how are the yields on these thing north of 5% (for example, ishares’s TIP) when 5 year TIPS are yielding around 2%?
avg life of the fund is 9 years so i’m assuming that they roll over TIPS that expire with similar TIPS. they’ve likely bought some of the TIPS far below the current market price so that has to be reflected in the yield. should rates stay this low for lets say 50 years, the yield of this fund will eventually reach today’s rates.
TIP has not been paying out anything recently because the monthly CPI readings have gone lower and lower since last August. It will not begin paying out again until CPI reaches the 219 range. The January reading was 211.143. ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
thanks for the info… the yield they show on my thompson and bloomberg must be trailing dividends. not helpful. what is the significance of the 219 reading on CPI that would let the fund pay out? thanks again and please excuse the ignorance…
Think of 219 like a high water mark. That was where CPI was last summer. So we have to get back to and exceed 219 before it starts paying out again.
Thank you. I’m pretty sure there are many retail investors out there who bought the etf thinking it was yielding around 5% without doing the requisite research. scary. not that i don’t think they are still a good investment in this environment, but still.
Right. I like TIPs for the long-term but don’t expect yield for a while.
Be careful of tips in a fund or the ishare… many of the bonds they hold have already been adjusted for past years of inflation. If we have deflation going forward, the bonds can be adjusted down and you could actually lose principal. However, if you buy a recently issued tip bond trading at less than 100, you are guaranteed 100 at maturity regardless of deflation. A while ago I bought some 10 years tips that had a “worst case scenario” ytm of 1.3%. That is even if we have -50% ongoing deflation, or more. If you buy a tip bond fund and many of the bonds are trading at 130-150 then you will lose money in that scenario as they will only pay 100 at maturity. The yield is higher on the ones that have been adjusted up but don’t buy tips just for the yield!
Does anyone know how iShares comes up with its yield numbers? For instance, right now it says TIP has a SEC yield of 2.07%. Also, What is the quickest way to calculate Yield to Maturity on these bonds, without having to make a large number of assumptions.
You can’t calculate a YTM without an inflation assumption. YTM ~= Inflation assumption + YTM assuming 0 inflation.
Yes, I guess that’s what I’m getting at - does any one know what they’re using as an inflation assumption. And while we’re here, could anyone shed any light on how to evaluate duration of TIPs. I would think they’d be much less sensitive to changes in interest rates (assuming the change was due to inflation).
You can value tips with YTM if you make assumptions about expected inflation. TIPS have duration but inflation expectations trump the interest rate effect, imho.
Anyone have a good article that goes into how you value TIPS and think about this stuff. I keep feeling that “in principle” I should be able to understand how TIPS work, and I have a decent first-order view of the process, but I keep thinking that there are additional complexities in there that I’d like to understand better. For example, TIPS duration is probably only about changes in the true risk-free rate without inflation expectations, whereas a comparable treasury has duration that includes (expected) inflation adjustments. Also, the way that inflation is calculated doesn’t always match up with headline inflation. Last summer, we saw inflation in most of our daily purchases, but since housing prices were falling, TIPS didn’t register any inflation adjustments. Anyone know of a good TIPS primer?
That’s true, Bruce, government reported CPI may or may not capture your own individual cost of living. Then again, how can they really register deflation when they didn’t register much inflation? TIPS are a floating financial instrument with zero credit risk so, imho, the proper way to value them is a DCF analysis with inflation expectations as the input variable. Imho, it is impossible to value TIP ishare. It is a collection of different TIPs with wildly different premiums… some are subject to deflation, others are not. No way to know what the thing is worth.
http://www.dmo.gov.uk/index.aspx?page=Gilts/Indexlinked has some good stuff. Although UK linkers have no floor, so if that’s likely to be relevant on your TIPS then you’ll need to value that implicit option.
bchadwick, email address?
Thanks cfasf1 brucebiz_wi at the yahoo place. BTW, are you in SF? I grew up in the Bay Area. Love it, although I find it hard to tear myself away from NYC.
No prob. I just sent it. yes I’m in the bay area. work in sf, live in alameda. have lived here most of my life… sometimes think of relocating, but it never happens… so i guess i like it here.