Are TIPS in a Bubble? 15 comments
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Question 1: U.S. Treasuries are widely acknowledged to be in a bubble. Since TIPS are technically considered Treasuries, are TIPS caught up in the same bubble?
Question 2: How strongly correlated have TIPS been with ordinary (nominal) Treasuries?
From Wikipedia:
Treasury securities are the debt financing instruments of the United States Federal government, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).
Technically TIPS are Treasuries. But two terms are commonly used:
- Treasuries: Usually refers to nominal Treasury Notes & Bonds
- TIPS: Only refers to Inflation-Protected Treasuries
Comparing Nominal vs. Inflation-Protected Treasuries:
- (IEF) Barclays 7-10 Yr Treas Bond-Wtd Avg Maturity 8.51yr
- (TIP) Barclays TIPS Bond Fund-Wtd Avg Maturity 9.10yr
The two bond fund ETFs are nearly identical in all aspects: they have nearly identical weighted average maturities and both are treasury funds. The fundamental difference between the two is that TIP is inflation-protected and IEF consists of nominal treasuries. As you can see from the chart above, IEF and TIP have roughly moved in tandem since the inception of TIP five years ago. In the last year, TIP has diverged widely from IEF.
According to a November 2008 report by Brown Brothers Harriman:
Question: I don't have a strong view on inflation so is there any reason to add TIPS to a diversified portfolio?
Answer: Since inception, TIPS have been additive to portfolio returns while limiting volatility. Over the past 10 years ending September 30, 2008, the correlation between the Lehman U.S. TIPS Index and the Lehman U.S. Treasury Index was approximately 80%, so TIPS have brought beneficial diversification while enhancing return.
US Nominal Treasury Bond Funds:
| Symbol | Fund Name (Description) |
| BIL | SPDR Barclays Capital 1-3 Month T-Bill ETF |
| IEI | iShares Barclays 3-7 Year Treasury Bond Fund |
| IEF | iShares Barclays 7-10Yr Treasury Bond Fund |
| PLW | PowerShares 1-30 Laddered Treasury Portfolio |
| ITE | SPDR Barclays Capital Intermediate Term Treasury ETF |
| SHV | iShares Barclays Short Treasury Bond Fund |
| SHY | iShares Barclays 1-3Yr Treasury Bond Fund |
| TLH | iShares Barclays 10-20 Year Treasury Bond Fund |
| TUZ | PIMCO 1-3 Year U.S. Treasury Index Fund ETF(NEW) |
US Inflation-Protected Treasury Bond Funds:
| Symbol | Fund Name (Description) |
| IPE | SPDR Barclays Capital TIPS ETF (Inflation Protected) |
| TIP | iShares Barclays TIPS Bond Fund (Inflation Protected) |
Conclusion:
TIPS have unique features which put them in an asset class of their own. As the chart above shows, TIPs do not always move in tandem with nominal Treasuries. If inflation picks up, as I suspect it will, you will begin to see a wide divergence in the performance of IEF vs. TIP.
Question: Are TIPS in a bubble?
Answer: NO.
FULL DISCLOSURE: Author is long individual US TIPS and WIP. You should perform your own due diligence and consult with an investment advisor before investing.
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On Jun 21 08:41 AM mangiamillie wrote:
> An informative article however I'm leaning toward Dennis Gartman's
> view about buying the ETF TBT.
1. A few years ago one could buy $30k/yr-per person of IBonds with a decent 2% fixed rate giving a 6%+ return, tax deferral etc. So IBonds were far better for individuals than TBonds/TIPs. Sadly now both the I-Bonds fixed rate is wiped out and the amount/yr reduced to a pitiful amount.
2. TIPs are based on US official CPI rates which are not to be trusted since last 20+ years. Even the official rates exclude fuel & food, greatly understate health & education costs and define housing in a "equivalent-rent" way that had housing deflating in the midst of a 50% rise in home prices!
3. Ironically, good dividend paying stocks give better inflation protection and better yield.
4. End of 20 year interest rate fall from the hawk Volker to the wimps Greenspan/Bernake who have become administration puppets.
5. As USD falling fears is actually more important than inflation - USD could "adjust" by 50% or more over next 5yrs, while it is doubtful inflation would be even 3%.
6. Treasury vigilantes are likely to keep rates rising higher on greater supply (US govt's need to sell bonds), and lowered demand (multi-reserve currencies) from US-hating empires (China Russia etc) as well as "allies" (Brazil, Australia, Europe etc).
7. Your chart shows that 0% appreciation for TIPs over last 5yrs. So how is that better than a CD?
> US Treasuries & TIPs are the LAST thing individuals should buy
> (unless they have 10s of millions) nowadays with 4% 10yr rates.
>
>
> 1. A few years ago one could buy $30k/yr-per person of IBonds with
> a decent 2% fixed rate giving a 6%+ return, tax deferral etc. So
> IBonds were far better for individuals than TBonds/TIPs. Sadly now
> both the I-Bonds fixed rate is wiped out and the amount/yr reduced
> to a pitiful amount.
>
Jain - agreed. When I read some time ago they were dropping the I bonds to zero interest rate, I thought "Why would anyone buy yhtm then" They're like US Savings bonds - a rip off.
> 2. TIPs are based on US official CPI rates which are not to be trusted
> since last 20+ years. Even the official rates exclude fuel &
> food, greatly understate health & education costs and define
> housing in a "equivalent-rent" way that had housing deflating in
> the midst of a 50% rise in home prices!
>
will address in response to Jimbo
> 3. Ironically, good dividend paying stocks give better inflation
> protection and better yield.
>
strongly agree. inflation protection does not track year to year.
> 4. End of 20 year interest rate fall from the hawk Volker to the
> wimps Greenspan/Bernake who have become administration puppets.
>
agree - see my current article on this seekingalpha.com/artic...
>
> 5. As USD falling fears is actually more important than inflation
> - USD could "adjust" by 50% or more over next 5yrs, while it is doubtful
> inflation would be even 3%.
agree with first half, disagree with the second half
>
> 6. Treasury vigilantes are likely to keep rates rising higher on
> greater supply (US govt's need to sell bonds), and lowered demand
> (multi-reserve currencies) from US-hating empires (China Russia etc)
> as well as "allies" (Brazil, Australia, Europe etc).
>
Given there recent past actions, just like watching a drunken sailor stumble down the street, I have no idea what the boys at the Fed will do next.
> 7. Your chart shows that 0% appreciation for TIPs over last 5yrs.
> So how is that better than a CD?
Backward-looking, yes. Good point. What about forward-looking?
US + FOREIGN CPIs - The US CPI is being fudged, most certainly. Even the establishment thinks so. Now that Geithner has got Bill Gross on his speed dial, you can expect the FUTURE Bill Gross to follow the party mantra telling us all we should be drinking the kool aid. But the old Gross was different. Given that he is a bond guy and an establishment type, you'd be surprised to read Bill Gross'es June 2008 article slamming the accuracy of the US CPI. I posted it in my instablog, just in case Bill Gross decides to erase the article from his website, at the urging of his new benefactors. link here: seekingalpha.com/insta...
In the above article Bill Gross smashes US CPI calculations but gives high marks for accuracy to non-US calculations.
On Jun 21 11:53 AM Jimbo wrote:
> I support Phillip Jain's viewpoint. I left TIPs early last year when
> I concluded the inflation data was being cooked.
forcing the price of bonds down thus offsetting the advantage of
Tips. I agree that TBT is a better play.
With the TIPs (this has never been practiced in real life in the US) - in theory, the TIP would start paying 1.5% real yield plus an inflation kicker of 7.5%. Total yield is now 9%. No one would have a reason to trash the TIP. In fact the inflation trade would flock to them. It has never happened, so it is just a theory, but this is the way the bonds work.
An alternative to this is to buy floating rate securities.
On Jun 21 01:34 PM remick wrote:
> Isn't it also true that as inflation heats up bond interest rates
> increase
> forcing the price of bonds down thus offsetting the advantage of
>
> Tips. I agree that TBT is a better play.
On Jun 21 08:54 PM hrant wrote:
> actually , companies that pay dividends and increase them are the
> best way to protect against inflation ; 2 examples XOm and PM .
Euro 32.34%
Japanese yen 4.89%
Pound sterling 19.32%
AUSTRALIAN DOLLAR 3.00%
CANADIAN Dollar 5.45%
Other Currencies 35.00%
There are many shortcomings for you:
1. It is a US Fund - and you live in europe so you are subject to 30% with holding
2. The fund pays in dollars and is price is measured in dollars - so you would have to convert the proceeds of the fund back to euros. the only thing you would lose is the currency conversion cost.
On Jun 21 11:34 PM User 155157 wrote:
> Hi, I live in Europe. I would rather have EURO TIPS. Is there an
> ETF specialised in EURO TIPS? Thanks. Dick Kluiver.
My annual return has averaged 5.21%.
I do not think that is so great, but it is better than losing.
On Jun 22 03:03 PM Chancer wrote:
> I bought TIPS in a Roth IRA about 7 years ago.
>
> My annual return has averaged 5.21%.
>
> I do not think that is so great, but it is better than losing.