Investing - Theory, News & General • What's up (or down) with TIPS?

I feel buying TIPS ladder is a sure losing game.

If inflation goes up, your holding loses value in the secondary market.

Do you mean if interest goes up?

And you’re assuming that value in the secondary market is relevant. If you bought to hold to maturity, it’s not relevant.

If inflation goes down, your yield + inflation rate is smaller. The inflation protection aspect is eroded.

Please correct my (wrong ?)

And do you mean if interest goes down? Or inflation?

If inflation is low, TIPS may be outperformed by nominal bonds, yes. But they will still earn a specific real yield.

I don’t understand your argument.

Returning to add:

Let’s say that I have 50K today and I’d like to be SURE that I’m transporting that 50K of buying power to 2034. Ultra, totally sure. That is a higher priority for me than taking a gamble on maximizing the return on that 50K. I’d like to grow its buying power, but my main priority is to preserve the buying power it has.

That’s what TIPS will do.

I would think inflation rate and interest rate typically are locked step by step. When inflation goes up, interest rate goes up, and vice versa.

Lots of confusion here, wellboy99. If you want to converse about TIPS, it might be worth investing some effort in learning how TIPS actually work. Birdfood has provided some useful info to get you started.

As to the last point, not so much. Here's a chart of the yield of a TIPS issued in 1999, and the year over year change in CPI:



I've put each on a different vertical axis, since the magnitude difference in CPI are so much larger than that of the TIPS yield. We see that sometimes they kind of move together, but other times not at all.

Here are some accurate statements that might help.

• Bond yield and price are inversely related. This is true of TIPS as it is for all other bonds. So yeah, if real yield increases, TIPS unadjusted price decreases, and vice versa.
• The magnitude of price change relative to yield change is larger for longer term bonds--again, true for all bonds. Technically, it's duration that matters more than term to maturity, but that's a fine point that we can put aside for now.
• If you hold to maturity, the interim changes in unadjusted price simply don't matter. You know the bond will mature at a price of 100, so you know exactly what you'll get in real terms at maturity.
• I qualified "price" with "unadjusted", because the price you actually pay or receive--the adjusted price--is adjusted based on the change in the reference CPI since the dated date of the TIPS (hmm, I think there might be more to explain than I can put in a reasonably short bulleted list, but here's a bit more.)
• The dated date for TIPS is the 15th of the month it's first issued, which is toward the end of the month.
• The reference CPI values used to adjust the TIPS prices lag the published CPI values by about three months. This is a very rough approximation to the reality, but good enough for now.
• So, if you hold to maturity, you know with almost no uncertainty what the internal rate of return (IRR) of the cash flows will be.
• The IRR may not equal the realized return if you're reinvesting the coupons (interest payments), because of the uncertainty in reinvestment rates.
• If you build a ladder of TIPS with the goal of generating a Desired Annual Real Amount (DARA) each year, you know with high certainty that the ladder will deliver the DARA each year. You don't care about coupon reinvestment rate, because the coupons are part of the DARA; i.e., you spend them along with the principal of any TIPS that mature that year.

If you understand all of this, you'll understand that "buying a TIPS ladder", as most of us do it, is most definitely not a losing game. We don't think of it as a game at all, but as a way to provide a relatively certain floor of safe, real (inflation adjusted) income in retirement. And IMO, there is no better way to do that, although you can do something similar with TIPS funds, so a TIPS ladder is not the only game in town.

Statistics: Posted by Kevin M — Thu May 30, 2024 12:42 am — Replies 25 — Views 2332

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