Tipswatch is written by David Enna, a longtime journalist based in Charlotte, N.C. He has been investing in Treasury Inflation-Protected Securities since 1999, also called ‘the good old days.’
This blog is meant to explore ideas, benefits and cautions about TIPS, which David believes are an under-appreciated and under-used investment.
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Greetings, great blog. Questoin: as interest rates rise, as I assume they will in the next several years, won’t stated interest rates of tips increase with a corresponding reduction in value of tips issued at much lower interest rates? I am thinking of dollar cost averaging into tips to avoid this scenario. Last question, is it better sto tagger maturities or just go long. I donb’t have a cola on my pension, and need to hedge with tips. Sorry to burden you, but can find this info anywhere. Thanks. Joe Keenan
Joe,
Thanks for the great question. I am an advocate of buying TIPS and holding them to maturity. When you do that, you do have some safety. I agree that the base rate on TIPS is likely to increase in the future, since the rates are at historic lows right now, across all time periods.
So yes, creating a ladder of TIPS issues makes a lot of sense. Some shorter maturity, those will roll over and you might get a higher rate. Some longer maturity, so you can get a higher rate now.
If you are investing in a TIPS mutual fund, I would start with a very small initial investment and dollar cost average in. TIPS funds are at 5-year highs and are a bit risky … in my opinion.
Interesting blog..hope you become a regular poster on Bogleheads as well.
Thank you Boglenaut, I appreciate the support. I love the Bogleheads site.
Thank you so much for this blog, which is informative and fair minded. Keep up the excellent work!
To retire in 6 months. Have I-Bonds and also a TIPS mutual fund in equal dollar amounts. Question: I plan to hold bonds until I need them but not sure what to do with the mutual fund. I keep hearing the fund is doomed to drop. Appreciate any advice.
Ronald A
David: I have been buying TIPS as a long term investor since 2008. I came across your blog only a month ago as I began to wonder whether to continue on the ladder or hold for a while. Have you written anything on the ladder concept. Your analysis of the data has given me additional perspective and has been a great help. Thank you! Vijay
Vijay, your strategy of buying TIPS since 2008 has certainly been wise. Every single one of these issues has gone up in value. (Pretty much every TIPS ever issued is up in value, since rates are touching all-time lows.) Buy-and-hold investors who are building ladders don’t get much joy out this, though. I am still a net buyer of TIPS, buying more than those that mature, and so I would love to see lower rates and lower values.
I was a heavy buyer of TIPS in the first half of this year (and I started this blog then). In that long-ago age – 10 months ago – TIPS were super boring, super predictable. Since mid-year 2011, TIPS have been dipping into uncharted waters. We are seeing negative real returns all the way up to 10 years. I stopped buying in July, The last I bought was the 30-year in late June at 1.744%, which looks good today.
Next year, I have two 10-year TIPS maturing and I expect to reinvest that money and more into TIPS. I just hope to see better rates.
Next week’s 10-year, likely to draw a negative real return against inflation, isn’t attractive. But is is a super safe investment. So it all depends on your fear level. Do you fear future inflation. Do you fear future stock market declines? If you say yes, then this is not a bad investment.
Hi David. I have just discovered your blog, and want to thank you for posting on this subject. I am going to risk asking a (possibly very naive) question, and hope that I’ve come to the right place for a response I’ve sought all over the net.
I started contributing to a Vanguard TIPS fund in my IRA back in 2007, and in comparing my total investment with the value currently displayed I’m showing a 27% gain in those figures. My question: is this gain real, and if so, why is this considered such a “boring” investment? And if I were to sell this fund now (which I don’t plan on doing), are those gains realized?
Thanks for any clarification you can give!
Fred, I assume you have been reinvesting your dividends, so some of that gain could be from the dividends that have already been taxed. So the entire 27% might not be a taxable gain. Most of the rest would be a long-term gain? And you are right, TIPS funds have been a fantastic investment and certainly not boring — you’ve done very well in a time of stock-market distress.
The one thing to keep in mind is that day after day – for more than six months – TIPS mutual funds have been hitting all-time highs. That is because the base rates for TIPS have been hitting all-time lows, lower than most TIPS investors thought possible. Part of the reason is that the Federal Reserve has been buying bonds to force interest rates down. And it has worked. Plus, turmoil in Europe has made Treasury investments very attractive as a safe harbor.
This could – or I might say will – reverse in the future. When that happens the base interest rate will rise and TIPS mutual funds are going to give up some of those impressive gains. But when will interest rates reverse? The trend is still gently down and the Fed is continuing its efforts to keep them down. There is some danger out there for TIPS mutual funds, we just don’t know when.
wait, he said his IRA. roth or traditional? either way, no gain recognized at time of sale.
David,
I just came across your Blog and have really enjoyed reading it and becoming better eduacated about TIPS! I have many questions I’d like to ask you, but will ask one ata time not to be to much of a burden. My first question has to do with investing directly in Mutual Fund TIPS.
What are the advantages over just outright purchase of TIPS?
What are the disadvantages of the TIPS Fund over outright purchases?
I thought I had a fair grasp of the subject, but after reading your Blog??? I just invested monies in a Mutual Fund TIPS several day ago, which I now see was not such a good idea!
Look forward to hearing from you,
Sal
Sal, I come from the buy-and-hold school of TIPS investors. I have been buying them from Treasury Direct for 13 years, and I have never sold an issue. Some of those early issues were awesome investments, and some are maturing this year, unfortunately.
Buying and holding TIPS is an extremely conservative investment. In theory, there is no default risk. There is deflation protection, since you will get your original investment back at maturity, no matter what. And you are protected against future inflation. You aren’t selling so you don’t need to worry about the ‘current value’ of your TIPS. You just wait for maturity.
Buying a TIPS mutual fund is also a conservative investment – but not as conservative. The net asset value of a bond mutual fund will vary over time, as interest rates rise and fall. Since TIPS rates have been falling for several years, to all-time lows, TIPS funds have done very well. If rates rise quickly, those funds will feel the pain – not a wipeout, but along the lines of 5% to 10% of principal value.
I don’t see interest rates rising quickly in 2012.
I am thinking of buying ibonds in addition to tips: unlike the current negative yiels on tips, you purchase ibonds at par. ibonds are only taxable when you cash time in. On an ongoing basis both the interest and the principal kicker are not taxed.
I have bought tips in the last year, and they have gone up…but i am building a ladder and plan to hold all til maturity. I will not benefit from the market appreication in these…as the underlying bond near maturinty, the market premium will have to go out of them, no? Thanks. Joe
Joe, I am with you on I Bonds, which can also work as a short-term investment you can hold until interest rates rise. On the ladder, you are correct that the ‘market value’ of your TIPS might rise and fall until maturity. But at maturity, you will get back your original principal and the inflation adjustment to principal. So it might be tempting to sell TIPS you hold now that have risen dramatically in value. A lot of investors feel that way. Not my strategy, though. That is how a ladder is supposed to work in a true buy-and-hold strategy. I just hold the TIPS to maturity and I only track the current par value (original principal plus the inflation additions).
do you have an opinion about inflation protection on an single premium immediate annutiy as compared to tips? Payout rates on annuities are very low, but if tied to cpi it will adjust upward. In the mean time the payout rate for inflation protection is approximately 2% less than an annuity without inflation protection.
Steve, sorry, I don’t have any knowledge of this type of annuity.
Greetings, just read an article that says that you can receive a tax refund, if you are due one, in I bonds up to a maximum of $50000. Is this $5k over the $10k annual limit? If yes, for those of us currently paying quaterly witholding taxes, what would prevent us from overpaying our quaterly witholding for the year in the amount of $5k to get the additional I bonds? Thanks. Joe Keenan
Joseph, that’s correct, you can use your tax refund to buy I Bonds. In a rare moment of clarity, Treasury Direct put up an excellent Q&A on this issue:
http://www.treasurydirect.gov/indiv/research/faq/faq_irstaxfeature.htm
It says: In any single calendar year, you can buy up to a total of $5,000 of paper I Bonds using your refund. The I Bonds are issued in paper denominations, so you are bypassing Treasury Direct, which has the $10,000 per-person cap.
I suspect the Treasury Department would love to have you overpay your quarterly withholding, money it can sit on through the year and then issue you I Bonds when you file tax return. If you do pay quarterly withholding, though, this is an excellent strategy, since you won’t earn anything on your money anyway. Loading up on I Bonds makes great sense right now, and will probably continue to make sense for at least two more years.
Thanks much, I have purchased a little bit of high dividend stock index funds to capture some yield, but am not sure I want to continue this. When inflation hits, stocks across the board will initially take a hit, won’t they? My thinking is that inflation protection and safetry of principal is more important than chasing a few points of yield at this time.
Great site, Dave. I have a question. My father passed away five years ago and left his IRA to my mother. The IRA was concentrated in Wells Fargo stock so I diversified her portfolio and laddered some TIPS. She is well diversified in stocks, a dwindling number of corporate bonds, CDs, TIPS and farmland. Her TIPS have significantly appreciated. She has one purchase, 2.5% due in 2029 that has almost doubled in value. I have been considering selling a couple of these for about a year. Any thoughts? I bought them as an inflation hedge, but if rates rise, these bonds will drop. She has little residential or commercial real estate exposure so I could reinvest in some type of REIT. Thank you in advance.
Jack, this is a great question. I would guess that your mother probably doesn’t expect to live to 2029, so this isn’t a buy-and-hold issue. My TIPS philosophy is always buy and hold, expecting to hold to maturity and get the inflation adjustment, plus the base rate, in the super safe section of my portfolio. (I don’t worry about the ups and downs of the current market.) But that isn’t for everyone, and in your mother’s case, it might make sense to sell the TIPS now and collect the profits, instead of waiting until 2029 to collect about the same amount of interest. It does balance out. And the value of these TIPS will probably decline five years out, I agree. The big question is: What is your next investment with these profits? I don’t have a strong opinion about REITS, but I own a REIT index I pretty much ignore. There aren’t any super-safe investments out there now paying an attractive yield. Getting yield means taking risk. TIPS aren’t risky, and that is why they are so popular now. Good luck with this decision.
David, I have had my TIPS in Legacy Treasury Direct forever … I may open a TreasuryDirect account for my TIPS and I-Bonds — it is all online, I am wondering about any vulnerabilities of this account! Have you any view … any source to direct me to? Thanks.
Ed, I also was a longtime Legacy customer, but I have changed over to Treasury Direct — for both TIPS and iBonds. The Treasury uses good security protocols, but I suppose there are still risks. I haven’t heard of any reported fraud cases, but the Treasury fraud policy does not guarantee your money. Here is a discussion of that policy:
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=87934
David,
VERY helpful, thanks much!
David, I thought I would ask you to declare something that I reckon you believe! When I first bought TIPS in 1997, conventional wisdom was ZERO chance of default by USA Treasury. ‘Lately’, this chance is said, by some voices, to be above zero, and I suppose I agree. But I figure the following, and ask if you figure the same: The USA will ‘have’ much more inflation, far ahead of defaulting!
Ed, I still operate under the assumption of zero chance of default. There is higher chance that the Treasury will manipulate the inflation rate to lower its costs and our return. And, yes, in reality, there is a higher than zero chance of default. Once we hit that point, though, I’d assume the stock market, bond market, every market would be in shambles. Gold? That might work. It would be ugly.