Comments on: Buying TIPS On Secondary Market, Part 4: What to Buy

By: TFB

TFB — Tue, 06 Jan 2009 00:17:41 +0000

DJ – Yields are still thrashing around. Just a few days ago the 20-year was about 2.2%. Today it's close to 2.7%. The auction won't happen until Jan. 26. We will see more swings for sure. If the yield holds above 2.7% the day before the auction, I will buy some.

By: DJ

DJ — Sun, 04 Jan 2009 22:31:06 +0000

TFB, Many thanks for the reply. I am interested to know your opinion on the upcoming 20-year TIPS auction in Jan. At what yield level would it warrant a bid?

By: TFB

TFB — Fri, 02 Jan 2009 05:10:02 +0000

DJ – As I mentioned in part 1, I have never bought TIPS in a taxable account. I can't tell you about the intricacies about tax reporting for TIPS in a taxable account. Assuming that you have other bonds in a taxable account, TIPS are not that different. They are still bonds. You receive variable interests that go up and down with inflation. The inflation adjustment to principal is taxable but not paid out until maturity. If you need the income and you don't mind paying the tax, I don't see anything wrong with having TIPS in a taxable account. But if you don't need the income and you are in a high tax bracket, the tax drag can be quite high.

All brokers' prices include a markup. Even if Fidelity itself doesn't make money from doing TIPS trades for you (which may or may not be true), the dealer from whom Fidelity gets the bonds and sells to you already included their markup in the price.

By: DJ

DJ — Thu, 01 Jan 2009 13:05:15 +0000

TFB,

Very informative series of posts on TIPS.
I have two questions:
1. Is taxable account suitable for holding TIPS?
2. Fidelity seems to offer trading TIPS for free. Or am I missing some hidden fees?

Thanks,

By: TFB

TFB — Wed, 31 Dec 2008 20:15:44 +0000

Dave – That will be in part 5 on how to buy. Use the unadjusted price for limit order.

By: Dave

Dave — Wed, 31 Dec 2008 20:07:00 +0000

When purchasing TIPs on the secondary market, do you recommend doing a market order or a limit order? When using a limit order, would I use the adjusted "ask" price or the un-adjusted price?

By: TFB

TFB — Wed, 31 Dec 2008 18:17:21 +0000

HueyLD - As I concluded in the previous post TIPS During Deflation, the inflation factor a.k.a. the index ratio becomes a factor only if you suspect there will be cumulative deflation from the date of purchase to the date of maturity. I'm not convinced that we should rationally expect cumulative deflation for 5 years or more. Because I'm also not very interested in buying short-term TIPS on the secondary market, the index ratio hasn't been a factor for me. I will try to join the two new spreadsheets I introduced in this series with the previous one in TIPS During Deflation and make one unified spreadsheet for comparing two TIPS. It will include the possible par floor boost, impact of brokerage commission, and the forward rate between two bonds.

By: HueyLD

HueyLD — Wed, 31 Dec 2008 17:39:00 +0000

I like the Forward Rate in this post because I always struggled to figure out which maturity to get given the YTM and the inflation factors. I do have a question given the different inflation indices among different bonds. Is there a way to incorporate the inflation factors into your formula?

Thank you for your excellent work.