After about six weeks of turmoil in the markets for Treasury Inflation-Protected Securities, we have seen yields on TIPS rise dramatically and a resulting free-fall in market prices on TIPS and and TIPS mutual funds. A recap:
- The 5-year TIPS is trading today with a yield of -0.24%. On May 1 it was -1.50%. That’s a gain of 126 basis points.
- The 10-year TIPS is trading today with a yield of 0.59%. Yes, that is positive 0.59%. On May 1 it was -0.66%. That’s a gain of 125 basis points.
- The 30-year TIPS is trading today with a yield of 1.45%. On May 1 it was 0.440%. That’s a gain of 101 basis points.
- The TIP ETF is trading today at $110.44. On May 1 it was $121.50. That’s a decline of 9.2%. Since this fund has a duration of about 8, that is what you get when interest rates rise 125 basis points.
- Because the 10-year Treasury is currently trading at 2.52%, this creates a 10-year inflation breakeven point of 1.93% for a 10-year TIPS. My ‘cheap’ marker for TIPS is a breakeven point of 2%. We are there.
- Likewise, the breakeven rate for a 5-year TIPS is a very attractive 1.66%.
What this means. In less than two months, TIPS have gone from extremely expensive with paltry yields to reasonably priced with more acceptable yields. In other words, TIPS are again an attractive investment.
Strategy? I have said for two years that I am not a fan of TIPS mutual funds, which is the way most people hold TIPS in retirement accounts. Today, I am changing my view. My view is that it’s time dip gently into TIPS mutual funds and set up automatic investments for the future. In other words, dollar-cost average in.
The overall bond market has taken a shock in mid-2013, and it could very well over-correct. On the other hand, I can’t see interest rates really soaring until the economy drastically improves. And Fed is continuing is bond purchases for the time being.
The risk? The TIP ETF is down 11.1% from its all-time high. If yields on TIPS rise another 100 basis points, which could happen in the longer (or even shorter) term, you’re going to see another 8% drop. By starting with a small investment and dollar-cost averaging in, you can minimize that risk.
My overall strategy is not changing however. My main holdings in TIPS will remain purchases at TreasuryDirect and holding to maturity, along with I Bonds. (My two-year ‘buying strike’ ended with last month’s 10-year auction.) If these current yields hold, future auctions are going to be a lot more attractive.
That’s what I am doing, but I can’t say it’s the best advice for everyone. Just something to think about.
Treasury Inflation-Protected Securities 
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E Royce, yes, I just bite the bullet and buy TIPS at auction on TreasuryDirect and pay current taxes, and hold the TIPS to maturity. When the TIPS matures, there is no tax owed, which is a positive in retirement. I consider this the same as owning a GNMA or Total Bond fund in a taxable account, when you reinvest the income. Tax-deferred would be better, I admit, but it’s a hassle to try to own individual TIPS at a brokerage and then deal with uninvested income.That’s why most people use TIPS mutual funds in retirement accounts.
I did an analysis of iBonds in the laddered gift approach I’ve mentioned to you before vs. taxable TIPs and for the current 10 year, you’re much better off with the laddered iBonds. The only drawback is that you can sell a 10 year taxable TIPs but you won’t be able to redeem the iBonds until you gift them over the 10 year period. But since you are buy and hold, you’d be much better off. I can send you the spreadsheet if you want.
Thanks again for very useful and informative site. I agree with you that the breakeven is cheap — even more so for the longer maturities. There is no other instrument that provides 30 year inflation protection (and even if you die in the interim, your heirs benefit from the rolldown of the longer maturity, i.e., a 30 year in 20 years = a 10 year with a 1.42% real interest rate).
I am curious about your buying these in Treasury Direct. You’re just constructing a ladder and paying the taxes as you go along?
Finally, a thought for your readers: iBonds can also be bought by entities that are under your SS # such as family revocable trusts.
Ed, I guess every mutual fund and ETF is a product of the financial sector. Some of the companies are worse (more greedy) than others. My TIPS investments will be in the standard-issue mutual funds from Vanguard and Fidelity. Those are two companies I trust as honorable.
Could you please let me know the names of those funds?
Thanks,
Matt
Matthew, these are:
1) Fidelity Inflation-Protected Bond Fund (FINPX)
2) Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
Hi Dave,
Thank you very much for the timely summary and your view — I was earlier hoping that you might be posting before the weekend!
Here’s a thought/prejudice against TIP ETF. It is a financial sector product … And the people of the financial sector are NOT trustworthy, because they keep out of sight very instructive, real price histories of stocks and homes:
http://www.showrealhist.com/RHandRD.html
http://www.showrealhist.com/recDJIAtoRD.html
TIPS only depend on UST.