The purpose of this thread is to discuss any and all topics related to TIPS (Treasury Inflation Protected Securities). There are lots of other threads focused on various aspects of TIPS, and of course post there if it's appropriate, but if anyone has any questions, observations, or anything else they'd like to discuss that doesn't fit nicely into another current thread, feel free to post it here. Questions can be absolute newb questions, like what are TIPS, how to buy them, or how the inflation adjustments are calculated, or more advanced questions, like "what is an outlier factor and why might one need to be applied in addition to a seasonal adjustment?" Huh? ![:?]( "Confused")
What's up with TIPS today are long-term TIPS yields, and what's down are long-term TIPS prices; remember that for bonds, price and yield are inversely related, so when one is up the other is down. I know this without even looking at any TIPS yields because the price of the very long-term TIPS ETF, LTPZ, is down about 1.3%; LTPZ holds about 43% of its portfolio on 10-20 year TIPS and the rest in 20-30 year TIPS, with an average maturity of about 22 years and average duration of about 19 years.
I tend to get more interested in doing TIPS trades when yields move up, so I did a couple trades today. I'll share what I traded and why, but first, the background.
I currently have nothing but TIPS in my IRA. They are laddered out to 2047, with approximately the same annual real cash flows each year from 2028-2047, but with 57% of my TIPS maturing 2025-2027--the first three years of my 23-year ladder. With all of these short-term TIPS, the market-weighted average duration of my TIPS "ladder" is about 6.2 years, but for a 23-year investment horizon it should be closer to 10 years; if a 2036 TIPS (midpoint between 2025 and 2047) were issued today, the duration would be about 10.3 years.
This duration goal applies if I want to match the average duration of my TIPS portfolio to that of my expected residual liabilities during the 23-year investment horizon. People who use TIPS funds to simulate a TIPS ladder use a duration matching approach something like this. If I had equal rungs in my ladder, I wouldn't have to worry about duration, since the timing of the real cash flows would match the timing of the expected residual liabilities. By "residual liabilities" I mean the expected real consumption not covered by Social Security income (I don't have a pension or any annuities).
Matching the duration of a bond portfolio to the investment horizon matters if we want to balance the price risk and reinvestment risk components of interest rate risk (aka term risk). If we have a higher tolerance for one or the other components of term risk, we may not want to match the duration of the bond portfolio to the investment horizon. The latter is one reason I've objected to some posts that simply state this duration matching as an axiom, without any qualifications.
I tend to be more sensitive to price risk than to reinvestment risk, which probably is due to the cognitive bias of short term thinking, but also probably to a long period of low and generally declining yields from about 2010 to mid-2020 (during much of which time I held mostly 5-year direct CDs at large yield premiums over 5-year Treasuries). This is why I ended up with so much of my TIPS portfolio in shorter term TIPS, after being shocked into action by the unexpectedly high inflation that began in 2021. Once I became comfortable enough with the evidence that current long-term TIPS yields are historically attractive, I started adding longer term TIPS to my portfolio, then I decided to just build an actual ladder targeting a Desired Annual Real Amount (DARA) for each rung.
I still like to move into new territory gradually, so rather than just selling all of my excess shorter-term TIPS and building a 23-year ladder with equal rungs, I've been gradually selling my soonest-to-mature TIPS and using the proceeds to add to my longer-term rungs. I started with my Jan 2024 TIPS, then moved on to my Jul 2024s, and finally my Oct 2024s, after which I paused for awhile.
Today I decided to start selling some of my 2025s to buy some longer maturities. I'm still hoping for even higher yields on the longest-term TIPS in my ladder, but the prices change much less for 202X TIPS than for 204X TIPS, for example, so I'm more comfortable adding to my 202X rungs right now. That brings us to today's trades.
I sold 10 of my Apr 2025s, and used the proceeds, plus a little extra cash from my minimal money market fund holding, to buy 12 Apr 2028s. Why did I select these particular maturities to sell and buy?
I hold a large excess of Jan, Apr, Jul and Oct 2025s. To increased my average duration by the most, I would sell the Jan, with the shortest duration, but due to the inverted yield curve, the seasonally adjusted (SA) yield of the Jan is 33 basis points higher than that of the Apr, so I decided to sell Apr instead. As a secondary consideration, I hold roughly equal real principal amounts of Jan and Jul for later maturities.
I already hold Jan and Jul 2028, but I kind of like have TIPS maturing more often if possible, so I decided to depart from my Jan+Jul maturities approach and add some of the Apr.
Previously when yields had increased to levels above my average yields for each maturity for the ladder I built with my initial DARA, I increased my DARA by 20%, then added to every rung to get there. Yields haven't increased much since then, so instead of increasing my DARA for all rungs, I decided to just start adding to the later 202X rungs.
What's up with TIPS today are long-term TIPS yields, and what's down are long-term TIPS prices; remember that for bonds, price and yield are inversely related, so when one is up the other is down. I know this without even looking at any TIPS yields because the price of the very long-term TIPS ETF, LTPZ, is down about 1.3%; LTPZ holds about 43% of its portfolio on 10-20 year TIPS and the rest in 20-30 year TIPS, with an average maturity of about 22 years and average duration of about 19 years.
I tend to get more interested in doing TIPS trades when yields move up, so I did a couple trades today. I'll share what I traded and why, but first, the background.
I currently have nothing but TIPS in my IRA. They are laddered out to 2047, with approximately the same annual real cash flows each year from 2028-2047, but with 57% of my TIPS maturing 2025-2027--the first three years of my 23-year ladder. With all of these short-term TIPS, the market-weighted average duration of my TIPS "ladder" is about 6.2 years, but for a 23-year investment horizon it should be closer to 10 years; if a 2036 TIPS (midpoint between 2025 and 2047) were issued today, the duration would be about 10.3 years.
This duration goal applies if I want to match the average duration of my TIPS portfolio to that of my expected residual liabilities during the 23-year investment horizon. People who use TIPS funds to simulate a TIPS ladder use a duration matching approach something like this. If I had equal rungs in my ladder, I wouldn't have to worry about duration, since the timing of the real cash flows would match the timing of the expected residual liabilities. By "residual liabilities" I mean the expected real consumption not covered by Social Security income (I don't have a pension or any annuities).
Matching the duration of a bond portfolio to the investment horizon matters if we want to balance the price risk and reinvestment risk components of interest rate risk (aka term risk). If we have a higher tolerance for one or the other components of term risk, we may not want to match the duration of the bond portfolio to the investment horizon. The latter is one reason I've objected to some posts that simply state this duration matching as an axiom, without any qualifications.
I tend to be more sensitive to price risk than to reinvestment risk, which probably is due to the cognitive bias of short term thinking, but also probably to a long period of low and generally declining yields from about 2010 to mid-2020 (during much of which time I held mostly 5-year direct CDs at large yield premiums over 5-year Treasuries). This is why I ended up with so much of my TIPS portfolio in shorter term TIPS, after being shocked into action by the unexpectedly high inflation that began in 2021. Once I became comfortable enough with the evidence that current long-term TIPS yields are historically attractive, I started adding longer term TIPS to my portfolio, then I decided to just build an actual ladder targeting a Desired Annual Real Amount (DARA) for each rung.
I still like to move into new territory gradually, so rather than just selling all of my excess shorter-term TIPS and building a 23-year ladder with equal rungs, I've been gradually selling my soonest-to-mature TIPS and using the proceeds to add to my longer-term rungs. I started with my Jan 2024 TIPS, then moved on to my Jul 2024s, and finally my Oct 2024s, after which I paused for awhile.
Today I decided to start selling some of my 2025s to buy some longer maturities. I'm still hoping for even higher yields on the longest-term TIPS in my ladder, but the prices change much less for 202X TIPS than for 204X TIPS, for example, so I'm more comfortable adding to my 202X rungs right now. That brings us to today's trades.
I sold 10 of my Apr 2025s, and used the proceeds, plus a little extra cash from my minimal money market fund holding, to buy 12 Apr 2028s. Why did I select these particular maturities to sell and buy?
I hold a large excess of Jan, Apr, Jul and Oct 2025s. To increased my average duration by the most, I would sell the Jan, with the shortest duration, but due to the inverted yield curve, the seasonally adjusted (SA) yield of the Jan is 33 basis points higher than that of the Apr, so I decided to sell Apr instead. As a secondary consideration, I hold roughly equal real principal amounts of Jan and Jul for later maturities.
I already hold Jan and Jul 2028, but I kind of like have TIPS maturing more often if possible, so I decided to depart from my Jan+Jul maturities approach and add some of the Apr.
Previously when yields had increased to levels above my average yields for each maturity for the ladder I built with my initial DARA, I increased my DARA by 20%, then added to every rung to get there. Yields haven't increased much since then, so instead of increasing my DARA for all rungs, I decided to just start adding to the later 202X rungs.
Statistics: Posted by Kevin M — Tue May 28, 2024 4:37 pm — Replies 3 — Views 285