A Look at Fixed Income Products: OSM vs TIP

Roger Nusbaum submits: Quite a while back a reader left a comment about what I thought sounded like an interesting fixed income product: SLM CPI Linked Note (OSM).

While I can't be certain that comparing OSM to iShares TIP Fund (TIP) is the best possible comparison, I want one inflation product for clients. I chose TIP. Structured products, which this sort of seems to be, have a lot of moving parts and are very difficult to fully understand. I am not sure why OSM is lagging and I am not sure if I could figure out why on my own and you probably don't need to spend time figuring out.

The important thing is that I heard about it, I watched it for many months and concluded it is not for me. It matures in ten years, and probably matures at its $25 par value. If you want to own it, you need to make sure about the price at maturity, and you need to be willing to hold it as I suspect it could still go down.

Comments

[Panskeptic:]

As long as the government fiddles with the inflation statistics in order to keep COLAs down, TIPS will lag as well. Would it make more sense to turn to a small immediate fixed annuity that allows for a customer-selected inflator in the payouts, e.g. 5%? A number of insurance companies offer this product. Diversification, inflation protection, everything except liquidity.

2007 Feb 20 08:36 AM

[lsuavecito:]

>>I am not sure why OSM is lagging and I am not sure if I could figure out why on my own <<

Perhaps the deceptive formula used to compute the rate has something to do with its lagging. It is also stated that the minimum interest rate will be 0.00%. Who needs it when equally rated JSM(senior debt)can be bought with a yield of 12.5%? JSM doesn't have the ridiculous CPI formula to deal with. It is what it is, a 6% bond.

Feb 10 12:05 PM