I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
What if I see late night commericials trying to sell me TIPS?
We pretty much have, lol. That's what got the price of TIP all the way up to an irrational $106.58 and 5-Year TIPS scraping along the bottom near 0%. There were so many "experts" saying to buy TIPS while I was selling.
I continue to believe that TIP is overpriced, but not as much as it once was.
TIP pays out all of the inflationary gains and interest each month as distributions. TIP's price should hover around some sort of long-term average, at least in theory.
Out of curiosity, I downloaded the historical prices into a spreadsheet. As of today, TIP's average price since 12/5/03 has been $102.73.
That's probably as good as guess as any what TIP's long-term fair price might be.
The downside risk is that TIP doesn't just return to its long-term average fair price though. In order to have an average you need to spend as much time below the average as you do above it.
Momentum is not TIP's friend right now. The last 4 months have seen TIP creep down in price. 66 cents in distributions (due to the very tame CPI-U) have not helped. Oil is also struggling at the $80 level. I do think down (or at least sideways) is likely from here, in sharp contrast to most it seems.
Some felt 12% returns were likely this year in TIP. I said to get ready for disappointment. 3.5% seemed much more likely, at best.
I can say this. If TIP hits $100 there will be at least some extra demand. I'll be moving money back from my online savings account to make a purchase. I may even be tempted sooner than that. It isn't because I think TIP will offer fantastic rewards going forward though. I simply value safety.
There are two forces at play.
1. The government is issuing a tremendous amount of debt. This hurts TIP's price. [Emphasis Added]
2. There are a lot of people like me who value safety or should value safety. Once you retire, you really should not be trying to swing for the fences, especially in this economy. This should help TIP's price.
Which force is ultimately stronger has yet to be seen. They might be fairly well balanced.
The weighted average real yield of the TIPS I own directly is 2.04%.
I'm completely fine with that. I'm holding it all until maturity. Even if the government offers more debt than the market can absorb, I'll still be earning 2.04% over inflation. I will only have lost the opportunity to get a better rate.
I do have very low expectations though. Those who expect to make a killing in TIPS are crazy.
Okay, maybe that was not the best way for me to word that, lol.
I meant to say that the government offers more debt than the market can absorb at current interest rates. In other words, so much debt is offered that interest rates must rise until demand is finally back in balance.
"The Search is Over, Ive Been with you all the while"
ReplyDeleteLOL
I readt that TIPS issuance will hit a record this year. Any takes? What if I see late night commericials trying to sell me TIPS?
GYSC,
ReplyDeleteWhat if I see late night commericials trying to sell me TIPS?
We pretty much have, lol. That's what got the price of TIP all the way up to an irrational $106.58 and 5-Year TIPS scraping along the bottom near 0%. There were so many "experts" saying to buy TIPS while I was selling.
TIP Chart
I've been thinking since November that TIPS are overpriced. I sold at $105.401. People only seemed to see the inflation side of the risk.
I'm still 85% in TIPS and I-Bonds, but I am sitting in much more cash than normal right now. I was pretty much "all in" in November.
Here's what I said yesterday.
Re: All is calm in TIP land
I continue to believe that TIP is overpriced, but not as much as it once was.
TIP pays out all of the inflationary gains and interest each month as distributions. TIP's price should hover around some sort of long-term average, at least in theory.
Out of curiosity, I downloaded the historical prices into a spreadsheet. As of today, TIP's average price since 12/5/03 has been $102.73.
That's probably as good as guess as any what TIP's long-term fair price might be.
The downside risk is that TIP doesn't just return to its long-term average fair price though. In order to have an average you need to spend as much time below the average as you do above it.
Momentum is not TIP's friend right now. The last 4 months have seen TIP creep down in price. 66 cents in distributions (due to the very tame CPI-U) have not helped. Oil is also struggling at the $80 level. I do think down (or at least sideways) is likely from here, in sharp contrast to most it seems.
Some felt 12% returns were likely this year in TIP. I said to get ready for disappointment. 3.5% seemed much more likely, at best.
I can say this. If TIP hits $100 there will be at least some extra demand. I'll be moving money back from my online savings account to make a purchase. I may even be tempted sooner than that. It isn't because I think TIP will offer fantastic rewards going forward though. I simply value safety.
There are two forces at play.
1. The government is issuing a tremendous amount of debt. This hurts TIP's price. [Emphasis Added]
2. There are a lot of people like me who value safety or should value safety. Once you retire, you really should not be trying to swing for the fences, especially in this economy. This should help TIP's price.
Which force is ultimately stronger has yet to be seen. They might be fairly well balanced.
The weighted average real yield of the TIPS I own directly is 2.04%.
I'm completely fine with that. I'm holding it all until maturity. Even if the government offers more debt than the market can absorb, I'll still be earning 2.04% over inflation. I will only have lost the opportunity to get a better rate.
I do have very low expectations though. Those who expect to make a killing in TIPS are crazy.
Mark,
ReplyDelete"Even if the government offers more debt than the market can absorb, I'll still be earning 2.04% over inflation"
Wowza thats a good one.
GYSC,
ReplyDeleteOkay, maybe that was not the best way for me to word that, lol.
I meant to say that the government offers more debt than the market can absorb at current interest rates. In other words, so much debt is offered that interest rates must rise until demand is finally back in balance.