ready to implement The Permanent Portfolio.

However, here I sit with still nothing unchanged with my portfolio since I made my initial investments over 20 years ago in January 2003 (except for since 2019 attempting to make maximum iBond purchases).

What I have currently evolved to is this:

60% of my portfolio - Golden Butterfly
40% of my portfolio - U.S. Treasuries (maybe half TIPS / half traditional. Still need to determine the time terms for these purchases)

Finally, my "variable portfolio" would be the not small amount I have in my Vanguard charitable fund. This is truly a perpetual portfolio as opposed to my own portfolio which is managed for my lifetime (which for planning I am assuming to go to age 100).
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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