coherent commentary

10-Year TIPS: An Investor's Benchmark

bearfund, I too have a problem with that index. It totally missed the run up in housing (a huge consumer expense) and now that housing is falling off the politicians are calling that a deflationary event.

However, I became more comfortable with the index when I looked at the actual index data for the last 30+ years and I looked at how it's calculated. The other aspect that gave me a little faith is that recently it has been coming in fairly high (5% up in 1 month) so it appears it's not totally corrupt. All that being said, inflation is a personal issue that is impossible for 1 governement number to try to hit. It is what it is, and I realize it is a speculation but the academics who put the numbers together (BLS) are not the same guys who are accountable for money supply (the Fed), there are political forces that influence both, but I don't think there is a conspiracy. I'm not betting the farm on it, either way.

10-Year TIPS: An Investor's Benchmark

Owen, ok you got me on the pluralization. Thanks for pointing that out. But you might want to go ahead and correct the people who write the U.S. Treasury website, because they refer to it the same way I did. Oh, and while you're over there arguing with those folks about how they're spelling the bonds they issue, have a gander at the way tips bonds work. I'm not going to argue with you until you read it but it says that the principal is adjusted up or down to reflect inflation or deflation. At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. So, If you buy one in the secondary market that has been adjusted up over the last few years, you stand the (slim) chance that it gets adjusted down over the next few years and in that case you could lose your principal.

10-Year TIPS: An Investor's Benchmark

Owen, you are wrong. I just bought a ten year tip trading at 97. If there is MASSIVE deflation, I will receive 100 when it matures. I could have bought a 10 year tip (that used to be a 20 year tip) for 130. If there is massive deflation I might only get 100 back at maturity.

Bearfund, tips are great in a retirement account where taxes aren't an issue. If you modeled your theoretical return on tips over the last 10, 20, 30 etc. years (had they existed), they would've been an excellent addition to a portfolio... completely replacing cash and lowering overall volatility.

10-Year TIPS: An Investor's Benchmark

(1) it is possible to lose a LOT of money on a 10 year tip bond if you don't buy a new issue, or if you buy one that has been marked up to reflect past inflation. In other words, if you buy a 20 year tip bond with only 10 years left, that has already been marked up by 30% due to past inflation, and then we experience deflation going forward, then you will lose money. You will actually lose principal and be returned less than you paid. The same thing goes, to a lesser effect, if you buy the ishare instead of actually buying a tip bond.

(2) That being said, Since 1970 we've experienced oil shocks, minor wars, political scandals, terrorist attacks, all sorts of good & bad things, etc., etc. Since then CPI has NEVER been negative. Only 5 times has it gone below 2%. Comparing the TIP yield to a yield of a regular treasury, or cash, is the reason they are a compelling buy. It's heads I win, tails I don't lose (if you buy the right tip).