By David Enna, Tipswatch.com
I am traveling for the next 2 1/2 weeks in a far-off land with a Mediterranean climate (I hope this applies to March), a beautiful coastline, amazing historical sites and hearty foods like Čobanac.
Its flag is one of my favorites in the world. Want to guess the country?
Of course, the trip means my internet access is going to be iffy for much of this time, and my schedule is going to be crowded through late March. So I won’t be able to update this site as frequently or as thoroughly as usual. I will try to check in to answer questions when I can, but that could also be iffy.
To add to the confusion, daylight savings time begins today (March 12) in the United States, but not until March 26 in the Central European Time zone. Oh, and by March 26 I will be in the Eastern European Time zone, doubling my dizziness.
But … the news never stops
March 14, 8:30 a.m. ET. The Bureau of Labor Statistics will release the February inflation report. This will be a crucial report. It will help set the course for future Federal Reserve actions on inflation, and also be the fifth of six monthly reports that will determine the I Bond’s new variable rate.
The Cleveland Fed is nowcasting a monthly inflation rate of 0.54% for February and annual inflation of 6.21%. Its core forecast is 0.45% for the month and 5.54% for the year. These Cleveland Fed numbers haven’t been highly accurate recently, and I haven’t yet seen other consensus estimates.
Most likely, when the inflation report is released Tuesday, I will be hiking in a nature preserve or sitting on a bus, heading for the coast. I will try to post the news and analysis as soon as I can, in whatever form I can.
March 19, 8 a.m. ET. At this time, I am planning to post my preview article on the 10-year TIPS reopening auction scheduled for Thursday, March 23. This one has been looking promising, after the originating auction on Jan. 19 got a “disappointing” real yield of 1.22%. The March 23 auction should get a better result, but real yields have been declining in recent days.
March 23, 1 p.m. ET. I’ll try to post the 10-year TIPS auction results as soon as I can. At that time (7 p.m. CET) I might be in the middle of a hearty dinner or finishing a fourth glass of wine. So take note: accuracy could be an issue.
Last week’s banking news
I have been out of the country during several economic collapses, so I get touchy when I see headlines like “Why Silicon Valley Bank’s crisis is rattling America’s biggest banks.” It reminds me of the hundreds of times I have heard CNBC commentators say the Federal Reserve would keep raising rates until “something breaks.”
Did something just break?
An interesting side to this story is the fact that banks were loading up on ultra-safe U.S. Treasurys during the era of near-zero interest rates. Now that the free-money era has ended, those Treasurys have declined sharply in value. But, as the Wall Street Journal reports:
Banks don’t incur losses on their bond portfolios if they are able to hold on to them until maturity. But if they suddenly have to sell the bonds at a loss to raise cash, that is when accounting rules require them to show the realized losses in their earnings. Those rules let companies exclude losses on their bonds from earnings if they classify the investments as “available for sale” or “held to maturity.” …
“This is the first sign there might be some kind of crack in the financial system,” said Bill Smead, chairman and chief investment officer of Smead Capital Management, a $5.5 billion firm that counts Bank of America Corp. and JPMorgan among its holdings. “People are waking up to the gravity that this was one of the biggest financial euphoria episodes.” …
The Federal Deposit Insurance Corp. in February reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed’s rate push began.
This adds some perspective to the Federal Reserve’s somewhat controversial plan to reexamine banks’ capital reserves, a topic Fed Chairman Jay Powell got hammered on in last week’s congressional testimony. Powell absolutely could not say “there is a problem.” I just hope there isn’t a problem.
I am also hoping (as always) that we won’t see financial chaos while I am trying to enjoy my Mediterranean adventure. I’ll just close with a picture I took in 2018 in another country I am visiting on this trip:
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
Visited Zagreb last year. I enjoy the reason for the checkerboard flag. Legend has it that “According to one legend, the Croatian king Stjepan Držislav was captured by the Venetians, only to challenge Doge Pietro II Orseolo to a chess match for his freedom. He went on to win all three games of said match, and in some versions even won control over the cities of Dalmatia as well. He then incorporated the chessboard pattern into his coat of arms to commemorate this triumph.” Probably apocryphal but good way to remember Croatia!
Love this, thanks
Croatia. I have been trying to find time to get there
If you can make it up to Istria, highly recommend a few days in that region. Safe travels and enjoy!
Let me say that I do value this site and the information it provides. But I’m done with TIPS. And yes, I have been researching them for years.
There’s no such thing as long term inflation protection, because inflation is in the here and now. If inflation is running hot and the Fed raise rates, then the principal value of TIPS falls, so it fails in the short term of protecting you. Yields don’t adjust upwards either. The result: an investment that declines, with little yield. The exact opposite of inflation protection! Look it up yourself, TIPS are yielding less than ordinary Treasuries.
And on top of all of that, the government has a vested interest to discount CPI to avoid the increasing payments that would result from an accurate measure.
So what are TIPS, then? TIPS are just Treasuries marketed to certain types of people that understand inflation and want protection, but will never get it with these instruments. It’s basically a marketing tool.
A diverse portfolio of alternative currencies, such as precious metals and now crypto, for example, and yes, we can debate on this forever, and carefully selected stocks and even commodities, if one desires to play that game, will always beat TIPS both in the short and long term, which makes TIPS sort of a meaningless investment.
Just buy regular Treasuries as part of a diverse portfolio. TIPS have never routinely beat them, and they are not doing so now either. I mean come on, what more evidence do you need.
Crypto? Really? Not for me.
TIPS’s inflation factor – derived from non-seasonally adjusted CPI-U – impacts principal which in turn applies to the coupon. Therefore, TIPS principal and coupon income do track their stated inflation bogey. Whether that standard is YOUR personal inflation is another matter, but the BLS is very transparent in what they measure and how they measure.
For me, fixed income is a guaranteed base layer in my investment portfolio. I am not speculating or trying to achieve maximal returns, just a real-dollar return and TIPS are the only vehicle available to do so. I sleep very well at night knowing maturing bonds in my TIPS ladder will outpace inflation year after year and provide a reliable income floor for the remainder of my days.
As a thought experiment, I compared a $1000 nominal 5 Year Treasury Note (9128284L1) with a 2.75% coupon to a 5 Year TIPS bond (9128284H0) with a .625% coupon both starting on 30 Apr 2018. They will mature roughly the same time (15 Apr 2023 for the TIPS and 30 Apr 2023 for the Note). The final values in nominal dollars with interest included are: Note – $1141.53; TIPS – $1241.19.
Why did this happen – at the time of the auctions, the Break Even Inflation rate between the Note (YTM 2.837%) and TIPS (YTM .631%) was 2.206 and the last 18+ months really ramped up the inflation factor (annual inflation of 6+% in 2021 and 7+% in 2022) to have the actual annual inflation rate be 3.827% over the course of the 5 years. Offsetting UNexpected inflation is what TIPS are designed to do and in this case they did. The nominal 5 year lost money in real dollars over that timeframe while the TIPS kept pace. That is what I mean by being able to sleep well at night with my TIPS ladder.
VIPSX Vanguard Inflation-Protected Securities Fund Investor Shares shows 4.5% annualized return since inception June 2000 and a 10-yr annualized return of 1%.
Of course, I cannot speak for Mr. Enna, but he has certainly outperformed the above Vanguard fund. I know that my 2019 TIPS purchase has not done well and having to spend time with OID on the tax return has been annoying. At least with ISavings bonds, not getting any 1099-INT so far has worked out very well.
Hope you can ignore the news, with the remarkable drop in yields today. Quite the ride in fixed income of late.
I have to admit this sort of news is impossible to ignore. Seems to be a sea change.
Safe travels Mr. Enna. Please make sure to come back.
Croatia is great. I’d love to be there for Easter.
Always thought the accounting for treatment of AFS securities where the MTM is debited/credited not thru earnings on down to net worth but rather as a contra account to retained earnings is a sham. True the net worth in both cases is the same, but where is the justification for this treatment. Whether you trade actively or not, if you retain the option to sell, then mark to market and let the chips fall where they may. S/b only two categories, banking book (HTM) and trading/AFS. Model the stickiness of your deposits and duration match your investments with a margin of error.
Croatia 🇭🇷
“Powell absolutely could not say ‘there is a problem'” because…?
The Federal Reserve chairman can’t and won’t say “the banking system has a big problem” on national TV. It could cause a run on the banks. (I’m not saying there is a problem, but Powell is going to be cautious in suggesting it.)
Enjoy your vacation, the coast and nature preserves. I had no idea on the flag, am a bit geographically challenged.
I have not read the WSJ article yet, but banks have two portfolios for investments, most use Held to Maturity since, they are not supposed to “trade” that portfolio and do not have to mark to market on a daily basis. HOWEVER, if the portfolio is available for sale then they can trade and it has to be marked to market daily. Might double check that, but old examiner memory is pretty confident. Love you newsletter and love my I Bonds. Those are in my HTM portfolio for income only….like a smart banker.
Wow, maybe I am out of date. A friend sent me this. We used to just use HTM and AFS…now the FRB says actual Trading account. Maybe WSJ is correct and I am just not current. Regardless, here is a good read.
https://libertystreeteconomics.newyorkfed.org/2015/02/available-for-sale-understanding-bank-securities-portfolios/
This is a 2015 article. There is a new rule on accounting for investments, ASU-2016-01, which became effective 12-15-2017. That may be the confusion. However, the new rule primarily affects equity investments, not debt investments.
Enjoy your well deserved vacation. If not now, then when? Thank you for helping us negotiate the gauntlet of TIPS investing.
Croatia! My brother-in-law is from Zadar. Have a great trip and keep the i-bond articles coming.