By David Enna, Tipswatch.com
I woke up today in rainy Sitka, Alaska. Rain is not an an unusual thing in Alaska in August, I have learned. It has rained every single day on this trip, which started August 14. Rain is in the forecast for the rest of the trip.
But hey, we’ve seen some rainbows … and bears, moose, eagles, ravens, caribou, reindeer … along the way. No otters yet, I want to see an otter.
I know a lot of news has been breaking out in the last two weeks, which always seems to happen when I am traveling, especially in places with little or no internet. From the little I can grasp, it appears that Fed Chairman Jerome Powell finally set the markets straight on his intentions: To fight inflation until inflation is defeated. That was what Powell should have said, and the markets should have expected it.
But, no, the markets still had a lingering belief that the Fed would step in to save the stock market. But that can’t happen while U.S. inflation is continuing at an annual rate of 8.5% and raging even higher across the globe.
So for inflation-protected investments, what has happened in the last two weeks?
- The 5-year real yield started at 0.29% on Aug. 15 and closed Friday at 0.47%.
- The 10-year real yield started at 0.35% and ended at 0.47%.
- The 30-year real yield started at 0.89% and ended at 0.85%.
These aren’t dramatic moves, but the current yields keep the 5- and 10-year TIPS as attractive investment possibilities. There’s a 10-year TIPS reopening auction coming up on Sept. 22, followed by a new 5-year auction on Oct. 20. Both of these could be attractive, especially since the 5-year real yield should track higher with any upcoming Fed moves in September.
I’m not connected enough right now to give an opinion on anything else going on. If you you have ideas, comments or theories, post them in the comments section below.
I will be back home in North Carolina mid-week, as long as I survive whatever Covid protocols are thrown at me in the last days of the trip. In closing, here’s a view of Denali National Park:
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
If I buy 5 yr TIPS (individual TIPS, not in a fund) during the upcoming Oct new issue auction, and I hold them until maturity, can I lose money? I keep reading about losses during deflation. (Obviously, I don’t really understand these things 🧐)
The October auction will be a new issue, and the real yield should be positive. That means the TIPS will likely auction with a price slight below par value, in other words at a discount. When you buy a TIPS, your par value is guaranteed to be returned at maturity, but all future inflation accruals are subject to the ups and downs of inflation. That new issue auction in October looks very safe. I’ll be writing about it in the days before the auction.
Since principal bumps are taxed in the year they are given, if you buy and hold the tips in a TAXABLE account, my understanding is it is possible to lose money.Here is how it could happen: Say the first couple of years of a TIPS there are principal bumps due to inflation/CPI growth. You must pay taxes on those delta bumps in those years. That tax money is GONE! Now for the rest of the years until maturity there is deflation, and you end up with the original principal. Even though the principal isn’t allowed to go less that what you originally paid, the taxes you paid in the “good years” is gone. Highly unlikely scenario, but possible. Herb
Taxes are an issue with all investments, especially bonds in taxable accounts where you are reinvesting the interest. I’m not a tax expert, but I wonder if the scenario you lay out would result in some sort of tax writeoff? It’s best to buy TIPS in a tax-deferred account.
The 5 year TIPS yield went up to +0.76% today. This is quite the turnaround from the negative yield at the beginning of the month (-0.06%). The price is $97.14. That means the inflation adjusted price is below $102 for the first time in a long time ($101.90). The best inflation adjusted price that I’ve been able to purchase this year was $101.18. If this trend continues, I may just do a little nibbling on the secondary market before the October auction.
For the first time on this site we’re seeing some disparaging remarks being made.
Just recently, I had to give-up on another financial website that I’ve used for years because the comments section became engulfed in partisan politics. It then degraded further into personal attacks. I sure hope that this blog doesn’t meet a similar fate. If you guys can’t agree on politics, at least keep it civil.
Thanks Jimbo. We want a civil discourse here, and on-topic. Since I am traveling, I haven’t been able to monitor this closely.
I’m going to dabble a bit in the 5yr TIPS. There aren’t many reasonably safe investment options that generally keep up with inflation. I’m maxed out on i-bonds. Maxed out on stocks. Don’t want real estate. Don’t understand crypto. Ten is too far out to contemplate. 😏
Nature looks like a Bob Ross painting, lol.
Trying to formulate a plan, the best case /worst case. Is the worst case one gets their principal back and the return is zero. One best case inflation stays 8% and you make 40%? I also have to guess on a riskless investment. For me I think Tbill will yield at least 5% next year and one can lock in longer term. Takes quantifying at least for me.
my understanding of the worst case situation for a TIPS held to maturity would be face value of TIPS + earned interest – initial TIPS purchase price. this assumes zero or negative inflation adjustments to principal. in that situation, the result could be negative if TIPS purchase price is high and earned interest low.
Looks right. Only the original par value is guaranteed at maturity. Now that real yields are positive, new TIPS will be auctioning close to par.
Is par value 100 or is par the auction price in this case?
It is 100, the amount before any adjustments.
Seems like TIPS is a bet on Powell will not continue interest rate increases. If not Powell then what will bring down inflation? I think Powell will raise till inflation drops below the interest rate then simple t bills will yield more then tips. Thats my bet. I staying short term till the cross happens.
I learned that fear of missing out is not the worst thing in markets!
Just keep in mind that T-bills cap out at one year. It’s not a long-term investment.
I buy T bill at the brokerage, 3 month out . Cash is not an investment, you just make what you can when you can, riskless!
I am also contemplating the 5 year TIPS. It is more liquid than I-Bonds and I can buy them in my IRA. It’s also going to have less interest rate risk and, if inflation remains high, the payoff should be adequate. I wish they offered them more than once per quarter. If I read the Treasury calendar right, they will be issued again in mid-October.
I would vote inflationary now, perhaps deflationary in the long run (2035 and out). The green stimulus will be inflationary by increasing the demand for the raw materials to build the infrastructure and the bill does nothing to increase supply of oil and gas to make the transition to green. I don’t know if the green plans are possible in 5 or 10 years and the opinions on that seem to be more based on political position than the real world. In the ,long run, green will be deflationary if it works. Also, I am not convinced the tough talk by Powell will be followed b y action; he seems aggravated that the market does not believe and him and rather believes in a pivot; but what will the spending look like if short rates go to 4% with the debt and deficits we have now; I believe the government wants inflation to “painlessly” reduce the debt; the politicos (red and blue) just want to someone to blame other than their fiscal policy.
The original name of the IRA bill was Build Back Better! “To get your vote, we can name it anything you want” was the conversation. The bill is a start to open up things that were taboo for a long time!
Powell will bring inflation down, but Congress will take credit no matter what it was named.
. Visited Alaska in the spring a few years ago and experienced a few days of rain as well. Was totally gobsmacked during our drive from the Anchorage airport to Seward. And continued to be throughout the trip. Thanks for sharing the view of Denali. Just spent a glorious week camping in a region that had no cell service or tv reception. Discovered I could survive not knowing the daily gyrations of the market or whatever headlines were occurring. Glad that Powell finally said what he needed to say. Having just retired I am happy to see interest rates rise on my short-term money. I haven’t quite grasped TIPS enough yet to put any money in but taking advantage of the improved rates with T-bills. Not buying anything longer than 6 months duration until there is a signal that the tide will shift.
Me too 3 month Tbill ladder is good. I have been trying to undestand a strategy for Tips, but so far looks like just a speculation on inflation where you could be holding the bag for years! It took me 3 yrs to understand income annunities, but got alot of free dinners!
I’ve been trying to discern the effects of the so called inflation reduction act. For example the debt jubilee effect by forgiving some student loans. Inflationary or deflationary? Also the effect of lots of dollars being spent to stimulate green. Not sure when these dollars will enter the economy or how and when the effect will take place. Herb.
My only non-political comment is that the act will have little or zero effect in reducing inflation. I hate the title of that bill, which was completely a marketing ploy. Sure, there will be some drug price benefits, but that affects only certain Americans taking certain drugs.
My political comment would be, it is too bad a few Republicans could not join Democrats to keep the good parts of the law, while removing the bad parts of the law. It is hard to comprehend this is how Americans want our government to non-function.
Egads, the reason I brought up the act was that my concern is an economic one not a political one. All my studies indicate that monetary policy can only do so much to rein in inflation if it is undermined by continued excess spending. So, in keeping with the spirit of this inflation-oriented blog, do people think the act will be inflationary or deflationary, and why? Right now, I’m looking to add to i bonds and tips as finances permit.
Excess spending. It is all relative. I heard at the time the GI bill was considered excessive. This resulted in the making of the middle class and the baby boomer retirement / American greatness. The naysayers were wrong! It was an investment in the future. Like all investments no one has a crystal ball! This is an Invesment in the future.
I think we are a consumer-driven economy. The Inflation Reduction Act and debt forgiveness might not be deflationary but they’re going to stimulate the economy. The often overwhelming college debt is keeping some folks out of the housing market and out of other consumer spending. To some extent, this is being addressed.