Long dated TIPS might still be a viable buy even at current price levels.
Unlike conventional bonds whose price rise as yields decline, price declines as yields rise, with inflation bonds (TIPS) the price rises as REAL yields decline, price declines as REAL yields rise (where real yields = nominal yield minus inflation).
My guess is that low/negative real yields are likely to persist for a whilst yet, perhaps three years or more i.e. prices could remain relatively high for a while yet.
If real yields turn more positive again likely the economy will be doing relatively well, so whilst TIPS might lose, stocks might gain to counter-balance that and more.
If some nasty mess occurs and inflation spikes sharply whilst nominal yields are kept low, then real yields would move sharply negative and TIPS could soar in price. The Fed/Treasury would welcome such a sharp spike in inflation as that in effect erodes debt at the cost to savers/investors.
IIRC back in 1917, nominal yields were being kept down at sub 4% levels whilst inflation hit nearly 20% levels i.e. a -16% negative real yield. Under such conditions long dated TIPS might rise quite significantly.
The UK TIPS equivalent (index linked gilt) for 2055 currently has a modified duration (volatility) that is very high (35) which somewhat indicates that for every 1% change in real yields the TIPS price moves 35%. A modestly small holding of that, perhaps 10% to 20% could rise sufficiently to counter-balance the rest of the portfolio under such a high inflation, low yields environment. If in contrast high positive real yields occur and the 10% or 20% loses heavily, the 80% or 90% of other investments might be gaining sufficiently enough to counter those TIPS losses.
As a guide a 30 year TIPS bought when real yields for 30 years were +1% and when inflation was perhaps 2%, that then saw inflation spike to perhaps 10% might see the longer dated end yields decline to perhaps -5%. A 29 year TIPS priced to a -5% yield would generally have gained +400% compared to a year earlier (when it was a 30 year priced to a +1% real yield) i.e. $100 price rises to $500 price.
In the meantime, there's also sufficient volatility for the likes of AIM to potentially trade the (volatile) longer dated TIPS holding(s).
[FT250 = mid cap stock index, PHGP = gold, IL Treasury = Index Linked Gilt (TIPS)]
A benefit for US TIPS is that the repay at least par value, such that if during the lifetime there's overall deflation, then you get repaid par value - which is a real gain (purchase power has risen due to negative inflation over the period). If bought when priced to a positive real yield, then holding to maturity at least maintains purchase power. Or trading the holding potentially might lock in a real gain if during the holding period circumstances depict a sharply higher price. In the UK we don't have that repay at par option (if there's overall deflation the TIPS repay less than the par value, but that matches purchase power). Our benefit comes from taxation - as inflationary uplift element is non taxable, whilst in the US (depending upon which account they're held in) the inflationary uplift element is (I believe) taxable.
Clive.
Unlike conventional bonds whose price rise as yields decline, price declines as yields rise, with inflation bonds (TIPS) the price rises as REAL yields decline, price declines as REAL yields rise (where real yields = nominal yield minus inflation).
My guess is that low/negative real yields are likely to persist for a whilst yet, perhaps three years or more i.e. prices could remain relatively high for a while yet.
If real yields turn more positive again likely the economy will be doing relatively well, so whilst TIPS might lose, stocks might gain to counter-balance that and more.
If some nasty mess occurs and inflation spikes sharply whilst nominal yields are kept low, then real yields would move sharply negative and TIPS could soar in price. The Fed/Treasury would welcome such a sharp spike in inflation as that in effect erodes debt at the cost to savers/investors.
IIRC back in 1917, nominal yields were being kept down at sub 4% levels whilst inflation hit nearly 20% levels i.e. a -16% negative real yield. Under such conditions long dated TIPS might rise quite significantly.
The UK TIPS equivalent (index linked gilt) for 2055 currently has a modified duration (volatility) that is very high (35) which somewhat indicates that for every 1% change in real yields the TIPS price moves 35%. A modestly small holding of that, perhaps 10% to 20% could rise sufficiently to counter-balance the rest of the portfolio under such a high inflation, low yields environment. If in contrast high positive real yields occur and the 10% or 20% loses heavily, the 80% or 90% of other investments might be gaining sufficiently enough to counter those TIPS losses.
As a guide a 30 year TIPS bought when real yields for 30 years were +1% and when inflation was perhaps 2%, that then saw inflation spike to perhaps 10% might see the longer dated end yields decline to perhaps -5%. A 29 year TIPS priced to a -5% yield would generally have gained +400% compared to a year earlier (when it was a 30 year priced to a +1% real yield) i.e. $100 price rises to $500 price.
In the meantime, there's also sufficient volatility for the likes of AIM to potentially trade the (volatile) longer dated TIPS holding(s).
[FT250 = mid cap stock index, PHGP = gold, IL Treasury = Index Linked Gilt (TIPS)]
A benefit for US TIPS is that the repay at least par value, such that if during the lifetime there's overall deflation, then you get repaid par value - which is a real gain (purchase power has risen due to negative inflation over the period). If bought when priced to a positive real yield, then holding to maturity at least maintains purchase power. Or trading the holding potentially might lock in a real gain if during the holding period circumstances depict a sharply higher price. In the UK we don't have that repay at par option (if there's overall deflation the TIPS repay less than the par value, but that matches purchase power). Our benefit comes from taxation - as inflationary uplift element is non taxable, whilst in the US (depending upon which account they're held in) the inflationary uplift element is (I believe) taxable.
Clive.
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