Buying TIPS On Secondary Market, Part 4: What to Buy
This is part four of the Guide to Buying TIPS On the Secondary Market. In first three parts of this guide, we looked at Why Secondary Market, Understand Quotes, and When to Buy. Part 5 in this series will be about How to Buy.
Suppose you decided this is the time to buy some TIPS on the secondary market. But which one should you buy?
At the time of this writing, there are total of 27 TIPS bonds on the market, with maturities ranging from 2009 to 2032. Much like when you buy a flat screen TV you have to decide roughly what size you want: < 30", 30"-40", 40"-50", > 50" etc, when you buy TIPS, you have to decide what maturity range you want. A short-term TIPS (< 5 years) is less risky and it lets you deploy the money elsewhere if your plan changes, but it protects you against inflation only for a shorter period of time. A long-term TIPS (> 10 years) is more risky and you are locked in for a long time (we are only talking about buying and holding to maturity here, not trading bonds). But a long-term TIPS usually, but not always, has a higher yield and it gives you protection for a longer period of time. An intermediate-term TIPS (5-10 years) is just somewhere in between short-term and long-term. No hard and fast rules here. You pick the maturity range that suits you.
Buying TIPS On Secondary Market, Part 3: When to Buy
[Updated on December 31, 2008 with feedback from readers.]
This is part three of the Guide to Buying TIPS On the Secondary Market. Parts one and two are Why Secondary Market and Understand Quotes.
Like when you buy any other bonds, you want to buy TIPS when yields are high and prices are low. There are several places where you can monitor the TIPS market.
Vanguard, Bond Yields. This web page lists the current yields on all kinds of bonds. It used to include specific issues of TIPS in the middle of the page, but right now that section is blank. I'm not sure if it's just temporarily not available or gone for good. Keep an eye on it. Maybe the data will come back. Although the web page shows a current timestamp, it's not clear to me when the data were last updated or how frequently they are updated.
Buying TIPS On Secondary Market, Part 2: Understand Quotes
This is part two of the Guide to Buying TIPS On the Secondary Market. Part one was Why Secondary Market?
The price and yield quotes are perhaps the source of most confusion about buying TIPS on the secondary market. Unlike regular ("nominal") bonds, TIPS are quoted in real price and real yield while the actual purchase is done with nominal dollars. Let's take a look at an actual quote from Fidelity for one specific bond.
Buying TIPS On Secondary Market, Part 1: Why Secondary Market?
After reading my posts on Individual TIPS Or TIPS Mutual Fund and TIPS Auction Step By Step, some members of the Bogleheads forum asked me to write a similar guide for buying TIPS on the secondary market. If you are not familiar with inflation indexed bonds Treasury Inflation Protected Securities (TIPS), I recommend you start with a fund or ETF, then progress to participating in a few TIPS auctions before you jump into buying TIPS on the secondary market. That way you will understand better how they work. If you are ready, here we go. This is the first installment of the Guide to Buying TIPS On the Second Market. For the sake of length, this guide is limited to issues related to buying TIPS. It does not cover holding TIPS or selling TIPS.
First of all, what does buying TIPS on the secondary market mean? It means you are buying the bonds from someone who already own them. Bond dealers make a market in these bonds. They advertise a price at which they are willing to buy ("bid") and a slightly higher price at which they are willing to sell ("ask"). This is very similar to how the stock market works. Like stocks, bonds also trade on the market every day at different prices by the minute. But unlike buying stocks, retail investors usually cannot get the current market price when they buy bonds. The market price is reserved for institutions who buy and sell millions of dollars worth of bonds. Retail investors can only buy from retail brokers who often add a markup. On the other hand when you buy TIPS from auctions, you pay the same price as the institutions pay. There is no markup.
Then why should we even consider buying on the secondary market? Because most of the time we have no better choice. The Treasury department only holds TIPS auctions a few times a year (it had 8 auctions in 2008). Because the secondary market is open all year round, sometimes the prices are attractive but there is no auction. If you want to take advantage of the attractive prices, you have to buy it on the secondary market. When Treasury holds an auction, it only does it for one bond. The secondary market has all issues trading all the time. If Treasury is doing an auction for a short-term bond but you want a long-term bond, you either have to wait or you have to buy it on the secondary market.
Financial Times One-Year Subscription for 2,000 Frequent Flyer Miles
If you have frequent flyer miles from American, Delta or Northwest airlines which you have no other use for, you can get a 1-year subscription to Financial Times newspaper for 2,000 miles.
I like Financial Times because the FT has a lot of analysis and commentaries and a good coverage for international business news. It's a true world business newspaper whereas the Wall Street Journal is more focused within the U.S. Although FT's home base is in the UK, you are getting its US edition. There's still enough coverage for U.S. business and financial news. The commentaries are often written with an outsider's angle, which is very nice. The letters to editors come from intelligent people all over the world.
This is a great deal because the 1-year subscription to Financial Times normally costs $99. A 1-year subscription to its chief competitor the Wall Street Journal costs $249. At a usual value of $0.02 per mile, 2,000 frequent flyer miles are only worth $40. So for a value of about $40 you can get a quality newspaper delivered to your home or office six days a week for one full year. I see the paper as an ongoing business education at very low cost.
Free E-File Is NOT Free
The tax preparation software companies already started selling their packages for 2008 tax year. The two major players Intuit and H&R Block both advertise that they include free federal e-file in their software this year.
From Intuit (maker of TurboTax):
Automaker Bailout Loan: Secured Or Not?
News came that the federal government is going to give a $17.4 billion loan to GM and Chrysler. It's still not clear what the government receives as security for such loans. The Associated Press article on Yahoo! said,
"Under terms of the loan, GM and Chrysler must provide the government with stock warrants giving it the option to buy GM and Chrysler stock at a specific price."
3 Reminders About Year-End Mutual Fund Distributions
I wrote on Tuesday that I bought PIMCO CommodityRealReturn Strategy Fund D (PCRDX) on Dec. 5, 2008. It's a good segue to today's post. As luck had it, only a few days later, my jaw dropped when I saw the price of the fund dropped 25% in one day.
It turned out it was just some year-end distributions. You probably heard or read about the usual advice "don't buy a fund distribution" or more generically "don't buy a dividend." So how do fund distributions affect investors? What exactly is so bad about buying a distribution?
Ratings in Magazines Versus Actual Customer Experience
Good customer service is worth paying for. I think everybody understands that. But in this age of easy price comparison, we sometimes forget. Fellow blogger indexfundfan is having trouble with TradeKing, an online discount broker. TradeKing is holding his money hostage for 60 days. According to TradeKing, it was rated
- #1 in customer service by SmartMoney Magazine in 2008
- #1 Discount Broker by SmartMoney Magazine in 2006 and 2007
- the highest ranking of 4 stars in Barron's 12th Annual Survey of Best Browser-Based Online Brokers
- an Official Honoree in the Financial Services category in the 12th annual Webby Awards
Looks impressive, right? TradeKing has been aggressively promoting itself with a $50 signup bonus for new customers and an affiliate program which pays referral money to websites that help promote it. But based on the way TradeKing treated indexfundfan, especially how it suspiciously changed its website after he complained about the 60-day ACH holding period, I doubt it has the best customer service.
Diversifying Portfolio with Commodities Futures Fund
I first heard about commodities futures in the last bear market. In 2002, commodities futures returned something like +25-30% while the S&P lost 22%. People were saying back then commodities futures were a great investment because they had "equity-like" returns while being uncorrelated with the stock market. This characteristic would add diversification to one's portfolio and at the same time not reduce its return like adding bonds would do. PIMCO introduced a commodities futures fund for retail investors in 2002. I wasn't so convinced by the story. In my mind I had always associated commodities and futures with speculation. I also thought people were chasing performance while justifying it by saying they were doing it for diversification.
Since then, commodities futures funds had very good returns, all the way through the summer of 2008, driven by rapidly increasing prices of oil, agriculture products and metals. I was watching on the sideline thinking somehow I missed the boat. Then it crashed down hard. In a period of about five months, the price of the PIMCO fund dropped over 60% (blue line is the PIMCO fund; red line is S&P 500).
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