TIP Math

I did some math today on TIP and I thought I would share it here as well.

Expected TIP Performance

I went through the holdings of TIP line by line today.

I took each bond in the fund (as of May 4th) and used the treasury daily yield curve to determine its approximate real yield. I interpolated the yields using this data as seen on the Treasury's website (as seen in my table below).

0 years: 0.00% (just an estimate, since it is not provided)
5 years: 0.34%
7 years: 0.82%
10 years: 1.25%
20 years: 1.61%
30 years: 1.73%

Here's a simple example. If a bond was due to mature in 6 years, then I used the average of 0.34% and 0.82% to come up with 0.58%.

Once I had estimates of the real yield of each bond in the fund, I then weighted each of them based on the amount of that bond in the fund.

My best guess for TIP's current real yield (the yield after inflation) is 0.82%. There's some room for error there but it is probably fairly close. The fund charges expenses of 0.2% so let's subtract that off. It leaves us with a real yield of 0.62%.

There is certainly risk in TIP at these prices and I would argue that the upside is very limited.

That said, I continue to hold it in my IRA. It's not like real yields are good anywhere these days. I'm simply trying to urge some caution here. Don't expect more from TIP than it can deliver.

If inflation averages the 2.16% over the next 10 years that the bond market expects (seen by subtracting the 10 Year TIPS yield of 1.25% from the 10 Year nominal treasury yield of 3.41%) and nothing else changes, then this fund should provide an ongoing 2.78% return. That's it.

Correction: I said that real yields were "after inflation". I meant to say that real yields are the yields "over inflation". For example... If you earn a 0.5% real yield when inflation is 2%, then you earn 2.5% overall.