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.