Treasury Inflation Protection Treasuries (TIPS) (bond, investment, income, stock market)

[Maddie104]

TIPS have been a good fixed income "investment" for me and I thought it might be instructive on how I buy and sell TIPS.

I purchased a $10,000 TIPS bond at the December 2018 auction and the inflation forecast was approx. 2%. This was a reissue of the April 2018 purchased at a discount in December 2018. Purchase price was $9953.66; zero commission. As of today, the short-term gain is $317.53. I received an interest payment of $31.73. So, I am considering selling to take this four month gain.

I decided to purchase this TIPS in December since the real yield was 1.129% with a very low breakeven of 1.15%.

The link below does a good job of explaining TIPS and historic real yields. The main point is I buy TIPS when the forecasted inflation is low so the breakeven is low (and generally demand for TIPS is low). So, it's a contrarian bet on inflation. I hold TIPS in a Roth account so the timing of the trade (LT vs ST) for gains purposes is immaterial. In deflationary times, the market value may decrease but, at maturity, TIPS are redeemed at the indexed inflation value or principal amount ($10,000 in this case) whichever is greater. Obviously, this return should not be compared to the stock market which has an risk factor in excess of TIPS.

9128284H0
U S TREASURY NOTE INFLATION INDEX NOTE .625% 04/15/23 04/15/18
(FIFO)
Lot details
10,000.0000 $1.00 $9,953.66 $10,271.20 +$317.53 —
+$317.53

DATE ACQUIRED (noncovered shares)
12/20/2018 10,000.0000
$1.00
$9,953.66
$10,271.20
+$317.53
—

U S TREASURY NOTE INFLATION INDEX NOTE .625% 04/15/23 04/15/18 $31.73

https://tipswatch.com/

[mathjak107]

whether tips are a good investment or not depends on what you are comparing them to ... with low inflation usually standard treasuries are a better deal .

[CaptainNJ]

i havent heard these mentioned for a long time. i think they got hot around the time of the stimulus packages and economic recovery when people started worrying about inflation.

im curious to see how they panned out. it doesnt seem like the concerns that caused them to become popular ended up materializing as actual problems.

[Maddie104]

Originally Posted by CaptainNJ

i havent heard these mentioned for a long time. i think they got hot around the time of the stimulus packages and economic recovery when people started worrying about inflation.

im curious to see how they panned out. it doesnt seem like the concerns that caused them to become popular ended up materializing as actual problems.

That's my point. I do not buy when inflation is a concern. I sell them when inflation becomes a concern. So far any TIPS I have purchased I haven't held to maturity but traded for a capital gain.

[CaptainNJ]

Originally Posted by Maddie104

That's my point. I do not buy when inflation is a concern. I sell them when inflation becomes a concern. So far any TIPS I have purchased I haven't held to maturity but traded for a capital gain.

is this a new strategy for you or is it something you have been doing for a long time?

[Maddie104]

Originally Posted by CaptainNJ

is this a new strategy for you or is it something you have been doing for a long time?

I started purchasing TIPS in 08-09 but haven't bought for the past few years since the coupon was so low. I buy opportunistically -- when it's believed we are going into a recession. WIthout going into a lot of detail, when demand is low via TIPS auction, the higher bids are accepted with a higher coupon and bonds are often sold at a discount. The December 2018 was a very good auction for the discount and coupon. If you check out the link, there is a brief history of TIP auctions. This isn't to say, TIPS are better than treasuries but I prefer to have an assortment of investments to take advantage of interest rate/inflation surprises.

Conventional wisdow is to buy TIPS when inflation is in sight but this is when demand is high and the auction results reflect this.