[Toddsterpatriot]

Interest on a bond is a charge for the use of money which reflects also the projected purchasing power of the future interest and principal, the fact that such purchasing power is unpredictable, and the risk of default by the borrower. Given two bonds of identical maturity and issuer, one of which eliminates inflation risk (i.e. reduces the volatility of inflation adjusted returns) and one of which does not, the latter will be priced to yield more.

I agree with you to this point.

The above, unlike the rest of our dialogue, is objectively the way things are. If you don't believe me, please ask a knowledgeable friend about it. Or just give it a little thought yourself:

I work in the brokerage industry. I think my logic is strong on this.

TIPS offers inflation +3% and you expect inflation to average 2%. But even if you are right, it will sometimes be 0% and sometimes 4%. Therefore, if priced at 5%, your average inflation adjusted return is, indeed 3%, but your actual return will sometimes be 1% and sometimes 5% and if you've mis-estimated inflation it can go either higher or lower. Fundamental theory of investment, as well as logic, results in a premium price paid for the bond with lower (after inflation) risk. Therefore, people pay more for it, thus reducing its yield.

Here's where you've gone off course. Once you buy a TIPS, your rate of return is locked in , assuming that you hold till maturity and there is no government default. That return may be higher or lower than an unadjusted treasury. In your example, if inflation is 2%, my inflation adjusted return is 3%. If inflation is 20%, my inflation adjusted return is 3%. My return is never 1% or 5%.Inflation adjusted return is actual return.

My entire point in mentioning TIPS is that if we eliminate inflation risk the only risk left is risk of government default. The TIPS then are as close to a risk free investment out there now. If even this investment will pay me more than Social Security then I'm getting screwed, do you agree?

So, how is the government making my retirement more secure? They're not.

[A. Pole]

My entire point in mentioning TIPS is that if we eliminate inflation risk the only risk left is risk of government default.

Which can take open or disguised form.

So, how is the government making my retirement more secure?

Without government your money, retirement and investments become worthless pieces of paper. I know many people who experienced it a NUMBER of times. America is lucky to be a strong state and protected by the oceans so many things are taken here for granted.

[Deuce]

I agree with you to this point.

My ENTIRE point is made above this point. Everything that followed was an attempt to get you to recognize the INDISPUTABLE issues involved. You mis-interpreted my analysis by attributing my comment about the non TIPS bond to a TIPS bond.

In any event, if you are in the brokerage industry, either you or someone knowledgeable to whom you have access should confirm that since a TIPS has less risk that an identical non TIPS bond it will be priced to have a lower EXPECTED return. This is ABCs of investing.

Your comment that AFTER the FACT a TIPS could be higher or lower is IMMATERIAL.