Aldebert

The Retiree's Conundrum

How about savings bank "money market" accounts or short CDs at 1.5% - 2.0% ?

Inflation Expectations: Slowly Inching Higher

True, and you don't even have to wait. Tell grandma to buy a lowly Series I U.S. Savings Bond.

From the Treasury's November 1st press release:

I Bond Earnings Rate 3.36%, Fixed Rate 0.30%
The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate. The 3.36% earnings rate for I bonds bought from November 2009 through April 2010 will apply for their first six months after issue. The earnings rate combines a 0.30% fixed rate of return with the 3.06% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The fixed rate applies for the 30-year life of I bonds purchased during this six-month period. The CPI-U increased from 212.709 to 215.969 from March 2009 through September 2009, a six-month increase of 1.53%.

California Pension Plan: Too Big to Fail and Acting Like It

There is only one solution that will be used by government to solve this problem. Not reduced pensions, not higher taxes, not default, but "shared" pain through inflation, with the middle class hardest hit.

O Canada (Part II): There's Gold in Them Thar Hills - and Plains

Canadian Railroad Trilogy, ©1967 by Gordon Lightfoot

There was a time in this fair land when the railroad did not run
When the wild majestic mountains stood alone against the sun
Long before the white man and long before the wheel
When the green dark forest was too silent to be real

But time has no beginnings and the history has no bounds
As to this verdant country they came from all around
They sailed upon her waterways and they walked the forests tall
Built the mines, mills and the factories for the good of us all

And when the young man's fancy was turnin' to the spring
The railroad men grew restless for to hear the hammers ring
Their minds were overflowing with the visions of their day
And many a fortune lost and won and many a debt to pay

For they looked in the future and what did they see
They saw an iron road running from the sea to the sea
Bringing the goods to a young growing land
All up from the seaports and into their hands

Look away said they across this mighty land
From the eastern shore to the western strand

Bring in the workers and bring up the rails
We gotta lay down the tracks and tear up the trails
Open her heart let the life blood flow
Gotta get on our way 'cause we're moving too slow

Bring in the workers and bring up the rails
We're gonna lay down the tracks and tear up the trails
Open her heart let the life blood flow
Gotta get on our way 'cause we're moving too slow
Get on our way 'cause we're moving too slow

Behind the blue Rockies the sun is declining
The stars they come stealing at the close of the day
Across the wide prairie our loved ones lie sleeping
Beyond the dark ocean in a place far away

We are the navvies who work upon the railway
Swinging our hammers in the bright blazing sun
Living on stew and drinking bad whiskey
Bending our backs til the long days are done

We are the navvies who work upon the railway
Swinging our hammers in the bright blazing sun
Laying down track and building the bridges
Bending our old backs til the railroad is done

So over the mountains and over the plains
Into the muskeg and into the rain
Up the St. Lawrence all the way to Gaspe
Swinging our hammers and drawing our pay
Layin' 'em in and tying them down
Away to the bunkhouse and into the town
A dollar a day and a place for my head
A drink to the living, a toast to the dead

Oh the song of the future has been sung
All the battles have been won
On the mountain tops we stand
All the world at our command
We have opened up her soil
With our teardrops and our toil

For there was a time in this fair land when the railroad did not run
When the wild majestic mountains stood alone against the sun
Long before the white man and long before the wheel
When the green dark forest was too silent to be real
When the green dark forest was too silent to be real
And many are the dead men too silent to be real

Bond Market's Message Is Clear: Slow Growth Ahead

Low inflation? Maybe so, but the real return on 20 year TIPs tightened to 2.02% and 10 year to 1.56% as of yesterday. For those of us planning to participate in next week's auction, that's too bad.

Why You Need TIPS in Your Retirement Account

I agree with your post.
I am of the opinion that effectively the duration of the TIPs fund (and its underlying securities) is even shorter than usually stated because the principal amount of the securities is constantly adjusting with changes in the level of inflation. Unlike MBS, where "option-adjusted" duration is generally measured, I don't think that stated TIPs duration accounts for the constant principal adjustment. (Of course, my view is based on my belief that I can rely on a correlation between mid- to long-term interest rates and inflation rates.)

TIPS Market Is Probably Underestimating Future Inflation

I certainly agree with the conclusion that TIPS are a good place to be. However, I think that (at least for individual investors, rather than institutions matching long-term liabilities) the focus on comparing 10-year TIPS or 20-year TIPS to their fixed-rate treasury counterparts via the "inflation breakeven" is misplaced (though ubiquitous).

I don't believe that long-dated tresuries are a typical choice for individuals who are more likely to consider shorter duration alternatives (medium term corporates, broad bond market funds, CDs, etc.) To me, the key is the real yields on the TIPS, which yesterday were 1.83% and 2.29%, respectively. TIPS do not have anywhere near the duration of the fixed rate treasuries of equal maturity, so I don't compare them. The question is whether a "full faith and credit" instrument that will guarantee me 2.29% "real" return (let's ignore the slightly lower interest payment that would result from net deflation), will guarantee me a return of principal (even if there is net deflation), will automatically adjust with inflation, and will be salable at close to par value (unlike the fixed rate securities) is a good investment for my retirement account? And of course I think it is.

TIPS: Cheap Inflation Insurance

When discussing TIPs and comparing them to fixed rate Treasuries, why doesn't anyone focus on the duration (and I am refering to real duration, i.e., interest rate sensitivity, as opposed to the term-to-maturity which is mislabled "duration" on the chart above)? For example, take a 10 year TIP vs. a 10-year Treasury. My thinking is that it doesn't make sense to compare the yields on the two because every six months, effectively interest rate on the TIP adjusts. That is the fixed coupon is applied to an adjusted principal amount. Thus the market value of the TIP is much less sensitive to changes in market rates and therefore less risky compared to the fixed rate Treasury. Now there is a question of the basis risk in that the changes in inflation that will be applied to the principal amount are not the same as the changes in the yield curve, but I am will to bet that in a rising inflation environment they will be correlated enough to protect me. I look forward to anyone else's thoughts on this.

Why Is It So Hard to Modify a Mortgage?

An additional reason (though I don't mean to suggest that this is the primary reason): if the loan has been securitized, the servicer of the mortgage may not have the right (under the securitization agreements) to modify it. E.g., if a 7% mortgage backs a 6.5% security with the remaining 1/2% going to the serivcer as its fee, if the loan were modified to lower rate, say 5.5%, the mortgage could no longer back the 6.5% mortgage-backed security as there would not be enough interest cash flow. If modified, it would have to be bought out of the security and treated as if the loan paid off. In this case, someone would have buy the modified loan out of the mortgage pool backing the MBS, a role most servicers do not play as part of thier servicing functions.

Four Inflation Hedging Investment Strategies

I agree with 1 through 3, but note that TIP cannot yield 7.46%.