I downloaded the holdings of the fund into Excel and did some crude analysis to come up with an estimate of the real yield of the fund. I really wish they'd report that on their website. If it is there, I can't seem to find it.
I compared the maturity of the individual holdings in TIP to the real yield curve as seen at the Treasury. I interpolated the results. In other words, if a bond matures in 6 years I used the average of the 5 year TIPS yield and the 7 year TIPS yield. I then weighted each bond within the fund based on the percentage of net assets. Smaller holdings therefore got weighted less than larger holdings.
Note that TIPS bonds maturing in less than 7 years have negative real yields now.
By my crude estimation, the real (inflation adjusted) yield of TIP is now roughly 0.3%. Subtracting the 0.2% fund expenses from that leaves 0.1%. That's it. This fund basically tracks inflation now as seen in the CPI and nothing more.
As of 10/7/10, there were 30 TIPS bonds in the fund.
By my estimation, 50% of them are currently earning a negative real yield.
I would argue once again that I-Bonds paying 0.2% over inflation are the better bargain right now (even for long-term holders of TIP).
1. I-Bonds cannot deflate during deflation.
2. I-Bonds can be tax deferred for up to 30 years.
3. I-Bonds can be cashed out without a loss if interest rates rise.
All three of those reasons could potentially be very important.
This is not investment advice. Please look at the holdings within TIP yourself and compare to the yield curve at the Treasury. I'm just an anonymous poster on the Internet. Do not trust my math. The math is there to do though should you wish to pursue it and I have supplied the links.
$0.25484--fortunately none of the now "in-the-money" calls I sold over the last few months got assigned to harvest the dividend.
The good thing about buying TIPS at auction in a Fidelity qualified account is that Fidelity does not require a minimum amount of bonds and charges no fee or commission on auction purchases. Also, except for the last reopener on the five year, the bid Fidelity has shown in the secondary market a day after the auction has been one to two dollars above the auction price.
I'm glad to hear that worked out well for you! :)
Like you, I got altitude sickness too (at $107.90). In hindsight, I should have just left it there. My IRA now sits in cash awaiting the next 30 year TIPS auction (which is quite a few months from now). Maybe. The vast bulk of my nest egg continues to sit in TIPS and I-Bonds though.
"Can I-Bonds be purchased in an IRA account?"
I don't think they can but more importantly I do not think you should.
One of the best features of I-Bonds is that they offer tax deferral. IRA accounts already do that. I-Bonds should therefore be purchased outside of a retirement account.
If this is a long-term purchase for you, then you might consider buying long-term TIPS to put in your IRA. That's what I will be doing during February's 30-Year TIPS auction more than likely. You'll get a better rate than I-Bonds and the money will grow tax deferred like I-Bonds. You'll lose some of the deflation protection but over the course of 30 years deflation should not be a risk anyway.
Just opinions of course!
TIPS and I-Bond input is probably the easiest to give. If you buy directly from the government and hold until maturity you pretty much know exactly how you will be doing. The only real variable is what inflation does. More inflation is bad, even for holders of TIPS and I-Bonds. However, it is worse for those without inflation protection though. Potentially much worse.
Fortunately, inflation hasn't been much of a problem since I turned bearish in 2004. Although I am not earning much interest, I'm also not paying much in the way of taxes. I consider that a net positive.
I'm still a hoarder though, but thankfully my hoard is not growing in dollar value much. For example, the free market has determined that Progresso soup should only cost 98 cents per can this week (at my local QFC). Unlike our zombie banks, I was forced to mentally write down the value of my canned soup hoard. The good news is that I added 30 cans on the price weakness, lol. Sigh.
In another sign of the times, my local US Bank branch called me at 7pm on a weekday and asked that I call them back. It freaked me out a bit. I called back and they wanted to make sure I was happy. They were also fishing to see if I needed to borrow any money and to think of them if I did. I didn't. I feel no great desire to borrow money to buy more stuff. Our country is overflowing with self storage units. I think we've got too much stuff already and perhaps that's at least partially why I still lean deflationary.
This Christmas should be interesting. The import traffic is coming in heavy. The outgoing traffic is not. What if stores have stocked up for a stellar Christmas and it does not appear? Then what?
"The main problem with I-Bonds is the 5K limit with another 5K treasury direct limit. After this is maxed out, TIP is the only choice."
For those who are long-term bearish, you can always buy longer term TIPS directly from the government and hold them until maturity. You can get positive real yields instead of concentrating on the negative real yields in the shorter term TIPS. You also save yourself an additional 0.2% per year in fund expenses.
Or, alternatively, you could simply wait for better real yields in cash. TIPS may be fully pricing in an inflationary QE2 that might surprise investors with its lack of effectiveness.
Contrary to popular opinion, QE2 could actually lead to more deflation. Adding bank reserves only creates inflation if that money is ultimately lent. Meanwhile, the lack of interest earned on savings is pushing savers (such as myself) to save even more to compensate. The less interest I earn, the less money I spend.
This could partially explain why Japan has been slipping in and out of deflation for 20+ years. They have been the masters of QE and zombie bank policies (toxic assets never purged from the system). It could be that we have learned nothing from their example.
February 16, 2010
Japan sets inflation goal in fight against deflation
"But there is little the bank can do given its view that quantitative easing didn't achieve anything... all they can do is keep interest rates at [close to] zero."