my tips i own are already up in appreciation more than the 30 year yields..it has become an appreciation centered game . the tips are just an opposite bet from conventional bonds ... the bonds will get a kicker if inflation rises.Kevin K. wrote: ↑Mon Sep 28, 2020 5:16 pmMuch as I admire Craig and J.M. Lawson and that book I think their views on TIPS are largely mistaken and are based on the fact that TIPS performed terribly during the 2008 market crash - which turns out to have more to do with Lehman Brothers than it does with TIPS per se (see link below).Vil wrote: ↑Mon Sep 28, 2020 4:02 pmWhile I can see your point on short-term Treasuries, I can vividly recall couple of paragraphs from Craig's book that are related to TIPS, in essence (+cite):
- "Among the risks involved with TIPS is the integrity of the reporting process for inflation, also known as the Consumer Price Index (CPI). Even if
one believes that the CPI provides an accurate picture of inflation in the broader economy right now, the question is whether the government would
be tempted to manipulate the CPI during some future period of severe inflation. In fact, the U.S. CPI has been changed a number of times through
the years for various reasons. There is nothing to say it can't be changed again in the future."
-"TIPS have only been available in the United States since 1997 and have not been through a period of high inflation. Therefore, anyone stating how
TIPS would do during a period of high U.S. inflation is just guessing regardless of what credentials they hold. If the United States were to encounter
a period of high inflation, TIPS owners could easily begin to feel more like crash test dummies than investors"
- "the increases in the value of TIPS during periods of high inflation will never be great enough to offset the losses in the rest of the portfolio. TIPS are simply not as volatile as gold. As already discussed, in a crisis gold can have explosive price movements in excess of 100 percent annually. The chances of TIPS ever doing this are basically zero due to how they are priced by the markets"
Just some extra food for thought on TIPS, not necessarily do want to bring them under the lights for any further discussion :-)
Disclaimer: I am non-US, but following a variety of the US PP (local-currency hedged). Cannot spot a teddy bear anywhere around me :-)
William Bernstein has this to say about the "they can manipulate the CPI" trope:
"Some worry that the government may manipulate the CPI in a way that understates inflation and erodes the real purchasing power of TIPS. This is unlikely for the simple reason that the bond market would consider this to be a form of default, which would have two consequences: first, it would produce bond market turbulence of a sort that the Treasury could ill afford, and second, it would destroy the Treasury's future ability to offer them, possibly permanently. The United Kingdom first offered inflation-linked gilts in the early 1980s and scrupulously maintained the integrity of its inflation reporting."
Getting back to Jonathan Clements, what's he's doing is buying short-term tips (think VTIP) and short-term Treasuries as a low-duration barbell that's agnostic about inflation. That's entirely different than buying long-term TIPs as a substitute for LTT's which Rowland and Lawson rightly object to because they don't provide deflation insurance. However as Bernstein points out deflation is the least likely of the 4 economic scenarios the PP was designed to deal with and the most expensive to insure against. And remember Clements has his ~67% equities in fully internationally-diversified, small cap and value tilted funds, which according to Bernstein and others are the best long-term inflation hedge of all.
Here's the link to the article I mentioned about what happened to TIPS in 2008:
https://movement.capital/the-largest-ar ... s-in-2008/
All that said, I personally don't see TIPS of any duration priced with negative nominal interest rates as being appealing. For the 50% of my portfolio I have in fixed and cash I'm buying our annual 10K limit in iBonds, putting a decent chunk into NCUA insured 6-12 month CD's paying .60-.80% (better than 10 year Treasuries and just as safe IMHO) and including about 20% in Vanguard's BSV ETF, which is 70% government, 30% high-quality corporate, very short duration. Equities and gold are 25% TSM, 10% Total International and 15% Gold. That's the PP-inspired portfolio (which I admit is no longer very PP like in terms of percentages). Much less sophisticated than Mathjak 107's portfolio for sure, but easy to maintain.
But while Mathjak107 has his conventional and his inflation-fighting portfolio, I've decided after years of thinking about it to diversify across active and passive strategies, so the other half of my assets are in 80% Vanguard Wellesley, 20% Gold (see my thread on Wellesley in the Variable Portfolio forum here if interested). To be clear I'm not recommending anything I'm doing to anyone else. It's just a good-enough allocation that takes into account the knowns and the known unknowns of these crazy times as best I can. Needless to say I will happily revert to a more PP-like bond allocation if we ever get back to Treasuries with positive real returns.
i think any portfolio weighting for inflation , but not severe inflation , should have tips at the base of the pyramid .
if you look at most real return funds that is exactly what they hold along with other inflation oriented assets .....
fidelity's strategic real return is tips , floating rate loans , mortgage reits and commodities..
"• The fund's assets are allocated among inflation-protected securities (including U.S. TIPS),
floating-rate high-yield bank loans, commodities and related investments, and real-estate-related
securities (including REITs), using a target weighting of 30%, 25%, 25% and 20%, respectively.
This strategic allocation attempts to take advantage of the low correlation among these security
types in effectively hedging inflation over time."
)
