Treasury and TIPS discussion thread

Finance
41

If it were equal up and equal down, I would say it’s semi-steady.

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42

It’s almost equal – 0.01, and even that depends on the day you look.

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43

David Enna of Tipswatch gives a glass half full take on the latest five year tips auction

Inflation breakeven rate

With the 5-year Treasury note trading with a nominal yield of 3.87% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.16%, much lower than results for this maturity in recent auctions. The market is now pricing inflation through the next five years very close to the Federal Reserve target of 2%. Which raises the question: Is the market crazy?

Whatever happens over the next 4 years, 10 months, investors in CUSIP 91282CJH5 at today’s auction got a low-risk, appealing result, especially versus the 5-year nominal Treasury.

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44

TIPS are starting to push a 2.5% real yield. Time to dive in again?

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45

Today, the five year treasury note interest is 4.71% while the five year tips real rate is 2.27% so the breakeven inflation is 4.71-2.27=2.44%

If you live in a high-tax state like my California, it makes sense to buy them in a taxable account since the interest and OID is not state taxable. If you hold them in a tax deferred account like an IRA then, depending on your state, they will also be taxable when you withdraw. Too bad that is such a PITA.

I need to educate myself on this. Harry Sit wrote a somewhat dated, but still useful book called Explore Tips. Time to go back and reread it.

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46

Schwab has Treasuries maturing in ~20 years with a 4.961% yield, and TIPS with a ~20 year maturity have dropped slightly and are yielding 2.457%.

47

Here are some good sources for data:
Numbers as of Apr 26, 2024 1130;EDT
TIPS rates

Feb15, 2044; 2.461%

Fixed income rates

20 year treasury 4.92%

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48

Any of you bond-buying veterans recommend one discount brokerage over another for this?

49

In a taxable account you’ll pay federal taxes on the interest AND the inflation-adjustment annually though. Since you’re also taxed on inflation adjustment, you effectively get taxed before you can withdraw the principal. That doesn’t sound optimal to me.

In a tax-deferred account, you may be state-taxed on the interest + inflation-adjustment at withdrawal but I think the federal tax-deferral (and no phantom income) over 20 years makes up for it (unless you’re in a really high state tax bracket maybe). Still I think TIPS makes sense in a taxable account only if you cannot fit them in a tax-deferred account.

P.S.: I wish there was a calculator of the state tax rate breakeven point for taxable vs tax-deferred on say the 20-yr TIPS. Should be doable in a worksheet myself but I’m lazy :wink:

50

I have bought both through Fidelity and Schwab. Both charge very little. One small difference is the lot size required to get the best rate for a given bond. When you decide on a bond, the rate given is usually for a large lot, may be hundreds of $1000s. You have to look at the “book” and scroll down to see the lot size that you want. The difference between the large and small lots is usually small, only a few basis points but Schwab seems to give better rates for smaller lots.

That said, there’s a major problem with Schwab in their handling of the money in your settlement account. They require you to put it in their bank account, which is now yielding only about 0.5%. Fidelity allows you to hold it in a money market account yielding over 5%. It does not take too many days to make up for any difference in the yield for your lot size.

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51

Glad you mentioned the huge difference in sweep between Schwab and Fidelity. The schwab cash spending account is disgracefully low compared to almost all brokerages. So better watch your maturing bonds closely if you’re holding them there.

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52

Chapter 6 of Harry Sit’s book discusses a way to deduct the OID payment from the annual interest so you do not have to pay tax on the OID before the bond matures or you sell it. This is called bond premium amortization. The calculation is pretty hairy, no pun intended, and you have to keep pretty good records, but might be worth it. He has a spreadsheet on his website that may help
https://thefinancebuff.com/go/tips-premium

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53

Great point on Fidelity vs Schwab. Probably the single largest reason I use Fidelity more.

Other considerations / items that I’ve noticed:

  • I think Fidelity is a bit easier for new issues (T-Bills/Bonds, agencies (Federal Home Loan Bank, Federal Farm Credit Bank, etc.);
    If you are buying new issue corporate bonds, I regularly find that one will have the bond available and the other will not. Obviously that issue should go away once they are issued and trading on the open market;
  • Starting in June, Fidelity is going to give you the option of keeping your free cash in the higher yielding SPRXX vs the the lower quality options they have now;
  • On the other hand, Schwab seems to generally have higher money market rates with SWVXX and SNAXX vs Fidelity’s SPRXX and FZDXX.

https://www.schwab.com/public/schwab/nn/money_fund_yields.html

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54

Thanks. Had read the section of the IRS pub on opting out of amortizing the OID. Seemed to indicate you could ask your custodian to not amortize but even then where and how to report it on your 1099 form was not very clear. Would get really fun for sure if you did a 30-yr TIPS ladder for retirement income. LOL