Bought 20-Year TIPS

By Harry Sit

I bought more TIPS today. For people not familiar with TIPS, they are inflation indexed bonds. See previous post TIPS: Inflation Linked Bonds for more information.

Like everybody else, I feel the threat of higher inflation. A tank of gas cost me $58 last week. For the longest time it was $30-35. I still remember the exact gas station where I filled up when it crossed $40 for the first time a few years ago. Pretty soon it will be over $60. I don’t even have a big car.

The price for inflation protection actually came down lately. The following chart shows the yield on 20-year TIPS (click on it to enlarge). A higher yield means a lower price.


Source: Federal Reserve Bank of St. Louis.

I bought some 20-year TIPS at a yield of about 2.2% (red line in the chart). Although it’s way below the 2.8% peak level in summer 2007, the yield has been much lower this year. It was at a low of 1.6% just 3 months ago. 2.2% is in the middle between the recent peak and trough. So I think it’s a reasonable price for more inflation protection. I chose 20-year TIPS because they have the highest yield (lowest price) and they offer inflation protection for the longest time.

I bought on the secondary market through Vanguard and I had to pay a $40 commission. It’s OK because I want to lock in to this price now. Fidelity and Schwab don’t charge a commission for buying TIPS online. The next TIPS auctions will be on July 10, 2008 for 10-year TIPS and July 22, 2008 for 20-year TIPS. If the yields remain attractive, I will buy more then.

Related Post: Individual TIPS Or TIPS Mutual Fund

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Posted on June 5, 2008 under Investing. Keywords: .

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2 Comments on Bought 20-Year TIPS

  1. AGG on June 6, 2008
     

    I’ve read an interview with Bill Gross, who is a well recognized authority in bonds, manager of the Pimco Total Return fund. He said that the treasuries are way oversold and while it is not time yet to consider high-yield, he is moving into AA and A rated bonds.
    You are advocating TIPS, does it not bother you that it is so much oversold? Everyone is looking for a safe heaven nowdays. Last year it was international, then commodities and goverment-backed since S&P is still batting 1400.

    Why bonds now at all? You are getting 2.2%, then by not cash? My fidelity FDRXX does better than that?

  2. TFB on June 6, 2008
     

    Bill Gross likely said TIPS are overbought, not oversold. They may have been overbought a few months ago. The chart I included shows the price for inflation protection has come down to a level which I consider reasonable.

    It’s “2.2% + inflation”, much higher than FDRXX.

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