I went through the holdings of TIP line by line today.
I took each bond in the fund (as of May 4th) and used the treasury daily yield curve to determine its approximate real yield. I interpolated the yields using this data as seen on the Treasury's website (as seen in my table below).
0 years: 0.00% (just an estimate, since it is not provided)
5 years: 0.34%
7 years: 0.82%
10 years: 1.25%
20 years: 1.61%
30 years: 1.73%
Here's a simple example. If a bond was due to mature in 6 years, then I used the average of 0.34% and 0.82% to come up with 0.58%.
Once I had estimates of the real yield of each bond in the fund, I then weighted each of them based on the amount of that bond in the fund.
My best guess for TIP's current real yield (the yield after inflation) is 0.82%. There's some room for error there but it is probably fairly close. The fund charges expenses of 0.2% so let's subtract that off. It leaves us with a real yield of 0.62%.
There is certainly risk in TIP at these prices and I would argue that the upside is very limited.
That said, I continue to hold it in my IRA. It's not like real yields are good anywhere these days. I'm simply trying to urge some caution here. Don't expect more from TIP than it can deliver.
If inflation averages the 2.16% over the next 10 years that the bond market expects (seen by subtracting the 10 Year TIPS yield of 1.25% from the 10 Year nominal treasury yield of 3.41%) and nothing else changes, then this fund should provide an ongoing 2.78% return. That's it.
"I just didn't know enough during those best years of I Bonds and TIPS (most of the last decade) In fact, in the hindsight - I would have locked most of my savings into I-Bonds...oh well."
The financial services industry makes no money telling us to invest in I-Bonds. It was pretty much a secret that we needed to find out for ourselves. I stumbled upon it in 2000, and it was mostly just luck that did it. It's hard to find things when you don't know they exist.
I've been investing in I-Bonds for 10 years now and I've yet to see the word "I-Bond" anywhere in a bank, other than on the I-Bond form kept in a locked cabinet.
It was especially hard to spot I-Bonds in 2000. The reason I-Bond rates were so good was because the vast majority of investors thought stocks would earn at least 10% per year, each and every year, well into the distant future.
I was also not immune to that belief. Fortunately, it didn't hurt me (except at the bottom if I would have sold in a panic). As of 2004, I'm done though. As said in Dune...
"The sleeper has awakened!"
I think our country faces serious economic challenges well into the distant future. I really don't think now is a great time to be taking on heavy leverage, high risk, and a swinging for the fences mindset.
I'm taking on plenty of risk just sitting in inflation protected TIPS and I-Bonds. I could very well lose it all someday. That said, if I lose it all in TIPS and I-Bonds, I will neither be alone nor will I be first.
I don't regret I Bond purchase...as you said it is hard to say what it's going to be in November. And likely it won't be that much better. I do like your commentary on the subject, so will look forward once again in October. In fact, you were right on the money by saying it will go down in May.
I just didn't know enough during those best years of I Bonds and TIPS (most of the last decade) In fact, in the hindsight - I would have locked most of my savings into I-Bonds...oh well.
It is kind of a shame that treasury and federal reserve have been saying - we need to save more and consume less. But, their actions just don't back up their words. If it was up to me - Bernanke and Geithner would have been fired long time back. Economic cycles occur because of a reason...you can't keep following the greenspan way towards the mirage of false prosperity.
Real yields were extremely low early in 2008, much like they are now. This could very easily be a repeat of 2008.
Oil has fallen quite a bit in the last two weeks yet inflation expectations haven't. If oil continues to fall, deflation will once again be in the headlines.
From what I can see (hobbling information together from EIA and Bloomberg), west texas intermediate crude oil is down 17% in the last 2 weeks. That's the biggest two week decline in WTI oil prices since February 12, 2009.
There were (slightly) larger two week declines in 1990/1991 (recession), 1998, 2000/2001 (recession), 2003/2004, and 2008/2009 (recession).
There's a chance this is like 2003/2004 but that's not how I'd bet.
Using the power of hindsight, I would consider undoing my purchase of the 0.3% I-Bonds in April even though I am ahead on the trade so far. November may indeed be better. Hard to say.
In any event, you are wise to wait until October with your remaining purchase. There's no point in locking in 0.2% until you have to.
That said, I-Bond rates won't go that much higher even if deflation strikes again. The government only gave us 0.7% on I-Bonds in November of 2008. That's the best rate we've seen since the start of the crisis. 5-Year TIPS yields were over 3.5% at that time. The markets may panic again, but the government won't. They are not going to reward the savers if the economy crumbles.
Unfortunately, my hobby yesterday was seeing an ear, nose, and throat specialist and learning the wonders of a scope inserted into my nasal passages, lol.
Meanwhile, our pet bird is off to see the vet today. Here's a picture of her.
But hey, the sun is out today in Seattle so it's all good. :)
I believe that high inflation isn't a given. With excess labor, tame and diminishing unions, and the ongoing cybernetic revolution, wherein labor is increasingly replaced by capital (i.e. automation), I don't see a wage and spending spiked inflation, not to mention that the ill-fated attempt to cope with the foregoing through easy credit (including home equity loans) has saddled households with crushing debt for years to come. Yet TIPs (and I-Bonds) are perhaps the safest investment for capital preservation and insurance against any inflation that does materialize, stagflation or otherwise.
Here's a bonus thought since you called me a dummy and seem to think you know all the answers.
Let's go back to your very first post that I could find on Yahoo. The stock is Converted Organics and based on your posting history it is one of your most talked about investments.
Here's what you said on September 13, 2008.
"This stock is going to $20 by the end of this year and next year we should see $50!"
17 people rated your post 5 stars out of 5. Wow. You sure knew your stuff.
It was trading at $8.69. Today it trades at $1.08.
It must come as a great relief to you that the stock that you loved so much recently regained compliance with the Nasdaq and was not actually delisted. It did manage to trade over $1 for 10 days in a row.
Out of curiosity, I went back to see what I was saying that same weekend.
"It seems Bernanke's finding some difficulty these days sustaining an unsustainable credit-driven boom. Go figure."
You represent exactly what is wrong with America.
First, nearly my entire nest egg sits in TIPS and I-Bonds and I have stated this time and time again here. I'm actually investing the same way you are and yet you still choose to pick a fight with me. Why?
Second, not only do you think you are smarter than the bond market as a whole and certainly smarter than me, you are arrogant about it. At least I know that there are no sure things. As Soros once said, it isn't about being right or wrong, it's about how much you make when you are right vs. how much you lose when you are wrong. Contrary to popular opinion, no long-term investor is always right.
Third, you state that inflation will hit 10% as a fact and not as an opinion. That's just so typical of Yahoo message boards. What's so special about 10%? Is it a nice round number? Why not 10.0003%? Or does your crystal ball not have that many digits of clarity?
Fourth, what if you really are right? What if inflation hits a billion percent though? You think it will hit 10%. How sure are you that it will stop there? Have you factored that in? TIP would be a horrible investment in that environment. People would be dumping dollar denominated assets in bulk. Or are you not looking that far forward?
Fifth, and most importantly, rather than debate what I wrote you simply resort to name calling. Brilliant.
I've owned TIPS and I-Bonds since 2000. I've got I-Bonds that pay 3.4% over inflation and will continue doing so tax-deferred until 2030. Since you think you are so much smarter than the rest of us, I can only assume you saw all this coming and started buying them before I did.
If inflation really does hit 10%, then I don't have to tell you that I-Bonds would be the superior place to put the money thanks to their tax-deferred nature. You know this of course. You already know everything there is to know.
So tell us wise sage. How many I-Bonds did you manage to buy before I-Bond interest rates fell to 0.2% and the government reduced the amount we could buy in a given year by 83% (in 2008)?