Thursday, May 6, 2010

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.


EconomicDisconnect said...

First off, I hate math!

Second off, Cramer saved the market, didnt you hear?

Really though, a piece of my stash is looking for a non cash home and maybe TIPS is the way to go. I just want it back, not big returns. You can be convincing.

Stagflationary Mark said...


If you really want safety but don't want cash, then you could probably do worse than I-Bonds and EE Savings Bonds.

If inflation goes to 10%, today's I-Bonds would be paying 10.2%. You could dump the EE Bonds without needing to find a greater fool.

If deflation strikes with a vengeance, today's I-Bonds won't lose money and today's EE Bonds would seem like a gift from God.

I think the lowest lying TIPS fruit has already been picked this year. Could be wrong though. Would you believe the 30-Year TIPS I bought in February is up 12%? Now might not be the time to pile in.

Just a thought.

Stagflationary Mark said...


As an added bonus, one would think that the government would be less likely to default on I-Bonds and EE Bonds. There's more than likely an American voter on the other end of every one of them.

Stagflationary Mark said...

I just saw the most amusing comment on the TLT message board.

it was a great year today :)

EconomicDisconnect said...

I am not piling into anything, but looking for some ideas for a portion of money to go to work. I think you know my two leaders, but I thought I would round things out a bit, LOL.

Stagflationary Mark said...


...looking for some ideas for a portion of money to go to work.

Money can't hold a job in this economy. Keep an eye on your coin jar. I suspect mine sits on the couch watching soap operas all day. Can you really blame it though? A full time job as a three month treasury bill pays just 0.1%. ;)

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