That was a nasty panic. I'm still waiting to exhale. If we get back to 108+ by the end of the year, I'll feel a little better.
I said I think the TIP bull market will continue for a while, but will be punctuated by panicked selling once in a while as treasury yields rise. I did not expect that kind of punctuation, though.
Fact is, no one knows how these relatively new instruments will fare in this new normal era. Only a US sovereign default should make these a disastrous investment, but with panic like we just saw a few weeks ago, perhaps "shorten your duration" and "fasten your seat belt" are the operative phrases here.
In my opinion, TIPS became a mini-bubble and investors rushed for the exits.
I would point out that roughly 45 days ago the 5-Year TIPS paid a real yield of -0.5%. That means investors were *knowingly* willing to *lose* roughly 2.5% (0.5% per year times 5 years) of their purchasing power over the 5 year period.
Why were they willing to do this?
In my opinion, investors weren't planning to hold for the full 5 years and instead intended to find greater fools. No greater fools appeared though.
That to me is the exact same mechanism as every other bubble we've had in the last decade, but on a much smaller scale.
"Fact is, no one knows how these relatively new instruments will fare in this new normal era."
We can know fairly well how they will do if bought in an initial auction and held until maturity. If done this way we do not require any greater fools. The day to day action in the TIPS market becomes irrelevant. It does not alter the amount we'll receive at maturity. It does not alter the interest payments. It does not alter the ability of TIPS to provide protection from inflation over the period.
Further, if purchased this way it changes what you want to root for. I *always* want to see higher rates and *lower* TIPS prices because I reinvest back into TIPS as my TIPS mature. Lower rates only hurt my long-term returns.
"Only a US sovereign default should make these a disastrous investment, but with panic like we just saw a few weeks ago, perhaps "shorten your duration" and "fasten your seat belt" are the operative phrases here."
I would point out that there are two kinds of defaults and both would be disastrous. We could default outright or we could default through extreme inflation. TIPS would not do at all well in hyperinflation. The taxes on the inflationary gains would become enormous.
I don't care about the volatility. I care about the ability of TIPS to maintain the purchasing power of my nest egg. The yield curve is steep therefore I wish to take advantage of it. I think the 30-Year TIPS represents something that can meet my needs and intend to participate in the next auction. I'll be holding until maturity. I won't require a greater fool.
1. I own inflation protected TIPS but wish to see very little inflation. Inflation only hurts me even in TIPS (due to the taxation).
2. I hold until maturity. I therefore always want to see lower TIPS prices and higher real yields. I don't really care what the market thinks my TIPS are worth. I just want a "cheap" price each time I reinvest.
3. I do not require a greater fool. I don't even require a middleman. I buy TIPS directly from the government and never need to sell. If 30-Year TIPS have a much higher yield than shorter duration TIPS then that's where I generally want to be.