Explore Bonds

New Global and International TIPS ETFs From iShares

TFB — Sun, 12 Jun 2011 07:00:00 +0000

IndexUniverse reports that iShares launched a global and an international inflation-linked bonds ETFs.

The global inflation-linked bonds ETF (ticker GTIP) invests in both US and non-US inflation linked bonds. The international inflation-linked bonds ETF (ticker ITIP) invests only in non-US inflation linked bonds. The expense ratio on both ETFs is 0.40%.

An existing ETF for international inflation-linked bonds is WIP from State Street, with an expense ratio of 0.50%.

It's not clear to me how inflation in other countries will affect a US investor. An increase in import prices will be reflected in the US CPI. Investing in TIPS in the US will protect the investors from such rise in the CPI. Inflation in foreign countries may also cause the value of their currencies to go down, offsetting the (nominal) gains from inflation adjustment.

Scott Burns Suggests Waiting for Better Yield In a 3-Year Ladder

TFB — Wed, 11 May 2011 07:00:00 +0000

A 68-year-old who has only 36% in bonds asked what to do: buy more bonds now or wait. Syndicated columnist and author Scott Burns suggests waiting in a 3-year ladder.

"So you needn't be in a hurry to increase that allocation to 60 percent.

If you do start increasing the allocation, the safest way would be to build a simple three-year ladder."

Scott Burns: What to do about bonds

Tipswatch: A New Blog About TIPS

TFB — Wed, 11 May 2011 07:00:00 +0000

While surfing on the Internet, I stumbled upon a new blog (started in April 2011) about TIPS: Tipswatch. Similar to this site, it offers news and commentary about TIPS.

From it's about-page:

"Tipswatch is written by David Enna, a longtime journalist based in Charlotte, N.C. He has been investing in Treasury Inflation-Protected Securities for more than a dozen years. This blog is meant to explore ideas, benefits and cautions about TIPS, which David believes are an under-appreciated and under-used investment."

I agree with David that TIPS are an under-appreciated and under-used investment.

Paul McCulley: Munis Are the Best Deals in Bonds

TFB — Tue, 10 May 2011 07:00:00 +0000

Retired PIMCO managing director and portfolio manager Paul McCulley appeared in an interview in the PBS TV program WealthTrack. He talked about Fed policy, market risks, and investment strategy.

Mr. McCulley said in the interview that intermediate-term munis are the best deals in bonds now. From the transcript:

"And actually my favorite sector, notably for the retail investor, is the municipal bond sector right now. It is trading at its cheapest relative valuation to Treasuries in decades, and so if I have to put money to work in the bond market now, and within an investment thesis, intermediate grade municipals beat everything else hands down for the taxable investor."

Watch the full interview below.

Look Beyond Reported Yield Numbers

TFB — Sat, 30 Apr 2011 07:00:00 +0000

Jason Zweig wrote in his WSJ column about how different TIPS funds and ETFs report yield on TIPS funds and ETFs differently.

How Inflation-Protected Funds Get to Inflate Their Yields

The difference primarily comes from whether the inflation adjustment is included in the reported yield.

Because the legally required SEC yield only covers 30 days, if inflation adjustment is included in the calculation, it can skew the result when inflation numbers change from month to month.

The the most reliable and relevant yield number for a TIPS fund or ETF is its weighted average real yield to maturity. Unfortunately most companies, including Vanguard which operates the largest TIPS fund, don't report this number because it's not legally required (iShares does).

The yield of a TIPS fund or ETF is driven by the yields on the bonds it owns. You can get a feel of what the yield should be by looking at the yields on the bonds. See TIPS Data and Resources for where you can look up the real yields.

April 2016 5-Year TIPS Sold At -0.18% Yield

TFB — Thu, 21 Apr 2011 07:00:00 +0000

The auction for 5-year TIPS maturing in April 2016 closed today. The resulting yield is -0.18%.

Although a negative yield isn't pleasant, the result is actually higher than I expected. Wall Street Journal reports that TIPS maturing in January and July 2016 were yielding -0.40% and -0.29% respectively as of yesterday. You would think the April 2016 maturity would yield somewhere in the middle, -0.35% or so, but the actual result is -0.18%.

Investors who bought at this auction paid a lower price than investors who bought similar notes on the secondary market. They also receive a better deflation protection because the newly issued notes don't have as much accumulated inflation adjustment as the existing notes.

Buying TIPS at auction remains to be a good way to buy TIPS.

TIPS: Bad Deal for Government, Good Bargain for Investors?

TFB — Thu, 21 Apr 2011 07:00:00 +0000

TheStreet.com reported a research paper written by three economists at UCLA saying that TIPS are a bad deal for the government compared to regular Treasuries.

Government Keeps Losing With TIPS

"Treasury bonds are almost always overvalued relative to TIPS. Total TIPS-Treasury mispricing has exceeded $56 billion, representing nearly 8% of the total amount of TIPS outstanding."

If they are a bad deal for the government, investors are getting a good bargain in TIPS.

A typical total bond market type of mutual fund or ETF (Vanguard VBTLX, iShares AGG) has at least 1/3 in regular Treasuries. If you believe the findings of this research, instead of investing in a mutual fund or ETF that includes regular Treasuries, pair up TIPS with an investment grade corporate bond fund or ETF. You get the same exposure and a better value.

Meanwhile, some other economists say that TIPS are still a good deal to the government and by implication investors leave money on the table for the inflation protection.

Economists almost always have different opinions on everything. Which economists are right about TIPS? I'm not qualified enough to judge. Instead of all-or-nothing, I think it's prudent to include TIPS as a part of one's bonds investment.

Reference:

Christensen, Jens and James Gillan, Has the Treasury Benefited from Issuing TIPS?, Federal Reserve Bank of San Francisco Economic Letter 2011-12

Fleckenstein, Mathias, Francis A. Longstaff, and Hanno Lustig, Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle, NBER Working Paper 16358

Tax Treatment of TIPS Issued At a Premium: IRS Notice 2011-21

TFB — Thu, 21 Apr 2011 07:00:00 +0000

The IRS issued a notice to clarify the tax treatment of the premium paid on TIPS issued at a negative yield.

Because the Treasury used to set the TIPS coupon rate at the nearest 0.125% below the auction result, and the auctions usually result in a positive real yield, TIPS are usually issued at a discount. In other words, you pay slightly less than $1,000 for each $1,000 TIPS. For a reopened bond, even if you pay a premium, the yield used to be still positive.

Now the Treasury sets a floor rate at 0.125% and the real yield on short-term TIPS are negative, TIPS will be issued at a premium. You will pay more than $1,000 for each $1,000 TIPS and you get a negative real yield. The IRS issued Notice 2011-21 to clarify the tax treatment of the premium paid.

The premium is amortized using the same method when the yield is positive. The amortized amount first offsets the interest. If it exceeds the actual interest received, the remainder is used to offset the inflation adjustment (OID). The IRS notice includes specific examples for the calculation.

If you hold individual TIPS in a taxable account and you will buy TIPS with a negative real yield, be sure the study the IRS notice and understand how to amortize the premium you pay.

To avoid math headaches, buy individual TIPS in a tax deferred account or buy TIPS fund or ETF in a taxable account.

Reference:

IRS Notice 2011-21: Treasury Inflation-Protected Securities Issued at a Premium

April 2011 TIPS Update From Larry Swedroe

TFB — Tue, 12 Apr 2011 07:00:00 +0000

Investment advisor Larry Swedroe published his monthly TIPS update for April 2011.

Because the estimated inflation risk premium is still very low, TIPS are seen as a better alternative to nominal Treasuries. However, the yield on both TIPS and nominal Treasuries are much below their long-term averages, especially for shorter maturities.

5-Year TIPS Auction Coming Up On April 21, 2011

TFB — Tue, 05 Apr 2011 07:00:00 +0000

A 5-year TIPS auction is coming up on April 21, 2011. The announcement is scheduled on April 14. This upcoming auction will be the first time when a new coupon rate policy takes effect.

Under the new auction schedule implemented since January 2011, there will be a TIPS auction every month. In the odd-number months (January, March, ...), US Treasury will sell the 10-year TIPS. They will sell 5-year TIPS every four months in April, August, and December. 30-year TIPS are also auctioned every four months in February, June, and October.

Under the previous coupon rate policy, the coupon rate on new issues is set to the nearest 0.125% below the auction result, with a floor of 0%. The new policy raises the minimum coupon rate to 0.125%.

Because the market yield for 5-year TIPS is currently below zero, it's almost certain the auction result will be negative. In that case the coupon will be set to 0.125% and the price will be adjusted to above 100. For every $1,000 face value bond, you will pay more than $1,000.

Yes, you are guaranteed to lose money to inflation if you buy this 5-year TIPS and hold them to maturity. However, with 5-year nominal Treasury yield at 2.2% as I write this, I expect the investors will lose money to inflation in the 5-year nominal Treasury notes as well if they hold them to maturity. Which will make investors lose more is the question.