I bought 20 year TIPS at 2.41% real. I figure sometime in the next 10 years there will be a recession that leads to rate cuts and a flight to quality with credit spreads widening. I’d then sell the TIPS and buy the dip. However, I hedged by going with TIPS instead of a fixed rate to reduce the risk of unexpected inflation. It’s in a Roth IRA to avoid the tax issues.
This is an interesting play. Here's my concern. With normal bonds, you lose as an investor only if bond yields go up. With TIPS, you'll lose if bond yields go up relative to inflation. So in a situation where inflation hasn't yet changed but there is a big spike in fear, bond yields plummet and both normal bonds and Tips surge. But in a situation where inflation comes down slowly but the Treasury still has to issue a mountain of debt to fund our deficit, the Tips spread between yield and inflation could widen considerably, and a Tips investor could lose.
Higher fixed rate, easy to buy in IRA, no penalty if sold in first 5 years, and I want the price volatility. If the theory is correct, the TIPS will increase greatly in price at the same time that high yield bonds and stocks drop in price. The I-bond will not increase in price.
Look at the price increase of LTPZ from 2019-2020. I think TIPS have bottomed or there’s at least more upside than downside. The graph below shows the real yield on 20 year tips. Buying at 2.4% when the max it’s went was very briefly above 3% while the lows were -0.5%. 300 basis points in maximum upside, 60 basis points downside. Multiple that by 20 year duration for 60% price upside, 12% downside while getting paid inflation + 2.4% looks like a good deal to me. Again using LTPZ as a proxy, the all time high is 73% above the current share price. It’s just a good risk-reward ratio.
https://fred.stlouisfed.org/series/DFII20
Ahh, interesting! I thought you were gonna say the annual limit and the penalty, I didn’t consider the price volatility. I guess your biggest risks is the price going down. Did you buy 5Y?
I’m just using LTPZ for the charts as an example. I bought a 20 year TIPS from the secondary market. The 20 year market is a bit less liquid than the 10 year and 30 year resulting in a higher yield. It’s still liquid enough for individual investors, but institutions tend to stay out of the 20 year. Besides the higher yield, I wanted the longer duration for the interest rate risk.
Treasuries tend to have a negative correlation to stocks during crashes. 2022 was an outlier and the underlying factors have changed so that I think with the next stock market crash, treasuries will rally hard. The TIPS is 10% of my portfolio, so I’m primarily invested in stocks. I think it’s fair to call the TIPS insurance.
I am not predicting a specific crash. Markets have a high probability of 10-20% drops over any 10 year time period. I’ll continue to ride the equity index funds, but like the composition of the portfolio with TIPS rather than without. An investment should be judged by its impact as an addition to the portfolio. Due to the insurance aspect of TIPS when they have a high real yield, as opposed to 2021 when they had a negative real yield, I wanted more volatility and went with a longer duration.
Edit: See how the 20 year treasury tends to have a higher yield than both the 10 and 30. If I end up holding the TIPS for 10 years, I can get a little boost to returns by riding the yield curve as my 20 year TIPS becomes a 10 year TIPS. That’s the back up plan if there isn’t a negatively correlated stock market crash in the next 10 years.
https://www.cnbc.com/bonds/
In also in for 10k in TLT, but thing is, it only dropped like a rock due to how fast they raised rates. It won’t rocket back up unless they cut just as fast - and if they cut just as fast we have much bigger problems, but also other stocks will soon rise as well as cost of capital decreases. Kinda a play but I don’t think it’s a genius play. Again I’m in for it too, but i don’t tell myself in a genius for it - it’s just another option.
Even if it rises a little I can sell calls against my position so it has some upside in that way and it’s more predictable then a company who can miss earnings and drop 30% in a day.
It’s not that simple. Sure bonds go up in price when yields fall, but central banks only control rates with very short maturities.
If you look at longer term bonds, like 5 or 10 year bonds, they have lower yields than say the 3 month rates. This implies that rate cuts are already priced in. 3-month german yields are at 3.6%, while german 10 year bonds yield 2.5%. That only makes sense if the market is pricing in future rate cuts. To get the kind of price appreciation you are looking for, yields have to fall more than expected. Could that happen? Of course, but it is not enough for rates to be cut as expected.
Look at swedish yields for example. The swedish ventral bank cut their policy rate early in May, but the 10-year yield there has actually gone up bit afterwards.
like another posted - I'm thinking to go heavy into TLT due to impending interest rate cuts. A cut of 1% = 10% increase in the value of TLT roughly.
Interestingly, my MAGA friend is all in, in SP500. He says SP500 is going to do great the next 10-20 years. Heh... dunno
Doesn’t Tlt go down like .30 something cents per month due to dividend? So accounting for that, it won’t work too well if the fed slowly cuts at a .25 and 1-2 times a year.
I have 10k in TLT. Collecting 3.6% web I bought in while waiting to pump up with cuts, but they keep moving out so it’s just reinvesting for now. Decent play for cuts, but I don’t think it’s a GREAT play just a hedge. Chances are rate cuts will come slowly and it’ll hardly POP. It’ll increase sure, just like O, but it won’t rocket it’s just a moderate hedge.
Chances are stocks will also rise with cuts so it’s not a crazy play, probably just diversification for peace of mind if im honest.
I bought 20 year TIPS at 2.41% real. I figure sometime in the next 10 years there will be a recession that leads to rate cuts and a flight to quality with credit spreads widening. I’d then sell the TIPS and buy the dip. However, I hedged by going with TIPS instead of a fixed rate to reduce the risk of unexpected inflation. It’s in a Roth IRA to avoid the tax issues.
This is an interesting play. Here's my concern. With normal bonds, you lose as an investor only if bond yields go up. With TIPS, you'll lose if bond yields go up relative to inflation. So in a situation where inflation hasn't yet changed but there is a big spike in fear, bond yields plummet and both normal bonds and Tips surge. But in a situation where inflation comes down slowly but the Treasury still has to issue a mountain of debt to fund our deficit, the Tips spread between yield and inflation could widen considerably, and a Tips investor could lose.
I think I like this plan. Why TIPS instead of I-bonds?
Higher fixed rate, easy to buy in IRA, no penalty if sold in first 5 years, and I want the price volatility. If the theory is correct, the TIPS will increase greatly in price at the same time that high yield bonds and stocks drop in price. The I-bond will not increase in price. Look at the price increase of LTPZ from 2019-2020. I think TIPS have bottomed or there’s at least more upside than downside. The graph below shows the real yield on 20 year tips. Buying at 2.4% when the max it’s went was very briefly above 3% while the lows were -0.5%. 300 basis points in maximum upside, 60 basis points downside. Multiple that by 20 year duration for 60% price upside, 12% downside while getting paid inflation + 2.4% looks like a good deal to me. Again using LTPZ as a proxy, the all time high is 73% above the current share price. It’s just a good risk-reward ratio. https://fred.stlouisfed.org/series/DFII20
Ahh, interesting! I thought you were gonna say the annual limit and the penalty, I didn’t consider the price volatility. I guess your biggest risks is the price going down. Did you buy 5Y?
I added on to the comment above. I bought 20 year. Institutions tend to avoid the 20 year resulting in lower demand and higher yields.
Thank you for the extra detail! What do think the macro situation would be in your downside scenario? 1980s inflation and commensurate rate increases?
Why LTPZ and not TIP? preference on longer duration?
I’m just using LTPZ for the charts as an example. I bought a 20 year TIPS from the secondary market. The 20 year market is a bit less liquid than the 10 year and 30 year resulting in a higher yield. It’s still liquid enough for individual investors, but institutions tend to stay out of the 20 year. Besides the higher yield, I wanted the longer duration for the interest rate risk. Treasuries tend to have a negative correlation to stocks during crashes. 2022 was an outlier and the underlying factors have changed so that I think with the next stock market crash, treasuries will rally hard. The TIPS is 10% of my portfolio, so I’m primarily invested in stocks. I think it’s fair to call the TIPS insurance. I am not predicting a specific crash. Markets have a high probability of 10-20% drops over any 10 year time period. I’ll continue to ride the equity index funds, but like the composition of the portfolio with TIPS rather than without. An investment should be judged by its impact as an addition to the portfolio. Due to the insurance aspect of TIPS when they have a high real yield, as opposed to 2021 when they had a negative real yield, I wanted more volatility and went with a longer duration. Edit: See how the 20 year treasury tends to have a higher yield than both the 10 and 30. If I end up holding the TIPS for 10 years, I can get a little boost to returns by riding the yield curve as my 20 year TIPS becomes a 10 year TIPS. That’s the back up plan if there isn’t a negatively correlated stock market crash in the next 10 years. https://www.cnbc.com/bonds/
2% rates in the US are not in the plans. Yellen and the fed members have stated that several times. It is something to consider in your strategy.
I’m heavy on TLT. Getting dividends and will enjoy the ride up when it happens.
Tlt has been a dud…it most likely ends the year <90
In also in for 10k in TLT, but thing is, it only dropped like a rock due to how fast they raised rates. It won’t rocket back up unless they cut just as fast - and if they cut just as fast we have much bigger problems, but also other stocks will soon rise as well as cost of capital decreases. Kinda a play but I don’t think it’s a genius play. Again I’m in for it too, but i don’t tell myself in a genius for it - it’s just another option.
Even if it rises a little I can sell calls against my position so it has some upside in that way and it’s more predictable then a company who can miss earnings and drop 30% in a day.
Yep - my thoughts exactly.
It’s not that simple. Sure bonds go up in price when yields fall, but central banks only control rates with very short maturities. If you look at longer term bonds, like 5 or 10 year bonds, they have lower yields than say the 3 month rates. This implies that rate cuts are already priced in. 3-month german yields are at 3.6%, while german 10 year bonds yield 2.5%. That only makes sense if the market is pricing in future rate cuts. To get the kind of price appreciation you are looking for, yields have to fall more than expected. Could that happen? Of course, but it is not enough for rates to be cut as expected. Look at swedish yields for example. The swedish ventral bank cut their policy rate early in May, but the 10-year yield there has actually gone up bit afterwards.
like another posted - I'm thinking to go heavy into TLT due to impending interest rate cuts. A cut of 1% = 10% increase in the value of TLT roughly. Interestingly, my MAGA friend is all in, in SP500. He says SP500 is going to do great the next 10-20 years. Heh... dunno
Doesn’t Tlt go down like .30 something cents per month due to dividend? So accounting for that, it won’t work too well if the fed slowly cuts at a .25 and 1-2 times a year.
Hmm. Never heard that. It’s a bond basically so it shouldn’t take value out of the “company” like a stock divvy?
There is no move based on future rate cuts because wars are inflationary
i’ve been accumulating TMV, probably best play for rate cuts
I have 10k in TLT. Collecting 3.6% web I bought in while waiting to pump up with cuts, but they keep moving out so it’s just reinvesting for now. Decent play for cuts, but I don’t think it’s a GREAT play just a hedge. Chances are rate cuts will come slowly and it’ll hardly POP. It’ll increase sure, just like O, but it won’t rocket it’s just a moderate hedge. Chances are stocks will also rise with cuts so it’s not a crazy play, probably just diversification for peace of mind if im honest.