What’s the Bloomberg 10-yr Inflation Breakeven index?
Interesting strategy but ultimately seems too complicated to implement for me since I don’t feel like constantly shorting nominal treasury bonds of matching durations.
It also sounds a bit too good to be true. If it were essentially an improved inflation hedge for your bond allocation using long TIPS and short nominal treasuries, why hasn’t anyone made an ETF for it that could be easily benchmarked (and backtested)? And how would these perform in a deflationary recession?
On the secondary market, treasuries with a ~25 year maturity have YTMs over 5%, TIPS are available as high as 2.64%. About the same place we were at 6 months ago.
Anyone see a reason to lock in now? I’m thinking about adding some of my 4.3% savings reserves - even short term I see it far more likely prices go up (pushing yields down) which would only compound gains if I do need the cash at some point.
With a 20+ year maturity for these TIPS, a few years difference doesnt really matter to me. I can sell the TIPS I have now at a 2.45% YTM, and buy a different TIPS, with a few years longer maturity, with a 2.60% YTM. Is there any reason not to make the swap, that I am not seeing?
I don’t see any aside like you said pushing the maturity date for the new TIPS. Only risk I can see is in fixed rate treasuries. If debt keeps getting worse and inflation is the way to “fix” it, then those 5% yields will be trouble. But no such downside risk I think in the short term for 2.6% TIPS.
September brings 10-year note and 10-year TIPS auctions. I’m trying to decide which one looks less risky 3-4 years down the road, given the current economic uncertainty. Any opinions?
IIRC the breakeven inflation on 10-yr TIPS was about 2.4% so it depends on how much of a recession we’re in for vs. how much the tariffs are gonna bump inflation and whether such bump is one-time or on-going (which is anyone’s guess at this point).
For me, if I had to pick, I’d assume the tariffs are going to be a moderate 1-time bump kept in check by a slowdown in economic output and mediocre jobs landscape in the short term. Both should keep inflation from tariffs moderate and prevent them from leaking into sustained wage growth.
On the other hand, if we do get into a more pronounced recession and government starts printing more money to stimulate the economy beyond what the Fed can do by cutting short-term rates, then I could see inflation handily beating the Fed’s 2% target. Unfortunately, if recent history of political appetites for fiscal prudence is any indication of future trends, I’d price that scenario relatively high.
Ultimately, for my situation, I’d pick the 10-yr TIPS not because I’m sure it’s going to beat an average 2.4% over the next 4 years but because the rest of my assets will perform better in a low-inflation environment than in a high inflation environment.
I executed this move, but in two steps. I made the purchase at about 2.65%, but “borrowed” from my cash reserves instead and delayed the corresponding sale a couple weeks - adding another 0.2% to the spread I captured (whatever that calculates to in higher sale price).
I also bought some Treasuries with a 5.08% YTM. I wish I’d put every penny I have into them at the time, because 2 weeks later I could now sell for a few thousand in bonus profit.
There are 0% Treasury STRIPs available with YTMs still at 4.9%. I’m thinking about buying a traunch of them too, but my mind is telling me there are a couple unique aspects to the STRIPS that I am forgetting and would be best to avoid.
I did. Twice, one at just under 5% and the other at 5.09%. If yields drop to where there is a huge increase in bond price I may sell and start over, but otherwise this is a forget-about-it-for-25-years holding.
I dont know if I’ll end up regretting it, but at a price of under $300 per $1k bond my $50k in bonds was a rather small bet regardless.
5 months later, and these Treasury Strips are over 5.4%, and the TIPs real yield has cleared 3%. I’m considering doubling down with the higher yields, but my fixed income allocation is already bloated relative to my total portfolio and 25+year horizon.
It kinda depends what you need and how you look at it. Also whether you’re in accumulation phase or withdrawal phase when speaking of 25+ horizon. If you have 25 yrs until withdrawal, you have even longer than that as a long-term investor.
Since 2000, equities have returned 5.7% real but look pretty pricey now. I’m not saying they’re not gonna keep returning this much but … With TIPS real yield at 3%, I’m looking at this as a equity risk premium of 2.7%.
Personally, at this point, I’m looking at a 3% burn rate from our portfolio to generate an income that’s about 2x what we’re spending right now. So I find the certainty of 3% real return pretty attractive and would not be against shifting my allocations a bit.
Yeah, I reached the magical 59 1/2 so I actually am gonna start taking modest distributions.
There is also the inconvenient part of not knowing exactly when I’m going to die My father died at 81 of cancer. My grandfathers lived longer.
So maybe a 20 year tip instead of 30? I think they exist. A lot of people just do the ladder that consumes itself as you go instead. Liquidate and spend each rung as it matures.
I think the underlying strategy here is that the net value is perpetually going up, that 3% yield covers double your annual spending (in Shandril’s case). While the TIP portion maintains buying power, both of the annual income and of the total nest egg, indefinitely.
Depends if you need the extra income the ladder provide and your other sources of income. But with a ladder, since by design a ladder leaves you with $0 at the end, I think it may be prudent to go longer than shorter.
Not truly indefinitely but at least for 30-years. Beyond that, it’s a bit of an unknown. That something that’s not totally out of the picture for people in their early 50s looking potentially at 30-45 years in retirement.
You could always sell some along the way and replace them with longer maturity ones at times when yields are attractive enough. But even without repurchasing any, I figure that after 30-years, if I’m still sitting on the same balance (adjusted for inflation) as I started, I should be able to wing it until the end of the plan…
My father died at 81 of cancer. My grandfathers lived longer.