By David Enna, Tipswatch.com
Over the last year (plus a few months) I have been gradually adding to my holdings of Treasury Inflation-Protected Securities. Mostly with nibble purchases, but sometimes — when the opportunity looks good — with larger investments.
And now, suddenly, real yields for TIPS have increased to 14-year highs, across nearly all maturities. It’s been rather stunning. The bond market finally seems to be embracing two ideas: 1) the U.S. economy isn’t falling into recession (near-term at least) and 2) the Federal Reserve isn’t going to ease off on interest rates until well into 2024.
So we are heading into an ideal time for building out a ladder of TIPS investments, extending 20, or maybe even 30 years. With a hold-to-maturity strategy, many of these TIPS are going to provide returns 2% above inflation, risk free.
Here is a look at the real yield curve spectrum through 2023, so far:
Obviously, there has been a lot of volatility. Since April, the 5-year real yield has increased 100 basis points. The 10-year is up 65 basis points. But the longer end of the curve has been more stable, with the 30-year up only 35 basis points.
The shape of this curve makes 5- to 7-year TIPS yields look most appealing. It has prompted me to go hunting for TIPS maturing around 2029 to 2030. On Friday, there were many possibilities with real yields higher than 2.0%, even on small purchase amounts. This is from Vanguard on Friday afternoon:
For the last entry, CUSIP 9128285W6, I clicked on the “show more” link to list the ask-side lot sizes. In this case, at that time, a purchase of just $1,000 could have nailed down a real yield of 2.009%. This was possible with most of the others, too.
Earlier in the week I made a purchase of CUSIP 91282CBF7, not shown on this list, which matures Jan 15 2031. I got a real yield of 1.795%, not bad. But this TIPS closed the week at 1.887%, showing how volatile things were.
In fact, every 5-, 10-, and 30-year TIPS issued or reopened in the last 12 years is now selling at a discount, because real yields are now higher than the coupon rates set over that period. Take a look at Friday’s closing TIPS values from the Wall Street Journal, showing the large number of TIPS with discounted prices and market real yields higher than 2.0%:
The one exception on that list is the TIPS that matures Jan 15 2027. That one is a relic of the past, a 20-year TIPS issued in January 2007 with a real yield of 2.42%. (The Treasury stopped issuing 20-year TIPS in January 2009. Bad move, but that’s another story.)
Bad side of rising yields?
It’s rare to see the entire TIPS yield curve rise to levels we last saw in 2011 — and at that time only the long-term 30-year TIPS had a yield this high.
The problem: All the TIPS you are currently holding have fallen in value over the last couple months. If you are holding to maturity, you should completely ignore these market fluctuations. But what if you have invested in TIPS mutual funds and ETFs? They’ve taken a hit. Morningstar data show that the TIP ETF has had a total return of -2.95% over the last year. Vanguard’s VTIP, with a shorter duration, is down -0.07%.
I could argue that these TIPS mutual funds are actually getting attractive at these yield levels, but I know from reader feedback that these funds aren’t popular right now. So the solution, if you want risk-free inflation protection in your portfolio, is to buy individual TIPS and commit to holding to maturity.
Is there a strategy?
Remember, I am not a financial adviser and just a journalist. I will offer ideas, but do your own research.
I am continuing my strategy of swapping out of VTIP in a tax-deferred account to buy individual TIPS to hold to maturity, in a ladder stretching through the year 2043. A week ago, I “wanted” real yields of 1.8% or higher, especially with maturities ending in the years 2040 to 2043 (there are no TIPS maturing from 2034 to 2039).
My TIPS ladder is pretty solid through 2031, but maybe yours isn’t? I consider the years 2028 to 2031 the prime market right now to nail down real yields at or close to 2.0%, with maturities stretching out more than 5 years.
Maturities beyond 2031 now have real yields in the 1.8% range, but that could change quickly in coming weeks. There is no way to know where this yield surge is heading. Remember that in the month of March real yields fell 50 basis points.
So my journalistic advice is pick your spots depending on your investment needs and look for attractive yields. When you see them, buy and don’t look back. This is the best time in more than a decade to build inflation protection into your overall strategy.
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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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 
You write: “I could argue that these TIPS mutual funds are actually getting attractive at these yield levels, but I know from reader feedback that these funds aren’t popular right now.”
I’m in Vanguard’s VTIP ETF (I wish that I had bought TIPS directly, but that’s the past) and the share value has dropped by $5 since I first invested. I’d like to hear your argument about why it’s getting attractive, because I’m considering selling it and taking my unrealized losses, or hold on for now and jump at some later point.
VTIP is the only TIPS fund I own, in a traditional retirement account, so I can’t take losses. I have been using it as a holding fund to buy individual TIPS over the last year — and I will probably keep that up until it is depleted. If you look at total return (including dividends) this fund lost 2.8% last year and is up 1.8% this year. Not horrible.
Thanks, David. Enjoy your wonderful vacation.
David, the rates peaked when you did the screen caps on Friday. Next time please give us warning so that we can pick up some TIPS and bonds as well. Just kidding. No more 5-6 year TIPS with 2% yield above inflation and the 20 year treasury is around 4.15% when it was close to 4.3%.
I was thinking of buying on Fri/Mon but then was also considering waiting for the new 10yr auction on the 20th. I am curious how you make the call to buy on secondary market versus getting a new issue (even if both are done on the same platform like Vanguard or Fidelity). My analysis paralysis cost me over 0.1% yield if I were to buy tomorrow (assuming tomorrow’s open = today’s close).
It is amazing how quickly real yields can turn around. Many of the 2% real yields continued into Monday this week, but gradually fell below 2%, and today’s inflation report sent them falling even lower. Now most of them are in the 1.75% range, a fall of 25 basis points. I had targeted 1.8%+ for the one TIPS maturing in 2040, but early in the week I went ahead and bought it at 1.79%. Can’t quibble about 1 basis point, and now it is at about 1.65%. Things can change quickly, of course. I am expecting to be a buyer at the July 20 auction, just because it is a new TIPS that matures in 2033, right before the TIPS “gap years.”
David, Look forward to a deep dive on the July 20 auction. Thanks for all you do!
… Coming Sunday morning.
Hi David, This is a bit logistics question, rather than financial. Since twitter is now requiring people to have accounts to see tweets, it has become impossible to see your tweets (especially the small notes you give in between article links). Is it possible to create another page on this site and cross-post those on the site as well, so that us non-twitter followers could still read your posts. Thanks.
I see now that the Twitter feed on my site is broken, probably another “innovation” by Elon Musk. (WordPress has confirmed this was caused by a change by Twitter.) One suggestion: Just create a fairly anonymous Twitter account and add the few people you want to follow. That should work and won’t invade your privacy.
Haha, that would mean rewarding twitter for their stupid decisions. Besides, I don’t want to log in to a site just to read the tweets. I follow you on this site and it was better to see your tweets right here.
The average age of Twitter users is 25-34. Perhaps there is another way to post between article info? No Twitter for me also.
Pat, one of the “good” things about Twitter is that you can self-select the people you follow and create a useful group. My @Tipswatch account follows just financial people I respect. Most of my posts there are results of various Treasury auctions, plus links to the articles I write. I do learn a lot on Twitter. It is not all bad.
I follow very few, but sometimes get jumped into an evil thread. It’s scary!
Ann, my advice on Twitter, if you decide to use it: Absolutely, 100% ignore the trolls. Never respond. Block them and move on. The trolls will try to carry on a needlessly angry debate for months.
David- Thanks! I never respond. Perhaps the solution is not reading the responses under the original tweet. Or perhaps not following anyone who might tweet something controversial…
Curious of any thoughts on the merits or not of redeeming a 4.9% Brokered CD that has 45 months remaining and is higher in value than when originally purchased back at the end of March and taking those proceeds and reinvesting them in the 2029, 2030 and 2031 TIPS that have real yields ranging from 1.76 to 1.86% at this point.
I presently have a TIPS ladder with established rungs from October 2024 through April 2028 and then have years 2032 and 2033 covered but still am missing 2029-2031 years of the 10 year ladder. My objective is preservation of purchasing power at this point. Thanks in advance.
This is a question for a financial adviser who understands your goals and portfolio. I’ve never sold a brokered CD and I don’t know what kind of bid-ask spread you’d be facing, or potential commissions.
Concerning the question of “do you have a strategy” – I know the focus of this website is to buy and hold, but is anyone giving thought to “buy and sell at an opportune time” on the assumption that sooner rather than later interest rates will fall back to more historic levels? Or are you, at least, considering that the opportunity to sell bonds acquired at these yields are likely to be disposable at a gain before maturity if one were to find that necessary or advantageous? And how are you grappling with the question of whether to dive in now or wait for possibly even higher yeilds (or doing some of both)?
The sell decision is always going to be a personal one — why are you selling, what is your profit, what are the tax implications. etc.? My advice in this one investment area — TIPS — is to buy and hold to maturity. My goal is to buy an investment with a set return above inflation for a set number of years. For that one part of my portfolio. Everyone can make an individual decision.
Now, on the question of future higher yields: The only way to confront that is to buy what you think is adequate to hold to maturity, and reserve some money for future purchases, if that is part of your plan. There is a lot of certainty when investing in TIPS, but there’s no way to know if better opportunities are coming.
FYI: I have been working on an article about the 10-year TIPS that will mature July 15. All the factors are already set, since the CPI adjustments were announced last month. That TIPS (with a real yield at auction of 0.384%) had a nominal annualized return of 3.055%. If you bought an I Bond in July 2013 with a fixed rate of 0.0%, it so far has had a nominal return of 2.64%.
I’ll note: 2.64% + 0.384% = 3.024%, really close to the actual result.
Other facts: A 10-year Treasury note issued in July 2013 would have earned 2.56% annualized. Vanguard’s Total Bond Fund ETF, BND, had an annualized total return (including dividends) of 1.47% over the last 10 years. The TIP ETF had an annualized total return of 1.93%.
Buying that TIPS worked out well. The article will publish July 18.
Not sure the Total Bond ETF is comparable since it has a lower duration.
That’s true, but I’m using it as an example of the total bond market, a common core investment.
Can I ask a general question here?
I bought the 5-Year Tips maturing 4/15/28 at auction, on 4/20/23.
My statement included accrued interest. It was a minimal amount of $0.45 for each $1,000 of par value.
If it is an original issuance, bought at auction, why is there accrued interest?
It’s a brand new issuance.
A new TIPS is technically issued on the 15th of the month, and the settlement date is the last business day of the month, so you owe accrued interest for those two weeks. You get that money back at the first coupon payment.
Thanks David and Jim.
Who’s getting the accrued interest? The US Treasury?
It’s an original issuance, no one owned it before.
Example (hypothetical):
Accrued Interest $10.
The first Coupon is $100 (inclusive of the $10 accrued interest).
So you get a net of $90 for a $100 coupon (because you paid $10 at purchase and then received a $100 coupon). What happens to the other $10?
Yes, at a Treasury auction, the Treasury gets the accrued interest. At a secondary auction, the seller gets the accrued interest. At a Treasury auction, the buyer gets 2 weeks of “free” interest up to the settlement date, so the buyer needs to pay that back. On the secondary market, the seller deserves the interest earned up the the sale date, which could be months of interest. It’s a fair system.
The bond was auctioned and started paying interest on 4/20/23. It was issued on 4/28/23 so it had accrued eight days of interest at the coupon rate of 1.25% by the time it was issued.
David, question about the CUSIP 9128285W6 you mentioned in the post.
In prior posts, you mentioned that on the secondary market, you don’t like to buy at too much of a discount as this would set your deflation floor lower. This issue had a pretty significant discount with a price of around $94. Have you loosened the standards to how much of a discount you are willing to accept on the secondary market?
No, in the past my caution was for a TIPS selling at a premium cost while also carrying a large amount of inflation-accrued principal. That means you are buying extra non-protected principal at a higher cost. In return, you are getting a higher-than-market coupon rate. But for some of these later-year TIPS (2040 is a good example) there is only one choice: pay a premium for the additional principal. At this point, to fill out my ladder, I am willing to go that route and simply lock down an attractive real yield.
I bought one of these yesterday, realizing that if the apocalypse comes with massive deflation I could lose 20%. But we will have bigger problems to worry about in that case.
BTW, part of my “strategy” is to avoid losing interest on my cash reserves, or paying margin interest, by paying too early or too late for my acquisitions. Schwab makes this rather challenging because they deduct the purchase price from cash immediately, and you may show a negative balance for days before settlement date. Furthermore, they lock the cash if it’s there, and you can’t withdraw it. To me, this is one of the advantages of Treasury Direct.
I’ve always been a fan of bonds, not bond funds. Mostly because bonds can’t lose money while the funds do lose money as yields rise. I also agree that this is a prime, possibly generational, opportunity to lock in high yields.
Like many others, I now have a much better understanding of TIPs, thanks to your publications., It’s gradually sinking in. I’ve always held TIPs in mutual funds based on general recommendations of many money managers. Now I am in the process of buying individual TIPs to fund annual end-of-year RMD distributions. So far, I’ve bought two five-year TIPS on the secondary market, one maturing in Oct 2024 and another maturing Oct 2025. I plan to buy two more maturing at end of 2026 and 2027 and maybe one more at auction this October for end of 2028. Options on the secondary market are surprisingly limited. Is it worthwhile carrying this out further into the future beyond five years? My concerns are liquidity if circumstances change and not really needing current income during duration of individual bond. It seems to me, that’s where short-term TIPs mutual funds have an advantage. Do you have any thoughts or suggestions regarding this strategy?
Once again, thanks for your work in this area.
I’ve heard others talk about this strategy of planning for RMD payments through maturing TIPS. I think it would work well, but it might not be 100% match your RMD needs, depending on growth of other assets in those traditional IRA accounts, or your charitable giving decisions. Possibly other readers have ideas on this?
There’s an alternative explanation why rates are going up.
The highest 10 year Tnote yields in the last 70 years were incurred as we were heading into (and beginning) the recession in Q2 1981
https://fred.stlouisfed.org/series/DGS10/
What I think is “different” this time wrt the recent increase in yields is the supply of government debt about to come into the market.
As a result of the “extraordinary measures” employed this year because of the debt ceiling politics, the Treasury will be issuing $1 Trillion on NEW Tbill debt.
As a result of the debt ceiling not being raised for the last several years (but raised now), the Treasury will be issuing $2 Trillion in new Tnotes and Tbonds
Unlike a delay in taking new issues to the stock market, this is debt which MUST be sold, and it comes on top of the Fed continuing to allow $95 billion a month in Treasuries and MBS to roll off their balance sheet ($1.14 TRILLION a year)
So it’s possible regardless of Fed Funds/recessions, we may see higher yields due solely to supply.
Has it started already?
On tap this week: $211 billion in Tbils, $90 billion in Tnotes and Tbonds ($40 billion 3 year nots, $32 billion 10 year reopening, $18 billion 30 year reopening)
https://www.treasurydirect.gov/auctions/upcoming/
On this one, blowoff, we agree. I do think the stepped-up Treasury issues are having some effect on the bond market. Add to that the Fed jawboning on interest rates, the Fed reducing its balance sheet, and a U.S. economy that is not stalling.
Thanks for this helpful piece. I don’t have plans for a TIPs ladder, but I do want some inflation protection, and to lock in current favorable rates as long as I can. I’m finding it hard to think about anything maturing beyond my mid-80’s, but I should probably be taking a longer view, since my mother lived well into her 90’s and two aunts have lived past 100.
I agree with Len 100%. Please keep in mind that holders of an ETF or a mutual fund cause outflows and inflows which impact passive fund holders both on fund NAV and taxes. As shared this view numerous times, I believe buying individual TIPS in a tax deffered account and keeping them to maturities is the way to go, at least for me….best
I bought into I-Bonds $10,000 + $10,000 = total $20,000, when around 8+%, just over 1 year ago. Inflation and rate is now around 4%. Should I hang onto these for a longer time? I also have CDs at 5.5% for 20 months. I am wanting to sell (b0nds) and take the penalty. I could use some advice, as am new to bonds. Thanks
It depends on your need for the money. I Bonds work best as a long-term holding, moving inflation-protected money into the future. But the I Bonds you purchased probably have a fixed rate of 0.0% (the current rate is 0.9%) so you might be able to do better. Was this a short-term investment? If so, and you want to redeem, read this article first: https://tipswatch.com/2023/03/29/want-to-exit-your-i-bond-investment-youd-better-have-a-plan/
There is no difference between a TIPS fund of a given average duration and a rolling ladder of individual tips with the same average maturity except the professional fund managers such as those at Vanguard can more easily optimize the timing of the buys and sells than can the typical individual investor. Also, much less work and cognitive load for an individual investor, particularly an aging investor, to simply buy a TIPS fund, or combination of TIPS funds from companies like Vanguard and Fidelity, with whatever average duration the investor finds suitable. This is a great blog generally speaking but it is simply a fallacy to think that there is any advantage for an individual investor to buy individual TIPS for the purpose of, in essence, creating their own TIPS fund and being their own fund manager.
A rolling ladder of TIPS? Possibly, but I don’t buy the argument, which I hear often. Buying an individual TIPS and holding to maturity guarantees a set return over inflation at maturity. What happens before maturity doesn’t matter, you are holding to maturity. A TIPS fund obviously has no maturity date and its value will rise and fall every day, even minute by minute. There is no certainty of the value at withdrawal. If you build a TIPS ladder that stretches to your probable lifespan, the need for a “rolling” ladder is diminished.
You “hear the argument often” because it’s a valid argument which you dismiss without addressing on the merits. (You yourself acknowledge that you are a journalist and not an investment adviser.) Look, I have a great deal of respect for what you are doing and avidly read your blog posts. But a rational investor MUST mark to market his or her investments, even if the intent is to hold to maturity. The individuals bonds that you buy, for example, “rise and fall every day” in value. The fact that you choose to ignore those daily changes in value is a cognitive bias on your part, not rational investing behavior. Just as there is no “certainty” of the value at withdrawal of a TIPS bond fund, there is equally no “certainty” that an investor in individual TIPS will, in fact, hold to maturity. And further, professional bond fund managers who know what they are doing gain an advantage over holding their portfolio bonds to maturity because they generally sell and replace them prior to maturity because holding bonds to maturity generally loses value because of yield curve issues. I’m surprised you’re not aware of this? But holding bonds to maturity is generally not an optimal way of maximizing expected value of a bond portfolio. An investor should sell their bonds not when they mature (which is basically a forced sale), but when expected return is maximized. I think the term is “rolling down the yield curve.” Tipswatch, I would appreciate if you would look into this issue, educate yourself, and post a blog post telling us why you think holding to maturity maximizes expected value of your TIPS portfolio, as opposed to sometimes selling “early” (i.e. before the bonds mature) when the yield curve warrants selling early. Thank you.
Alan, the “rational investor” of whom you write doesn’t exist outside of theory. All humans are subject to emotional influence, no matter the degree of conscious effort to subdue and negate it. I believe David recognizes this element of human nature and is providing his view of how to maximally protect oneself from the effects of emotional bias – thus, his perception that buying individual TIPS and holding to maturity is the most risk-free option available to the layperson. I happen to agree with him.
The stridency in your post also gives the impression of a sour investment advisor who’s being deprived of his or her usual fee-based lucre.
Duration matching has merit, but not as a way of assuring set returns into the future. That is obvious. Now, must we *really* mark-to-market our TIPS investments? This is an interesting question. I bought TIPS at TreasuryDirect for years in a taxable account. TreasuryDirect reports the value of those TIPS as par value x inflation index. Market value does not enter the picture, and in fact you can’t sell a TIPS at TreasuryDirect. You have to transfer it out to a brokerage to complete a sale at market value. Anyone holding TIPS at TreasuryDirect isn’t fussing over market value.
TIPS are an unusual investment, because they provide a guaranteed return over U.S. inflation. There isn’t another investment like this (except for I Bonds, which aren’t marketable and don’t get marked-to-market). Getting that guaranteed return over inflation makes TIPS an attractive hold-to-maturity opportunity today, when real yields have hit a 12- to 14-year high.
I am not writing for professional bond managers, obviously. I am writing for small-scale investors, about a devoting a portion of a portfolio to protection against inflation.
In my investment world, I have never told a TIPS before maturity and that is highly unlikely to ever happen. But you are free to think as you want. I hope you will keep reading this site, but understand I am not bending on my personal hold-to-maturity strategy.
Maybe if you looked at it from a reverse angle so to speak: In many of your blog posts you discuss whether or not to purchase a TIPS issue based on your analysis of its return characteristics. Sometimes you deem the environment “favorable” vs. “unfavorable” to purchase TIPS. That’s one of the things your blog is all about. Selling the TIPS however is simply the reverse decision of buying. Never selling until maturity means you are not trying to optimize the return of your TIPS portfolio. Yet you do try to consciously optimize when you do or don’t buy them. It is inconsisent.
Apples and oranges gentlemen. Alan is talking about optimizing the return on a portfolio of bonds while Tipswatch’s is talking about liability matching for future spending needs.
Sorry Alan but I have to agree with David here. There is real value in the simplicity of buying and holding a ladder of securities for small individual investors both psychologically and functionally. I personally have 2 ladders going now because I am not even going to pretend I know where interest rates are going. A 6mo ladder of treasury bills and a 5yr ladder of notes, CDs, and TIPs. The 6mo ladder makes the opportunity cost of the 5yr ladder much more palatable. At some point I am expecting that psychological comfort will reverse and I will be glad I own some longer dated fixed income.
Hi Paul. The only way to know if there is “real value” to the approach you describe is to compare your portfolio of individually purchased fixed income instruments to a low cost bond fund (i.e. such as a Vanguard fund or combination of funds) with similar average duration, maturity, and costs (trading costs, bid/ask spread, annual management fee charged by the fund vs. the value of your own time, and any other relevant inputs). It is extremely unlikely that the typical individual investor even has the ability to compute these numbers for a collection of individually purchased bonds, TIPS, CDs, etc. I know I don’t.
The “real value” I am talking about here is the strategy of buying and holding a ladder of securities. The problem with ETFs beyond their expense ratios is that small investors are too easily turned into traders when using them. I am sure you have read the articles at how badly these “investors” performed after piling into the TIP ETFs recently. For most people a ladder where you roll the maturing bonds is a better choice. Simple and easy to hold in any kind of interest rate environment.
The problem is that most TIPS funds are passively managed. The bond fund manager does not have the freedom to sell bonds at will to take advantage of yield curve issues, etc. Instead, he or she has to follow as closely as possible, before fees and expenses, the total return of a TIPS index. Actually it is the investor who buys individual TIPS who has the freedom to either hold to maturity or sell earlier for whatever reasons.
For the last 15 years I have had nothing but poor returns or losses on bond funds. You can do well if you time interest rate movements well, but who can do that with any regularity. Buying individual bonds and holding to maturity is a godsend. Guaranteed return and the direction of interest rates does not matter.
It all comes down to: 1) in theory you can do better, or 2) with certainty you can do this. Buying TIPS and holding to maturity does assure a certain return above inflation. Can you do better? You can try with all the rest of your portfolio. But having a portion devoted to certainty is reassuring.
Another great post! Thank you.
Due to TIPS having positive yields, I’ve been able to move a lot of maturing CD’s into TIPS bonds over the course of the last year.
The problem that I have now is that I don’t have much liquid cash available to take advantage of the 2% TIP yields now available.
I’ve got a few grand that I can use for the novelty of actually owning a TIPS bond with a 2% yield.
When I grumble to my wife about the 1.5% yields that I have when I could be geting over 2% now she just laughs at me.
At our age, she says that we should just be happy that we’re still here and not worry about interest rate ticks.
For individual tips that have lost value, any thoughts about tax loss harvesting and rebuying a nearby maturity?
Interesting idea. All my recently-purchased TIPS are in a tax-deferred account, so that would not be an issue. I am not a tax expert and I’ve never actually sold a TIPS before maturity, so I have no experience there. If you held a TIPS fund like TIP in a taxable account, it certainly would work to switch to VTIP, which is quite a bit different and not create a wash sale. Would SCHP be different enough? Probably, but I am not sure.
Word to all. You are getting some of the best advice you will readily find anywhere, right here. I will continue laddering, which I call sampling and the pros call ‘ portfolio immunization’ but I am also nibbling at some maturities.
Bond funds stink. I will provide references if anyone shows the slightest interest. Don’t fire all of your guns at once, but holding to maturity is the edge we enjoy. Observe the downfall of some banks recently.
What sort of references regarding bond funds?
“but holding to maturity is the edge we enjoy”
If anyone bought 10 year Tnotes in July 2020 at a 0.55% yield, I doubt there will be much to enjoy anywhere along to road to maturity
Your securities are only worth what the market will pay (I personally disagree with letting banks value securities “at maturity”).
There is no reason to believe “Holding to maturity” is better than accepting a loss and making an alternative investment.
The fact that it’s a CERTAIN return doesn’t make it a good return.
Yes, buying a 10-year T-note paying 0.55% would have been a very sorry decision. Did I recommend that? No. Did I recommend buying a 10-year TIPS when the real yield was -1.50%? No. The whole point of this article is that real yields are very attractive now and it is a good time to consider buying as part of a hold-to-maturity strategy. Buying a TIPS with a real yield of 1.8% or 2.0% ensures your return will be 1.8% of 2.0% above inflation. That is a locked-in opportunity we haven’t seen for a dozen years.
The individual investor can decide. I encourage that. Buy or don’t buy and move on to the next investment.
As I’m sure you know Zvi Bodie doesn’t shy away from buying TIPS with negative yields, considering that they might be the best alternative at that time.
( I don’t buy them myself however.)
Well, even Zvi Bodie probably might have paused at -1.50%. But … A 10-year TIPS is maturing July 15. It auctioned with a real yield of 0.384%. It ended up creating a nominal annual return of 3.055%, versus 2.56% for the 10-year Treasury note, 1.47% for Vanguard’s Total Bond Fund and 1.93% for the TIP ETF. So at times, even a weak real yield can end up being an attractive investment. Check out my Tips vs. Nominals page: https://tipswatch.com/tips-vs-nominal-treasurys/ Several TIPS with negative real yields ended up outperforming nominal Treasurys of the same term.
The illusion that today I will be able to make selections that won’t be trading at a loss sometime in the future, if temporarily, is infectious. The bonds I purchase next week might be trading at a loss in a year. There is no reason to believe I know what the bonds purchased in 2020 will be trading at on some future date. It is another illusion to believe that I can keep ” ratcheting up” by taking losses and reinvesting the diminished capital at higher rates.