Great question from reader Drew:
Tipswatch — I hear you on “buy and forget it”. I’ve been doing that for years to build out a 30-year ladder which anchors the ‘safe’ allocation within my portfolio.
But I have a bit of a wrinkle I’d like to ask you about —
I recently noticed that the longer-duration 30yr notes that I bought at auction just over the last two years have appreciated considerably. For example, a 30-year TIPS note with a 2.13% coupon maturing in 2/14/2040 is currently trading at almost 30% above what I paid for it. In other words, if I sold, I’d achieve 12+ years of coupon payments in one fell swoop.
Even the recent 10-yr that clocked in at 0.639%. I bought, spending $10,008 on a note that is now trading at 10,436. If I were to sell it, just a month latter, I’d net $429, or almost 7 years of coupon payments at once. I figure I could just double up the next time 10-years go to auction.
I’m tempted to do this. . . am I missing something? Obviously if I sell I’m left with some gaps in my ladder.
Drew, I am not a financial adviser – I don’t even play one on TV – but my initial reaction is this:
I can see the quandary. I also have some older Treasury Inflation-Protected Securities that pay a real yield of more than 2% and even 3%. I consider those prized assets, but they are aging. I have one issue that pays a coupon of 3.875% and matures in April 2029. No way would I sell that one. I need those higher-yielding issues to balance off some of these more recent lower yields.
But there is logic to what you are saying, since you can sell and reap a large amount of future interest payments in the form of instant capital gains (and a lower tax rate, too). My cautions would be: 1) make sure you get the price you want since TIPS in the open market are thinly traded, and 2) understand that you may never – at least for several years – be able to replace those higher-yielding issues. The real yield on TIPS has been declining for years and that decline has even escalated recently. Eventually, we will hit bottom and start back up.
But you are right that this is a great selling opportunity.
On the 10-year paying 0.639%, that is a yield you could easily see again in a few months. So selling it, if you can get a good price, is a non-issue.
(But then this sort of reminds me of the time when I bought Apple at $80, and then sold it a couple of months later at $11o. Hmm … that worked.)
As of today, I wouldn’t be a buyer of new TIPS issues, or TIPS mutual funds. The rates are ridiculously low for all Treasuries. Treasuries are priced for a deep recession. The Fed’s announcement today of continued near-zero interest rates for two years is a slap at savers. We have few places to turn, and this could last for many more months. The lousy TIPS yields of a few months ago – like your 0.639% on a 10-year – now look very attractive.
Could the entire TIPS yield curve eventually go negative? Whoa, I don’t want to even think about that.
One of my favorite bloggers, Michael Ashton (The Inflation Trader) posted this chart today on the trend in the 10-year Treasury yield:
If this really is a bubble, selling and getting your profit now does make sense, especially for a 10-year yielding 0.639%!
One nagging question: Where will you put that money that was earning the rate of inflation plus 0.639%, until you can reinvest it in a super-safe asset?
I won’t waver from my buy and hold strategy, though. But sometimes, I say: Don’t buy. This is one of those times.