Investing - Theory, News & General • Now that long TIPS yields are 60 bp off their highs I will…

You were asking someone else, but I've been selling TIPS almost daily, lately my Apr 2024s, to buy longer maturity TIPS for my ladder.

I recall that your ladder was initially almost all relatively short term (0-5 year maturities).

Is your ultimate goal to maintain a balanced ladder, evenly covering liabilities from 2024-2033 as well, and overweighting 2034 and 2040 to fill out the missing years?

Also, why are you selling daily, rather than all at once? You could completely build your new ladder in one day and be done with it. Is it because you are hoping that yields will continue to rise?

Yes, after putting all of my IRA money into TIPS with maturities of five years or less, I decided to build a "real" TIPS ladder covering my expected residual expenses through 2047, so that's what I've been working on.

I kind of drifted into this. I first bought the 2047 because it had the highest yield of all TIPS, and I wanted to get in on that action. Then I bought some other 204Xs for the same reason. Finally I decided building a ladder made sense, especially with most TIPS yields at or above around 2% (although I lowered my threshold to about 1.9%).

To help with this, I started with #Crunchers TIPS ladder spreadsheet, and modified it to use quotes from Schwab, which I download daily anyway. Previously I had modified it to use quotes from Fidelity, but then just as an exercise to prove to myself that I could do it. I also include the settlement date and ref CPI in the imported quotes sheet, and can calculate the index ratios for the TIPS with that and the dated date ref CPIs that #Cruncher provides in his spreadsheet. Bottom line is that I've automated the spreadsheet so no need to copy/paste quotes from WSJ and copy/paste the ref CPI from #Cruncher's eyebonds.info website, or somewhere else.

In #Cruncher's spreadsheet there's a multiplier for each TIPS row that indicates how many of that TIPS to buy for that year of the ladder. For example, if you just want Jan 2028 0.500% TIPS for 2028, you'd enter 1 as the multiplier for that row. I want half in that one and half in the Jul 2028, so I enter 0.5 for each. The sum of the multipliers equals (or should equal) the number of years in your ladder, so for me the sum is 23.

I've entered multipliers of 3.44 and 3.56 for the Jan 2034 and 2040 TIPS respectively, because in another thread I worked out that 2.44X and 2.56X of each matches the durations of the gap year TIPS, given certain assumptions. Here's the resulting table:
The "Sum wts" are what I used to add to 1 for the multipliers for the 2034 and 2040 (e.g., 1 for 2034 and 2.44 for gap years = 3.44). Note that they add to 5--the number of gap years. So given the current yield curve, I'd sell about 80% of the 2034s and 20% of the 2040s to buy the 2035 when it becomes available. I originally had 3.5 for each, and that would be good enough, but hey, since I went to the trouble of working it out, might as well implement it.

I am building the ladder gradually by swapping the first-to-mature TIPS for longer maturity TIPS to minimize regret regardless of what happens to yields. If they go down, I'll be glad I bought some earlier, and if they go up, I'll be glad I didn't buy them all earlier. So far yields generally have been going up since I started, so regret is OK so far.

In my "Apr 2024 TIPS" thread, I posted that I got more than 100 for the sale of my Apr 2024s last week, so more than the maturity price, and this raised the question of why not just do it all now. The only answer is the regret about yield trajectories thing, but I am thinking of accelerating my swaps, especially when TIPS yields increase. Maybe do twice as many each trade. I still need to look at it for today.

Also, even if I sold all of my Apr 2024s, that would get me only about 1/3 of the way to completing the ladder, so I'd need to start selling Jul 2024s next. Guess what? Schwab has not been trading Jul 2024s for at least a week! I need to call them about this, but figured I'd get close to finishing up with the Apr 2024s first. I just looked, and I'll need to sell all of my Apr and Jul 2024s, and a large portion of my Oct 2024s to complete the ladder.

Next, a day or two ago, I realized that my RMDs will be larger than the DARA (desired annual real amount) I used for the ladder. So once I complete my first pass, I'll probably continue rolling shorter maturity TIPS into longer ones. Also, assuming 2% real and 2.5% inflation, my RMDs will increase through 2046, so I might have add increasingly more to later rungs of the ladder.

Statistics: Posted by Kevin M — Tue Feb 20, 2024 12:55 pm — Replies 2882 — Views 446397

---