TIPS Action Plan

Since I wrote about TIPS yield on the rise, TIPS yield continued to climb.

If you are not familiar with Treasury Inflation Protected Securities or TIPS, which are inflation indexed treasury bonds, please read my previous post TIPS: Inflation Linked Bonds.

I’m amazed by how much the real yield rose in a very short time. 3.0% isn’t too far out of reach. Here’s a chart showing the yield changes since May 1, 2007, a mere a month and half ago.

As the yields go up, TIPS become more attractive both relative to regular (“nominal”) bonds and also on an absolute basis. Larry Swedroe, co-author of The Only Guide to a Winning Bond Strategy You’ll Ever Need, suggested a shifting strategy toward TIPS in his book which he also shared in a post on the Bogleheads forum.

Real Yield % of bonds in TIPS Maturity
< 1.5% 0% < 5 Years
1.5% – 2.0% 0 – 25% 5 Years
2.0% – 2.5% 25 – 50% 10 Years
2.5% – 3.0% 50 – 75% 15 Years
> 3.0% 75 – 100% 20 Years

I modified Mr. Swedroe’s strategy table and came up with my own. Basically I’m shifting more slowly towards TIPS than what Mr. Swedroe suggested because I “require” or “demand” higher yields. Here’s my plan:

Real Yield % of bonds in TIPS Target Maturity Action
< 2.0% 0% N/A Not interested in TIPS
2.0% – 2.5% 25% 5 years Buy 5-year
2.5% – 3.0% 50% 5 years Buy more 5-year
3.0% – 3.5% 75% 10 years Buy 20-year
3.5% – 4.0% 100% 15 years Buy more 20-year
> 4.0% 100% 20 years Sell 5-year, buy 20-year

The yields right now land in the highlighted row. I already completed my action step. I bought more 5-year TIPS when the yield reached 2.5% on June 1, albeit a little too soon in retrospect, but when I bought it there was no way of knowing whether yield reached a top.

My next milestone is 3.0%. There are two scheduled TIPS auctions in July. A 10-year new issue on July 12 and a reopened 20-year on July 24. If the yield on the 20-year TIPS reaches 3.0%, depending on how close the auction date is, I will buy more 20-year either at the auction or on the secondary market.

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  1. TFB says

    “Historically” is only about 10 years for the U.S. with a big bear market in the middle, when we had really low interest rates. Who knows how high the rates can go. It’s hard to extrapulate a quick spike into the future. Maybe it will keep going up; maybe it will level off; maybe it will come down quickly. We will just have to wait and see. It’s impossible to time it. I’m keeping some amo just in case.

  2. Anonymous says

    When you buying TIPS, it is better to buy from Treasury direct or Vanguard VIPSX? What is thet trade off?

    I don’t link Treasury direct to charge $45 when you want to sell, and treasury direct only set TIPS at certain time?

  3. TFB says

    I thought I wrote about TIPS funds before but apparently not. It will be covered in the next post.

    I buy TIPS in my IRA. That rules out Treasury Direct because they can’t handle IRAs. I’ve bought both actual notes and VIPSX before. Funds like VIPSX are easier to buy and sell. Buying actual TIPS notes saves a bit of money but you have to be your own fund manager which could be headache or thrill depending on your inclination.

    That’s the trade off: convenience vs saving a little money, just like hiring a contractor vs DIY home repair.

  4. Jonathan says

    Interesting. I keep meaning to read Larry Swedroe’s book but for some reason reading 300 pages about bonds just doesn’t excite me just yet. But I wouldn’t mind reading your post on buying TIPS directly vs. TIPS fund.

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