Sunday, April 17, 2011

TIP Virtually Guaranteed to Lose Purchasing Power

I've spoken a lot about TIP on this blog in the past. It is now priced to lose purchasing power over the long-term.

I want to offer a kudos to Barclays for offering the needed "real yield" information. It wasn't always there and in the past I had to estimate it by looking at the bond fund's holdings. What a pain that was.

Barclays TIPS Bond Fund

Average Real Yield to Maturity 0.20%
Management Fees 0.20%
Weighted Average Maturity 9.02 yr

That's all you really need to know. The real yield is exactly absorbed by the management fees. You are also exposed to fairly sizable interest rate risk since the average maturity is so high.

It is possible to still make money over the long-term, but it does now require greater fools rushing in behind you. Once taxes are factored in, this investment should lose purchasing power.

I-Bonds at 0.0% are clearly superior. You will still lose purchasing power due to taxation but at least you can defer the taxes. It's a bit like comparing two types of dung though. I'm a dung buyer. I'll be buying I-Bonds again in May. Sigh.

As a side note, gold and silver should someday reach a point where they too will simply track inflation. That's the allure of them. Right? At that point, they too will lose purchasing power due to the taxation. They would become 0.0% real yield assets. When that day comes nobody knows of course.

This is a hoarding toilet paper environment if ever there was one. The government can't tax the inflationary gains if you simply consume the products in the future. Just something to think about.

I no longer own TIP. My last purchase was an ultra long-term TIPS bond and it has been treating me well so far. The real yield on that bond has fallen to 1.69% according to Bloomberg. The real yield infection continues to spread.

This is not investment advice.


Stagflationary Mark said...

April 15, 2011
Hedge Against Rising Inflation with TIPS ETFs

For full disclosure, Tom Lydon’s clients own TIP.

One wonders what Tom Lydon owns, lol. Sigh.

dearieme said...

"gold ......too will lose purchasing power due to the taxation": ah but if you buy gold Sovereigns in Britain, Her Majesty's Government views them as money and so refrains from subjecting them to Capital Gains Tax.

Stagflationary Mark said...


...Her Majesty's Government views them as money and so refrains from subjecting them to Capital Gains Tax.

Lucky you!

In the US, not only is gold subject to capital gains tax, but it is taxed at a higher rate (28% as a collectible).