Thursday, October 4, 2012

The 5-Year TIPS Floor

Click to enlarge.

In my opinion, the "sure thing" trend in this chart is likely to become far less of a sure thing within the next year or so.

If you believe the Fed's inflation target of 2% will become a reality, then there is no reason to own 5-year TIPS that pay less than -2%. Cash would be a better alternative (more liquidity, higher return). For the record, I have no opinion on whether you should believe the Fed's target.

Further, check out what another recession could do to 5-year TIPS yields. Contrary to some, it is my belief that the Fed hasn't permanently stopped recessions from happening. There is plenty of risk here.

Click to enlarge.

Disclosure: Long TIPS with intent to hold to maturity. I have no desire to buy 5-year TIPS at these prices though. Not even close. That said, I'm still very interested in 0.0% I-Bonds and will continue adding to my collection (in January more than likely). This is not investment advice.

Source Data:
FRB: Selected Interest Rates
U.S. Treasury: Real Yield Curve Rates


Stagflationary Mark said...

As a side note, I would sell all of my TIPS with a maturity less than 5 years right now if it wasn't for two small details.

1. My bonds are kept with the government. I trust the government more than I do brokerage firms. In order to sell them, I'd have to transfer them.

2. Like most brokerage firms, TD Ameritrade's "transparent pricing" does not apply to bond trading. I therefore have no idea what it would actually cost me to sell my bonds. I'm not about to feed their coffers with hidden fees. Call me stubborn.

Stagflationary Mark said...

TD Ameritrade: Pricing

Bonds Price
Treasuries at auction $25 flat fee
All other bonds and CMOs on a net yield basis

It's $25 to transparently participate in a free* government auction. Otherwise, it's bend over and accept whatever they give you, lol. Sigh.

* It's 100% free if you participate directly in a government auction and avoid the brokerage firm entirely.

Troy said...

Not related, but it occurred to me today that the 1990s tax regime could pay for a $300B/yr military but not the $800B/yr one we have now.

Romney's 20% tax rejigger will switch ~$500B/yr around, so it follows we need a 20% tax rise from here to just cover the additional defense expense we are bearing.

I made a graph:

Blue line is Medicare+Medicaid / wages and shows we need a 14% tax rate to just pay that current expense.

Oh, the baby boom is aged 50-66 now and Gen Y, another 80 million people, are entering their prime parenting years too now. JFG*

Anyhoo, medicare tax is 3%. We're a bit off there: shows we need to triple the medicare tax now to 9% of wages to just bring the program back to break-even.

Back to the first graph, green is DOD. 12% income tax for that alone. One hour out of each 8hr day for that alone.

Red was Social Security. Since the Greenspan Deal, we've been running "surpluses" on this account, but thanks to teh recession and ZIRP those days are over. Plus 10% of the population earns tons of money over the FICA cap, so the true FICA rate to bring SSA back into balance is probably 20%.

Yet we're still wasting our time on PPACA's hit on Medicare Part C and Big Bird.

We're really a nation of bloomin' idiots. Maybe Sweden will take me.

Stagflationary Mark said...


We're really a nation of bloomin' idiots. Maybe Sweden will take me.

Have no fear. We fully intend to infect Sweden with our idiocy and level the playing field, lol. Sigh.

Troy said...

yeah, all the otherwise healthy n euro states have massive housing bubbles -- Norway, Sweden, Denmark, Holland.

This table tells me who's doing things right and who's not.

Sweden is $100B in the hole, $11,000 per capita.

The US is only $8000 per capita in the debt hole, but the Swedes can still read articles about their trade surplus in the present tense, while ours is beginning to leave living memory.