Comments on: TIPS During Deflation

By: Richard Staub

Richard Staub — Tue, 26 May 2009 02:05:06 +0000

Great (and unique)spreadsheet (Tips during Deflation.
Please define L 25 "Cumulitive Inflation/Deflation until…"

Also, under "Sensivity Analysis" I assume each line is a separate entity rather than representing Year 1,2,3…… ??

Could not import into my Zoho Account spreasheet.Is this possible ?
Or can I copy it into my computer's Excel ?

By: edward

edward — Tue, 28 Apr 2009 00:17:04 +0000

Will do wonders for the sale of I Bonds, one would guess, advertising a 0% interest rate. [I think I miscalculated the semi-annual inflation rate, wrong base; it's *only* -2.78%]

By: TFB

TFB — Mon, 27 Apr 2009 23:56:20 +0000

edward – The combined rate on I Bonds cannot be below zero. It will be zero come May 1. I don't know if they will change their announcement template. My guess is that the fixed rate will also be zero. If that's the case, it doesn't matter how they make the announcement.

By: edward

edward — Mon, 27 Apr 2009 23:40:25 +0000

I Bonds even protect you from the effects of severe deflation—the earnings rate can't go below zero and the redemption value of your I Bonds can't decline.

The preceding is from the Treasury product FAQ for TIPS's cousin. My interpretation is that this says the fixed rate can't be less than zero, and, like TIPS, the I Bond has principal protection. However, we now know that come Friday, the next I bond rate will have a -2.86% semi-annual inflation rate. If Treasury stays true to form, announcing the nominal, or combined rate, on Friday, it can be expected to be a negative number, unless Treasury is pleased to offer the highest fixed rate ever for an I Bond. My guess is that they switch to fixed rate for the title, but a negative combined value will still be in the text. This would be a first, regardless.

Do you agree?

By: TFB

TFB — Thu, 12 Mar 2009 05:12:24 +0000

Balabu - I live in the U.S. and this article pertains to the U.S. While I'm not familiar with Real Return Bonds in Canada, I read the RRB entry on finiki. From what I gathered the RRB in Canada work similarly to TIPS in the U.S. with one exception -- there is no par floor. The conclusions #2, #3 and #4 in this post do not apply to Canadian RRB. In terms of the effect of inflation and deflation on the real yield, there is no difference among Canadian RRBs with different inflation ratios. If there is deflation, you will lose nominal dollars but the real yield will still hold.

By: Balabu

Balabu — Thu, 12 Mar 2009 03:54:01 +0000

I have a question regarding the effect of deflation on TIP ETFs. Assuming that I buy the ETF now and hold it 4 to 7 years. The current quoted yield on the Canadian ETF is 3.1%. Since the ETF holds TIPs of various maturities and various index ratios, which change as part of the holdings mature and is replaced by new TIP bonds. I assume that if there is deflation the new TIPs will reduce the blended index ratio of the ETFs. I wonder if you could state how will the ETFs affected by this scenario?

By: TFB

TFB — Sat, 20 Dec 2008 06:20:39 +0000

Joe M – Any point of time you only know maximum 45 days worth of inflation adjustment into the future, not 3 months. But because real YTM is determined by the market price, market participants form a view of upcoming inflation and adjust their bid/ask price accordingly. So the YTM number reflects the market participants' inflation expectation. That's why the near term TIPS have higher YTM numbers.

By: Joe M

Joe M — Fri, 19 Dec 2008 23:38:08 +0000

Hi TFB,

Thank you for clarifying so much. My question is about the fact that the Index Ratio applied for any particular date is actually the CPI from three months earlier. Does the Quoted YTM on the Purchase Date take into account the already known inflation/deflation change for those first three months of ownership? I am assuming the calculation for YTM uses the known Index Ratios for those first three months of ownership of the TIP.

Is that why the current quotes on near maturity TIPS seem to have so much higher Quoted Yields: example TIP maturing 1/15/10 has 5.23% Yield as compared to the longer dated maturities? Is it because the -3% deflation that is contained in the Sept, Oct and Nov CPIs (and Index Ratios) are reflected to a more significant extent in the short maturing TIPS? Or is something else going on?

By: TFB

TFB — Fri, 05 Dec 2008 17:39:58 +0000

Bill - I just Googled "Japan inflation" and found this link (scroll down to bottom for IMF data). Assuming the data are accurate (I didn't verify), Japan had deflation for seven years between 1999 and 2005, averaging -0.45% a year or -3.1% cumulative in those seven years. As to why the spread on TIPS is higher, I have no idea. Dealers set the prices to whatever they can get away with. Competition or lack thereof results in the prices retail investors like you and I see.

By: Bill

Bill — Fri, 05 Dec 2008 14:30:28 +0000

TFB,

Thanks for your website and spreadsheet – I found it yesterday. Two questions.

1) How bad was the Japanese deflation and for how long did it last?

2) Why is the spread between the bid and asked for TIPS so great as compared with other treasuries?