Posted on 06/24/2021 8:22:22 AM PDT by hardspunned
https://www.investopedia.com/terms/t/tips.asp
Inflation is personal, it affects us all differently.
“I” Bonds seem to be better than a savings account
I switched into a TIPS index shortly after the stolen election from a traditional income bond fund.
Seems to be working for me so far.
I bought some shares in SCHP a TIPS ETF in mid April. Not a lot just a small number. So far they are up 1.09%. I’ll give it a bit more time to see how it tracks with inflation over the rest of the year.
>>The flaw in a TIPS investment is this: the U.S. government that issues the bonds is the same U.S. government that measures inflation. So the U.S. government has a huge incentive to screw the investor by artificially under-reporting inflation rates.<<
You’re right, but not just because they’re worried about the payout on the TIPS. Social Security payments are adjusted each year by the previous year’s inflation rate. And while there are over $500 billion of TIPS outstanding, the inflation adjustment is paid at maturity. In contrast, the government pays out over a trillion dollars in SS payments every year and the inflation adjustment is paid immediately. The government has a huge incentive to find ways to adjust the CPI downward over time, and has done so.
Gold and Silver.
What about a currency, say buying the Swiss Franc to protect??? The Fed is not adjusting rates, because they know it will crash the budget. So, in my mind, that means the dollar will de-value against better currencies. Not touching the Euro or Canadian dollar, so that leaves me with something like the Swiss Franc or Japanese Yen
Yeah, that’s what caught my eye. The feds are still calling the shots on CPI, with that huge gubmint thumb on the scale.
They work as advertised, but they can also be too expensive at times because they move with the bond markets. Right now they’re way too expensive, in my opinion. (Although that doesn’t mean they can’t go even higher.)
Currently, they yield less than zero. Put another way, if you get zero inflation, you’re paying the government to take your money. It’s your judgement, but I wouldn’t lend money to the government for 30 years for less than 3%, assuming a zero percent inflation rate over that 30 years. You are lending it at less than zero percent at today’s prices. The most likely reason for that very low (now actually negative) real rate of interest is that the Fed is buying up long bonds, including TIPs, in massive amounts.
To give you an idea of the risk you’re taking, the .125% 30 year TIP today trades around $1,090 for a $1,000 bond. (If you pay that price, and there’s no inflation, you’ll get back $1,000 in 30 years and earn 1/8 of one percent interest, or $1.25, every year until maturity.) If they are trading at even a relatively low 2% yield to maturity in a year or so following a Fed tightening, which is entirely possible, even reasonable, then your bond will be priced at about $565 per thousand. That’s a loss of nearly half your principle in a year. And if we get the inflation your trying to protect yourself against, the Fed will inevitably tighten.
So, no, I don’t think they’re a good investment at today’s prices. They are just as risky as buying normal long bonds at today’s rate of 2.1% or so. (Disclaimer: I know a lot about regular bonds, but not all the details about TIPS, so some of what I wrote above might not be quite accurate.)
“’I’ Bonds seem to be better than a savings account”
I-bonds are currently paying 3.54% on an annualized basis. There are rstrictions on how soon you can redeem them. This interest rate is purely an inflation adjustment. The “fixed rate” is presently 0.00%.
Before you buy a TIPS ETF, get a copy of their portfolio of TIPS securities.
Add up the face value of the fund’s bond holdings.
Then, divide that value by the number of shares outstanding.
That will give you the face value of bonds held per share.
The face value/share tells you how much the portfolio will pay when redeemed.
You will certainly find that the face value/share is much less than the ETF’s price/share.
This is, of course, true for almost every bond fund because interest rates are so low.
The upside of TIPS is that interest payments increase with inflation — assuming you trust the government to accurately report inflation. However, TIPS are priced such that the real return is negative.
If you’re looking for an inflation protected bond — and you can commit to at least one year and don’t plan to invest more than $10,000 per year — take a look at the Series I savings bond. I know that savings bonds are boring, but sometimes they are worth considering.
Check out the treasurydirect.gov website for information about TIPS and Series I savings bonds.
Very interesting. Thanks for the input on the Series I.
” Any feedback for a financial novice trying to find an inflationary safe harbor?”
Stocks
However, I definitely agree that no one I know has ever made a lot of money buying or shorting TIPS.
Fiat currency is still fiat currency, even if it is not created by the Trillions like ours is. See post 9.
” ... savings bonds are boring, but sometimes they are worth considering.”
Definitely; I have old I-bonds that are now paying about 5.5% and old EE bonds that have paid 4% for 20+ years.
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