TIPS, anyone?

[Rukh O'Rorke]

Hey all,

Thought I wouldn't clutter the ibond thread with TIPS stuff.

Anyone want to look at learning about/buying TIPS with me? I think the phrase preservation of capital is the best one as to why I am buying. I am hoping to put aside "safe money" without risk of inflation eroding the value. I prefer the ibonds (who doesn't!?) but you can only do 10k/yr as a singleton, and I got a super late start to that part. I'm ok with that, as I prioritized growth and tax advantaged accounts and that worked out well for me so far. I certainly would have hopped on the ibond wagon sooner if I knew about them, but I also wish I was where I am career-wise about 10 years ago too .

So now I know about ibonds. And now I'm learning about TIPS. Do you know?? Do ya wanna know? Common, the first one's free*!

www.bogleheads.org/wiki/Treasury_Inflation_Protected_Security#How_it_works

After a TIPS bond is issued, its principal is adjusted daily using the Non-Seasonally Adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U). If there is inflation, the adjusted principal goes up. If there is deflation, the adjusted principal goes down. When the bond matures, the U.S. Treasury pays the original or the adjusted principal, whichever is greater. The principal adjustment factor is called the Index Ratio. The adjusted principal is the original principal multiplied by the Index Ratio. After the CPI-U number is announced for the previous month, the Treasury Department publishes the daily index ratios for the following month. For example, the CPI-U number for May is announced in June. The inflation during the month of May is prorated in the Index Ratios throughout the month of July and reflected fully in the Index Ratio by the end of July. Therefore the inflation adjustment has a lag of two months. [2]



Like regular bonds, a TIPS bond also pays interest twice a year. The semi-annual interest is calculated by multiplying the adjusted principal by one-half of the interest rate on the bond. 

I don't love that the value can go down below purchase price in deflationary times, but I think that is the least of the financial risks we'll be facing in the next decade or so**.

More from the boggleheads link:

Role in a portfolio

TIPS belong to the Bonds category. Their role in a portfolio is similar to that of other bonds. Because unexpected inflation is the biggest enemy of fixed income securities and because TIPS offer unique inflation protection, investors should consider including TIPS in their investment portfolio.



Another important aspect of TIPS is that it is expected to work as a good diversifier of the equity risk because it (and the inflation) tends to have slightly negative correlation with equities.

So along with ibonds, I think this is a pretty good bet for the usual bonds allocation historically recommended for AA allocation. I am hoping to avoid the "return free risk" that many bond funds have demonstrated, but I don't know how good an alternative this will prove to be. Hoping it is better than cash/savings/MM type returns, which lose when accounting for inflation.


*no, it isn't free, don't be silly, that was a joke.



**this exciting insight is worth exactly how much you paid for it, adjusted by inflation, and with 0.125% added information value thrown in for free.

[Rukh O'Rorke]

Here is the info on my purchase:



Security Type: 9-Year 10-Month TIPS
Par Amount: $100.00

Inflation-Adjusted Value: Not available

Price per $100: 107.208494

Investment/Interest Rate: 0.125%



So - I'm assuming I get a real rate of return of 0.125% with the value adjusted by inflation.....whatever that inflationary value might be. Which I guess not too bad, if the infaltion index is accurate/reflective of reality, which I often hear is not so.

Says it is paid out twice/yr, but can it be rolled into the security? what is tax tratment like? idk.

what the Price per $100: 107.208494 is -idk that either. the 7.208494 looks like inflation? but who knows?

[minnesotapaintlady]

Every time I try to study up on TIPs I get a headache.  Do I buy direct?  Through ETFs?  In a fund?   If I buy direct or in a taxable account I'll have to deal with the semi-annual taxable distributions that could really screw me up since I have to keep tight control of AGI.  I could buy them with ETFs or a fund in my traditional IRA and not worry about that, but I'm not contributing to my traditional IRAs anymore.  It would mean converting my bond fund or stocks. Not sure I want to do that either.

This is about as far as I get before I just stop thinking about them.

[Rukh O'Rorke]

Apr 5, 2022 9:25:47 GMT -5 minnesotapaintlady said:

Every time I try to study up on TIPs I get a headache.  Do I buy direct?  Through ETFs?  In a fund?   If I buy direct or in a taxable account I'll have to deal with the semi-annual taxable distributions that could really screw me up since I have to keep tight control of AGI.  I could buy them with ETFs or a fund in my traditional IRA and not worry about that, but I'm not contributing to my traditional IRAs anymore.  It would mean converting my bond fund or stocks. Not sure I want to do that either.

This is about as far as I get before I just stop thinking about them.

yeah - I'm not thrilled about the tax implications, but knowing me, I don't like to sell stocks I already have and buy into more conservative options so new money is the way to go and I like the treasury direct idea because you can cut out the middleman expenses and using the 5 year maturities, I want to ladder those so it seem to work out. the 10 year security was just the earliest I could purchase and I thought-ok having something at 10 years isn't the worst idea? idk. 

I'd like to have the tips hang on to the interest like ibonds, idk if that's possible or not - maybe this is more efficient in fund? I figured buying a small stake was the best way to find out. 

[Rukh O'Rorke]

this is what I got off the treasury direct site:

www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm

Semiannual interest payments and inflation adjustments that increase the principal are subject to federal tax in the year that they occur, but are exempt from state and local income taxes.

so - I the inflation adjustment would only be taxable when they are surrendered/mature?

lol, they are kind of complicated.

[Rukh O'Rorke]

was reading around boggleheads on this. Someone made mention of having tips in HSA account. That seems like a really good idea to me, seems you would have to do it in a fund, but I might need to investigate that

[minnesotapaintlady]

I would think you'd want your HSA to be in aggressive investments like a Roth?  Unless they mean they used it to pay expenses and needed to keep it safe?  I keep about 3-4K in cash in case I get hit with some larger expenses and anything over that into an S&P index fund.  Last year I basically spent everything I put in.  This year (knock on wood) we're doing better.  Expenses are only at $16 so far.

[Rukh O'Rorke]

Apr 5, 2022 11:54:12 GMT -5 minnesotapaintlady said:

I would think you'd want your HSA to be in aggressive investments like a Roth?  Unless they mean they used it to pay expenses and needed to keep it safe?  I keep about 3-4K in cash in case I get hit with some larger expenses and anything over that into an S&P index fund.  Last year I basically spent everything I put in.  This year (knock on wood) we're doing better.  Expenses are only at $16 so far.

I guess you could go either way with HSA - aggressive if you don't need for medical at this time but want it for medical in retirement, vs pretty safe if you might need a large chunk.

[Tiny]

Apr 5, 2022 11:54:12 GMT -5 minnesotapaintlady said:

I would think you'd want your HSA to be in aggressive investments like a Roth?  Unless they mean they used it to pay expenses and needed to keep it safe?  I keep about 3-4K in cash in case I get hit with some larger expenses and anything over that into an S&P index fund.    

       I think it comes down to how you plan to use your HSA money.   I keep some in cash and then the rest invested in a S&P index fund because this money is earmarked for use in future years once I'm truly retired/no more W2 income from what ever low wage job I'm working.  I've only had access to an HSA for 6 years (and couldn't max it the first few years) and don't expect to be contributing anything to it after 2022 -  so I'm not expecting it to have a ginormous value in 10 years but I want it to grow as much as possible. 

I can see how once I'm closer to starting to use the money in the HSA - that I would want it some sort of more conservative - just keeps up with inflation type investment.   

[Tiny]

I get a headache every time I try to figure out how TIPS benefits me and when investing in them is appropriate.


The income not being taxed by the State you live in can be valuable in retirement (depending on where you want to live in retirement).

[minnesotapaintlady]

Apr 7, 2022 10:18:11 GMT -5 Tiny said:

I get a headache every time I try to figure out how TIPS benefits me and when investing in them is appropriate.


The income not being taxed by the State you live in can be valuable in retirement (depending on where you want to live in retirement).

Yes, my state is not tax friendly to retirees.  I think I bonds satisfy all my needs for inflation protected, safe securities.  However, I'm only looking at needing 40K/year or so in income in retirement, so I think I'm fine keeping it simple.

[Rukh O'Rorke]

I'm a bit dissapointed that the TIPS hasn't caught on like the Ibond craze.....Likely because they are more confusing.


I am investing, but remain confused


My second purchase went through - this one for a 5 year security and still just $100, since I am experimenting. I found out 100 is the minimum for a purchase, but I just chose that out of the blue so I guess it is working....


I've put two more $100 investments for upcoming purchase opportunities, it will be the same securities...just 2 months older. So I got the 10 year one first but was at the delayed purchase op and got it at 9 yr 10 months, my second $100 into that security will be 9 yr 8 months.

Similarly I puchased the 5 year this month, and the second purchase will be for same with only 4 year 10 months left on it.


On the one I've had for a few months, no changes. still no info on any inflation adjusted value. Interest payment due July 15th, no info on how much that will be, but the interest rate is tiny 0.125%.

I will continue buying small amounts until I figure out how this works

[Rukh O'Rorke]

Tiny's thread had me looking into this again but I still wasn't able to track anything, but decided to look up what was withdrawn from my checking for these purchases. So I've figured out a piece of this now, and so far, am not too impressed? I don't have the full picure, so still just playing around. Here is the recent info on my holdings:

Security Type: 5-Year TIPS
Par Amount: $100.00
Inflation-Adjusted Value: Not available
Price per $100: 102.328775
Investment/Interest Rate: 0.125%

Well turns out I paid 102.76 for this! so lost money based on either the par amount of the price per $100 is even down from what I paid.

The other is even worse.


Security Type: 9-Year 10-Month TIPS
Par Amount: $100.00
Inflation-Adjusted Value: Not available
Price per $100: 107.208494
Investment/Interest Rate: 0.125%

I paid 108.74 for this one. Ouch!

So - is this inflation protection protecting me or the us treasury? Seem like a scam! At least so far. Will continue on for a while and see where it goes. Glad I am playing with small amounts here.

also a bit concerned about the purchases, because when I say pull 100 out of checking for this purchase, I think that is 100 dollars, but it is not! it is an unknown amount. So, very weird and caution is warranted!


this may not be the security I'm looking for......will keep you all posted as I learn more.

[Tiny]

I was kind of baffled by how the Treasury Inflation-Protected Securities (TIPS) work and it looks/feels like the money is "locked" up for 5 years or longer.

I'll admit I have no idea how TIPS work... my brain screams every time I try to figure it out.


So, I started with Treasury Bills - they seem to be more like short term "CDs" but you don't know what interest rate you'll get until you actually buy one.

I put in a purchase for $500.00 but I have no idea how much will actually be taken out of my TD CofI account...  (it has a $622.00 balance... so I've got plenty if it costs me more than $500). 

I should be able to see the results of the transaction on June 3rd... so the end of this week. I'll report back with what I bought and how much it cost me.

(I'm really hoping it's like a short term CD at a better interest rate than my local banks are offering. I have a alot of $$ in a savings account earning next to nothing...that I'd like to move somewhere else - without risking losing any of it - but maybe having it work alittle harder at keeping up with inflation. )

On another note - Ally just bumped up the interest rate to .75%.

[Rukh O'Rorke]

you can get tips through funds at brokerages, and I think TD said you can switch the security to a brokerage to sell on the secondary market, but that seems really complicated.

[Rukh O'Rorke]

been researching more on tips, after googling up why purchase price was higher than par value right now.

Inflation has risen at its fastest rate in decades, but Treasury Inflation-Protected Securities are still down sharply this year. What gives?



Treasury Inflation-Protected Securities, or TIPS, can help protect against inflation over the long-run, but over the short run, their performance may be dictated more by price declines in the secondary market than by the inflation-driven principal adjustment. That's been the case so far this year.



When considering TIPS, it's important to understand their unique characteristics and complex nature.

www.schwab.com/learn/story/are-tips-worth-considering-now

[Tiny]

And further proof of why everything I do is "hard" I can't accurately keep track of the stuff I do...

I went into TD and reviewed what I had done (and another old EE bond matured so I have more $$ to invest) and I see that I actually set up a purchase for a Treasury Bill to happen on 6/7/2022 NOT 6/2/2022. It's also an 8 week bill.

So, I guess I get to wait another 5 days to glean any additional info about the 8 week Treasury Bill I purchased. ::sigh::

[Rukh O'Rorke]

Jun 3, 2022 11:58:34 GMT -5 Tiny said:

And further proof of why everything I do is "hard" I can't accurately keep track of the stuff I do...

I went into TD and reviewed what I had done (and another old EE bond matured so I have more $$ to invest) and I see that I actually set up a purchase for a Treasury Bill to happen on 6/7/2022 NOT 6/2/2022. It's also an 8 week bill.

So, I guess I get to wait another 5 days to glean any additional info about the 8 week Treasury Bill I purchased. ::sigh::

I might join in some treasury bills. You know, just to see what happens. I’m a curious creature.

[Tiny]

Here's the T-Bill that TD says I purchased:

MARKETABLE SECURITIES

Treasury Bills $500

Security Type: 8-Week Bill
Par Amount: $500.00
Price per $100: 99.838222
Investment/Interest Rate: 1.056%

Issue Date: 06-07-2022
Maturity Date: 08-02-2022

I think I can call this a T-Bill.... I'm not sure that means the same thing to everyone....

I'll be honest I'm not sure if TD took $500.00 from my "no interest" account or some other amount.  

I can see why this is not more popular - the pain incurred to get a TD account - and then the overwhelming user interface, and then the "not really understanding what it is I'm buying - even though I read as much of the info as I could before my brain shut off"  thing. 


The 1.056% interest rate could be nice...  I probably should have had my EF money in T-Bills in past... and then just let them roll over -  instead of the CDs I was using (that eventually went to .25% )   I'm guessing T-Bills were a little higher - like HYSAs were... 

[Tiny]

OK, went back to the TD website for a little more pain...

My t-bill's interest rate:
Investment/Interest Rate: 1.056%


I found the 1.056% rate in a chart with the interest rates for t-bills going back to May 2022.

The interest rate for 8 week bills has been steadily rising in little increments.
as have the other durations rates.

I suspect the 2nd $500 t-bill i will buy later this week will have a similar interest rate.


Better than the interest rate I'd be getting if I transferred the $$ to my savings account (or a checking account with interest) or even Ally.

[countrygirl2]

I have tried reading up on these for some time and hated to admit I didn't really understand them. I will follow you guys for awhile and see if you can make it simple for me. LOL! Good luck with them.

[Rukh O'Rorke]

Jul 17, 2022 19:29:54 GMT -5 countrygirl2 said:

I have tried reading up on these for some time and hated to admit I didn't really understand them. I will follow you guys for awhile and see if you can make it simple for me. LOL! Good luck with them.

well, I've bought in 4 times at 100/time. Not quite sure if I'll buy more.

Here is info on the first one I purchased:

Security Type: 9-Year 10-Month TIPS
Par Amount: $100.00
Inflation-Adjusted Value: $104.81 as of 07-15-2022
Price per $100: 107.208494
Investment/Interest Rate: 0.125%

This security was issued in Jan, so the value reset in July. The par value is 100, and is inflation adjusted up to 104.81 - so seems like it is working well. However, my purchase price - which you don't know until the sale goes through - was 107.20! so it was an immediate loss of over 7%. This was based on an auction right around the time inflation spiked was hard in the news, so maybe the price got run up because of in flationary fears?

I bought into this same issueance later and got these:


Security Type: 9-Year 8-Month TIPS
Par Amount: $100.00
Inflation-Adjusted Value: $104.81 as of 07-15-2022
Price per $100: 98.982175
Investment/Interest Rate: 0.125%

the same inflationary adjustment, but this time I only paid 98.98 for a par value of 100, and now adjusted to 104.81, so in this case at least it seems to be working more in my favor. The first purchase was in March, the second in May.

Similarly, for my 5 year TIPS, I purchased in April for 102.32 for 100 par and then in June for the same one it was 98.87. Seems like the inflation adjustment is done semi-annually, and for the 5 year TIPS the 6 month mark will be October.

But my first two purchases were the 107 and 102 for 100 par amounts, and I was not very pleased with that!

[Rukh O'Rorke]

But - I am only just now seeing the first adjustments for inflation, and it is looking more favorable for these securities than I expected after the initial disappointments at the auction prices.

[Rukh O'Rorke]

ok - was wondering why I had a more unfavorable impression of the TIPS than my posting fo the details warranted.

the money pulled out of my checking is more than the price per 100 indicates. The difference across the 4 purchases ranges from 0.43 to 3.67, always higher than what the treasury direct site says the cost is. Why would this be? and who can I ask about this on treasury direct's side?

I check my recent 52 week bill and 3 year note purchase - and those lined up. 

Very odd!

[Rukh O'Rorke]

looking into the history of the purchase, there are these additional components:



Premium: $.00
Accrued Interest: $.03
Accrued Inflation Compensation: $2.35
Discount: $1.13

it seems that the accrued interest and acrued inflation compensation are added to the purchase price. harrump!


the discount and premium describe the difference of the price per 100 from the 100.  Discount subtracted, premium added.

[minnesotapaintlady]

Aug 3, 2022 20:06:01 GMT -5 thyme4change said:

Question -

Does anyone know someone who worked at a corporate restaurant before the pandemic and now? I bought sandwiches on the Jersey Mike's app, paid on the app and included a small tip. I would like to know if the workers actually get that?

Not the kind of TIPS this thread is about, but maybe someone will know anyhow.  

[thyme4change]

Aug 3, 2022 20:45:35 GMT -5 minnesotapaintlady said:

[quote timestamp="1659575161"

Not the kind of TIPS this thread is about, but maybe someone will know anyhow.   [/quote]Oops - I will delete it.

[Rukh O'Rorke]

Aug 5, 2022 9:33:30 GMT -5 thyme4change said:

Aug 5, 2022 9:33:30 GMT -5 thyme4change said:

Aug 3, 2022 20:45:35 GMT -5 minnesotapaintlady said:

[quote timestamp="1659575161"

Not the kind of TIPS this thread is about, but maybe someone will know anyhow.  

Oops - I will delete it.

too hilarious, actually!

[MarionTh230]

Apr 5, 2022 9:57:37 GMT -5 Rukh O'Rorke said:

this is what I got off the treasury direct site:

www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm

Semiannual interest payments and inflation adjustments that increase the principal are subject to federal tax in the year that they occur, but are exempt from state and local income taxes.

so - I the inflation adjustment would only be taxable when they are surrendered/mature?

lol, they are kind of complicated.

No.  The inflation adjustment is taxable in the year in which it occurs.  Treasury Direct will issue a 1099-OID for inflation adjustments to TIPS.  

This is one of the drawbacks on TIPS.  If you research and read other resources you may come across the term "phantom income".  It is the OID.  Let's say, just for illustration purposes, you buy a TIP for $100 and this year it adjusts up to $110 due to inflation.  TD will issue a 1099-OID report $10.00 that you will need to pay taxes on for this year.  The problem is, you never received that cash in hand.  That $10 was added to your TIP to increase the principle.  And the interest payment was paid not on the $100 of principle, but on the $110.  But, you don't get that extra $10 in cash flow until the security is redeemed.  Even though you pay taxes on the $10 while you hold it.

This entire phantom income thing is also why some sources will recommend holding TIPS in tax advantaged accounts only.  To avoid all these fun tax things.

[Rukh O'Rorke]

so far have held the 400 worth of tips I got, but it really bothered me so I put in a final $100 order so it will be an even 500 in tips.

Very silly, I know! Just super bugged me every time I looked at it!

Will see how the do over time, but feel much more comfortable buying notes and bills than the tips.