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iShares TIPS Bond Message Board

  • dbtunr dbtunr Mar 10, 2011 1:49 PM Flag

    general TIP questions

    assume interest rates go up and inflation is stable. What happens to the fund?

    assume rates and inflation go up. what happens to fund?

    Is this a good place to park money for a couple of years?

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    • "This is about recognizing the new economic reality that government is responsible for management, just like everyone else," Cuomo said. "The days where government can just throw money at the problem and raise more taxes ... those days are over."

    • Another question. What drives the monthly dividend payout for this fund? It seems to vary widely.

      • 2 Replies to mad_mike_7
      • As a side note, I would expect to see higher payouts in the short-term. Inflation has been running a bit hot lately. You can see a hint of real-time inflation at the Billion Prices Project over at MIT. Keep in mind that they just cover a subset of prices though (for example, the price of services in our service-based economy are excluded).

        http://illusionofprosperity.blogspot.com/2011/04/inflation-mood.html

      • "Another question. What drives the monthly dividend payout for this fund? It seems to vary widely."

        For the most part, the consumer price index drives the payouts of this fund.

        1. There are natural fluctuations in the consumer price index over the year due to seasonal factors. Some months just experience more inflation in general than other months. For example, picture the driving season and the Christmas season. In a truly efficient market, this should be priced in. You can see that in the following chart I made back in April of last year.

        http://illusionofprosperity.blogspot.com/2010/04/tips-seasonal-variations.html

        2. There are also random fluctuations in the consumer price index. These can be ignored by long-term TIP investors. You might earn a bit less in some months and a bit more in other months. No big deal.

        3. When deflation struck in 2008-2009 (as seen in the following chart) this had a huge impact on payouts. This cannot be ignored. The average inflation rate in the future will determine the payouts of this fund. However, I would argue that inflation does not actually help us. If you earn more in TIP because inflation is higher, then you will actually lose purchasing power as more money is paid to the government in the form of taxation on the inflationary gains.

        http://research.stlouisfed.org/fred2/graph/?g=bG

        If you are a TIP investor, you should root for tame inflation and low payouts. There won't be any bragging rights of course. It is much like owning fire insurance on your home and then hoping that your house does not burn.

        The last thing I want to see on my TIPS investments is that I am earning 100% per year. The taxation on those gains would hurt enormously. That said, I'd certainly be doing better than those who bought treasuries without inflation protection. That's something I guess.

    • "assume interest rates go up and inflation is stable. What happens to the fund?"

      "assume rates and inflation go up. what happens to fund?"

      1. If the inflation rate rises faster than interest rates rise, then TIP will do well.

      2. If interest rates rise faster than the inflation rate rises, then TIP will do poorly.

      3. If the inflation rate falls faster than interest rates fall, then TIP will do poorly.

      4. If interest rates fall faster than the inflation rate falls, then TIP will do well.

      "Is this a good place to park money for a couple of years?"

      Short-term TIPS pay negative interest right now. Investors are pretty much guaranteed to lose purchasing power. That's certainly a concern. Long-term TIPS rates have fallen a lot in the last month. The risk, in my opinion, is that the market may have priced in stagflation but we might get another round of deflation.

      You tell me what oil prices will be a couple of years from now and I could probably tell you if this would be a good place to park money. If oil falls to $50 then you'd have probably done better sitting in cash. I would not rule it out. I'm skeptical that we will see $150 oil again anytime soon. For the record, we entered the recession in December 2007. Oil was cheaper then than it is now. $145 oil was just insult to injury last time.

      Another risk is that our economy booms. TIPS rates were much higher during the dotcom bubble. I don't think we're going back to that era any time soon though. I therefore think this risk is minimal. A doubling of stock prices didn't drive TIPS rates up this time. Go figure.

      That said, I do feel comfortable owning long-term TIPS until maturity. I've been investing in TIPS and I-Bonds since 2000. I have no complaints.

      I don't have any easy answers for you. I don't see any safety in short-term investments right now. Stocks are expensive. Gold is expensive. Short-term TIPS yields are awful. T-Bills are awful.

 
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