I bought a 19-year TIPS last June. It was actually a bit less than 19 years. It will mature on April 15, 2032. That means it is now an 18-year TIPS. I locked in a 1.06% real yield with intent to hold to maturity.
As of today:
The 20-year TIPS yields 1.07%.
The 10-year TIPS yields 0.53%.
Using interpolation, those purchasing the 18-year TIPS now are now only getting 0.96% (1.07% x 0.8 + 0.53% x 0.2 = 0.96%).
I therefore cannot complain about my most recent purchase (or any previous TIPS purchase for that matter).
Real yields have been falling rather consistently since the early 1980s. It has rarely paid to procrastinate when a real yield became acceptable. For what it is worth (as a permabear), I feel today's long-term real yield is acceptable. If I had more money to deploy (beyond emergency savings), I would buy more long-term TIPS at these levels.
1. There is a whopping $12.2 trillion still willing to earn a nominal yield of just 0.084%. Talk about a slow painful death (of inflation adjusted savings).
2. I think the direction of this economy over the long-term is directly tied to the direction of real yields over the long-term. Waiting around for better real yields is a bit like waiting around for a better economy (temporary bubbles notwithstanding). Good luck on that one.
3. I don't think the global economy can tolerate higher real yields (our economy in particular). I would point to what these "low rates" have done to recent stock market activity, recent emerging market activity, and holiday sales.
4. Where's the hyperinflation? If anything, the CPI is trending down again even though we've been in ZIRP for 5 full years. You may wonder why I like long-term inflation protected bonds when seen in that light. Well, I am a relative inflation agnostic over the long-term. My investments are a pure play on falling real growth instead, and real growth has been falling. Big shocker.
This is not investment advice. As always, just opinions. Maybe I am wrong to be a permabear. You know what? I sure hope I am! It would only help me if real yields rose because the economy was doing better. I'd be able to reinvest the proceeds at higher rates when my bonds mature. I really don't think I will be that lucky though (not by any stretch of my imagination). Sigh.
Source Data:
St. Louis Fed: Custom Chart
Do I understand correctly that the tax that TIPS are subject to is income tax? There is no equivalent to a withholding tax, is there?
ReplyDeleteTIPS are free from state and local taxes. My state doesn't have a state income tax though so that's of little use to me.
ReplyDeleteAs for federal income taxes, I am taxed on both the interest and the inflationary gains each year. The math clearly shows that I really should not root for higher inflation rates! The taxes could bring me immense pain.
As for the withholding (with no job), I have to make estimated tax payments each quarter based on how much income I will make.
So this means that if I buy an ETF of TIPS and hold it in a British tax-shelter, I'll pay no tax on them? Oh happy day.
ReplyDeletedearieme,
ReplyDeleteI think the taxes on an ETF work a bit different, but don't quote me on it.
When I owned TIP, I'd get a 1099 for dividend payments the fund paid me and when I sold I had to pay capital gains tax on the gains.
It's been a long time since I owned TIP though, so I am not positive. In any event, my tax preparer took care of the details.