Where Are the TIPS Strips?

Let's say you're a risk-averse investor with a nest egg you want to save for retirement. You're not greedy; you'd rather take absolute safety over an extra point or two in annual returns. You could just keep your money in cash, but then you run the risk that it will be eroded by inflation: while that might not be a huge worry right now, your time horizon is decades long. And so you look to TIPS instead.

The problem with TIPS is the interest payments: if inflation is high, your coupon will be high as well, but it comes to you in rapidly-depreciating cash. Buying the TIP ETF, as Dave Neubert recommends, has the same problem: It, too, dividends out the coupon, leaving it to the investor to try to reinvest that coupon as best he can. The real yield on TIPS might be great right now (about 3%), but it probably won't be that high when you try to reinvest your coupons.

Fortunately, there's a solution. TIPS are strippable, which means that you can buy a 20-year zero-coupon TIPS -- just the final payment, with none of the coupons along the way. It's a risk-free way of getting a guaranteed real return over as many years as you like, and since you can pick which principal or coupon payment you want to buy, you can orchestrate things so that your bond matures on pretty much the very day you want: just when, say, you're set to retire.

One would imagine, then, that TIPS strips would be very popular investments right now. And one would be wrong. In fact, TIPS strips are so unpopular that one broker told me he suspected they don't actually exist. While TIPS are indeed strippable, the strips don't seem to be traded in any kind of a liquid market, and finding them in the wild is decidedly non-trivial.

I've spent a bit of time googling things like "tips strips cusip" without a lot of luck, so maybe my readers can help me out. How easy or difficult is it for an individual investor to buy TIPS strips? What's the bid-offer spread on such things? And why aren't they more popular?

Comments

[Augustus:]

The value of TIPS can go both up or down depending upon inflation or deflation. Getting the stripped version would have some downside risk. Buying the coupon version and reinvesting the coupon could give a better ride.

2008 Nov 10 07:14 PM

[zaparozhe:]

There are some TIPS with very low coupons - look at the April 2013. I think the coupon is like 5/8%. That's pretty close to a zero. It's a recent issue (therefore face can't go negative as with older bonds) and it trade with a similar YTM as the 5-yr straight treaury - no cost for the inflation insurance - go figure.

2008 Nov 11 12:44 PM

[dr.doolittle:]

say what?

2008 Nov 11 12:55 PM

[Tom Jacobs:]

Actually it is incorrect to say that TIPS can decline with deflation. There is a built in floor at zero, that is even with negative inflation (deflation) the principal amount does not decline.


On Nov 11 12:55 PM dr.doolittle wrote:

> say what?

2008 Nov 13 10:24 PM

[nym:]

Try googling STRIPS and 'treasury strips': for example, online.wsj.com/mdc/pub...

2008 Nov 16 05:44 PM