With high inflation (CPI-U
), it may be worthwhile to buy short-term/5-yr TIPS
directly. Here are some basic and practical details.
5-yr TIPS are auctioned
in April, June*, October, December*; those marked * are reopenings, not brand-new issues (see link for tentative schedule for 2022). Retail investors buy them noncompetitively in the multiples of $100s at Treasury Direct (TD; brokerages may have different multiples, say, 1,000s) up to $5 million. Basically, the auction determines a single clearing price relative to 100-par for all buyers, competitive (institutional, dealers) and noncompetitive (retail, institutional). All Treasuries have positive coupons, but TIPS have tiny/small coupons, and auction prices above par may easily lead to negative real rates.Buying at Auction
– You can do this via TD or brokerage account (and commission-free at major brokerages). Key dates are Announcement Date
after which the buy orders can be entered up to the early morning on the Auction Date (but it is safer to enter buy orders the day before by midnight); Auction Date
when the auction occurs in late mornings; Settlement/Issue Date
when transactions are settled, and securities issued. Beware that money from your account will be gone on the morning of the Auction Date (not on the Settlement Date as is typical for normal brokerage transactions, and if money is not available, the order will be cancelled). One exception to this may be when you also have Treasuries in the same or greater amount(s) maturing in the auction week, and then your brokerage may indeed settle all Treasury events on the Settlement/Issue Date (but do check this in advance with your brokerage). It is convenient that Treasuries maturity dates coincide with the Settle/Issue dates for auctions during the auction week. Buying/Selling in the Secondary Market
– This can be done at any time at brokerages. Treasuries trade at tiny bid-ask spreads and major brokerages don’t charge commissions for trading Treasuries. If you hold Treasuries in your TD account, you have to transfer them out to your brokerage to sell them before maturity. TD accounts are just for buying at auctions and holding them to maturities.Selling/Redeeming at Maturity
– Your TD or brokerage account gets credited with the proceeds.Taxes
– Even though TIPS accumulate interest/coupon and inflation-adjustment and those are paid only at maturity, the IRS want to be paid annually. You will get 1099-INT for interest and 1099-OID for inflation-adjustment every year and those should be reported in your IRS 1040; Treasury securities are exempt from state and local taxes, so make appropriate adjustments to your State 1040.
Procedures are similar for other Treasury securities, e.g. for T-Bills
(up to 1-Yr), T-Notes
(1+ to 10 yrs), T-Bonds
(10+ to 30 yrs). T-Bills don’t have coupons but are sold at discount to 100-par and mature at par (like Zero-coupon bonds).Upcoming 5-Yr TIPS
Announcement Date 4/14/22 (Thursday); Auction Date 4/21/22 (Thursday), Settlement/Issue Date 4/29/22 (Friday).Upcoming 1-Yr T-Bill
Announcement Date 4/14/22 (Thursday), Auction Date 4/19/22 (Tuesday), Settlement/Issue Date 4/29/22 (Friday)
TIPS, General https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm
TIPS, Rates & Terms https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_rates.htm
TIPS FAQs https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_faq.htm
Treasury Auction Schedule https://home.treasury.gov/system/files/221/Tentative-Auction-Schedule.pdf
Compare TIPS vs I-Bonds https://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm
5-yr TIPS https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/A_20220414_2.pdf
52-Wk T-Bills https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/A_20220414_4.pdf
Because you included the announcement for 52 wk bills, I am presuming those are your preferred maturities at this time.
Which of the Fidelity, Schwab, Vanguard, etc. brokerages is your preferred platform for buying (and later selling) Treasuries in the secondary market?
Just an FYI - Earlier today, I had looked at the 2 yr Treasuries and for the same issue, I noticed the YTM offered at Schwab and Fidelity was (the same and) higher than that at Vanguard - 2.481% vs 2.468%. TD was 2.43%.
2-yr T-Note would have to bought in the secondary market now, or you can wait for its auction in NEXT-NEXT week on 4/26/22 (see Treasury auction link in the OP). In the past, I have used both Fido and Schwab platforms for buying Treasuries. I don't have Vanguard Brokerage and am resisting conversion to one - a long story told elsewhere. The quotes you mentioned are from current bid-ask and until you enter your trade, you won't know what you got. In general, if there an auction nearby, I like to buy at auction.
The yield for 5-Yr. TIPS was -0.54% on 04-14-22.
The yield for 5-Yr. Treasuries was 2.79% on 04-14-22.
The corresponding 5-Yr. breakeven inflation rate is 3.33%.
Assuming yields don't change much between now and the auction date,
would you prefer to purchase 5-Yr. TIPS then or would you wait
for potentially better opportunities in the future?
1. As mentioned elsewhere, 5-yr TIPS now are 2nd best to I-Bonds. So, it for those who had their max fill for I-Bonds or who won't buy I-Bonds.
2. Individual TIPS do tap into month-over-month changes in CPI-U that is very high now and unsustainable: Jan +0.841%, Feb +0.913%, Mar +1.335%. Look at -0.54% real yield as monthly cost of 54 bps/12 = 4.5 bps only. BTW, I-Bonds tap into semi-annual change in CPI-U.
3. There is TIPS auction on this Thursday (4/21/22), so the time to act on it is short.
4. If the CPI-U growth slows down, as it must, sell TIPS or stick with them for 5 years (that may still turn out OK). As for what the current data are saying about inflation-expectations for 5 years, we will find that out in 5 years. But this idea here is to tap into the inflation wave for months, not years.
I was looking at 5-Yr TIPS from the perspective of the breakeven inflation rate.
Except for the past few weeks, it appears this rate is the highest it's ever been (earliest data - 01/02/2003).
Per your comments, recent monthly CPI-U changes have been very high.
Holding 5-Yr TIPS for several months in this environment seems like a sensible strategy.
BTW, I've accumulated a good-sized position in I-Bonds over the years.
Thanks for your detailed response!
tomorrow. If I had some Treasuries maturing this week, I think Schwab would have waited to settle everything tomorrow. All Treasuries maturing or auctioned this week will Settle on Friday.
I bought I-Bond in January in Trust a/c. I could open another individual Treasury Direct a/c, but I decided to use the 2nd best 5-yr TIPS route & also test things out. My TIPS purchase was far far far... smaller than $5 million (-:).
From your TIPS purchase, I am deducing that you think that inflation expectation expressed by market in the 5 Yr TIPS is going to surprise to the upside. To my surprise, the current 5 year breakeven rates at 3.36% are lower than they were in March.
BTW, settlement for today's 5 yr TIPS auction is next Friday - a week +1 day from auction.
Makes me not to want to buy Treasuries at Schwab.
Thanks for sharing.
Schwab took the money out on the Auction day for online Treasury/TIPS order.
Somebody may know it already for Fido online Treasury Auction orders. You Fido Rep said that for Treasury FRNs that don't allow online orders at Fido for Auctions, you can provide money until the Settlement Day. Confirm this if you do go through with your FRN Auction order. Also, whether there was any broker-assisted-trade fee.
Treasury Direct (TD) says that the money will be taken out by the Settlement Day, but what is the actual experience? I know that for I-Bonds, TD was very aggressive and took the money out on the morning of the next business day (it didn't wait until the end-of-the-day or the next day as I had expected).
I am aware of inflation-"expectations". Individual TIPS held to maturity do capture CPI-U month-to-month changes and those are going gangbusters now. Changes don't have to be high, but just positive AND persistent (for long enough). If there was a shorter-term for TIPS at Auctions, I would go for that, but 5-yr TIPS are the shortest maturities available. TIPS in the secondary market would introduce other market factors. I will know in 5 years how my 5-yr TIPS experiment went - either good or dead money. BTW, next 5-yr TIPS Auction is on June 23, 2022 (I wouldn't mess with 10-yr TIPS, but their Auction is on May 19, 2022).
FRED Inflation-"Expectations" https://fred.stlouisfed.org/graph/?g=OsmV
FRED CPI-U (Unadjusted) https://fred.stlouisfed.org/graph/?g=O9Mg
FRED CPI-U (Unadjusted), Month-to-Month changes https://fred.stlouisfed.org/graph/?g=Osv7
Only Treasury Direct can hold electronic I-Bonds.
If you have paper I-Bonds, you can hang on to them and hold them in bank locker.
But TIPS can be held at Treasury Direct or brokerages.
Announcement Date 6/16/22 (Thursday)
(Purchase at Brokerages or Treasury Direct from afternoon until the morning of the Auction Date)
Auction Date 6/23/22 (Thursday)
Settlement Date 6/30/22 (Thursday)
Edit/Add: Announcement, 6/16/22, https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/A_20220616_1.pdf
1.What is the rationale to buy individual TIPs vs an ETF. -- And especially VTIP, which holds short-term TIPs? any reason other than one has a finite duration instrument when buying the bond directly?
2. As I look at Fidelity's list of 2ndary-market TIPs, it appears shorter-term TIPs are still priced high with negative real-yields, while longer-term TIPs do have a modest (meager) posiitve real-yield. -- So why not go for longer-duration, especially, since the inflation-adjustment feature should serve as a mitigant to the longer duration?
3. More generally, as regards constructing the Treasury sleeve of one's portfolio, mightn't it make sense to populate the longer-duration portion of one's holdings with TIPs, rather than nominal bonds? --This would serve to protect one's buying power in the "outer years". And because TIPs are still risk-free (i.e. issued by Uncle Sam), they still seem to benefit from a flight to quality during risk-off periods. - I guess my point is if one is going to own ANY longer-duration Treasurys here, wouldn't TIPs have the edge over nominal bonds?
Thanks in advance for sharing your thoughts/comments on the above.
#1 - I started a thread on TIPS vs TIPS funds. It had dozens of views but no comments. Click Update to refresh the chart link there. https://www.mutualfundobserver.com/discuss/discussion/59484/individual-tips-vs-tips-funds#latest
#2 - Treasury site is showing only -0.02% real yield for 5-yr TIPS. Think of that as 2 bps cost. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value_month=202206
3# - Both short-term TIPS and long-term TIPS will get the SAME inflation-adjustments. So, if buying TIPS for current high inflation, why add more rate sensitivity? Only 5-yr, 10-yr and 30-yr TIPS have Treasury auctions. If there was, say, 2-yr TIPS auction, I would go for that. New issue TIPS held to maturity have advantages over those traded in the secondary market. The idea would be to hold them to maturity but if one had to absolutely access that money, one COULD sell them in the secondary market (at brokerages only).
Fido FIPDX says monthly (website and prospectus) but they were $0 for March, April, and $0.000000001 (I think I counted 0s right) for February and May (-:).
Thanks Yogi for your insight.
PS - I ask because it is one of the funds offered in my 401(k) plan. I own it.
By replacing FIPDX in PortViz with TLT (nominal LT Trsys), history goes back to 2004. TIP CAGRs were 4%, VBMFX was lower at 3.27%. TLT was 5% --- but with materially greater volatility vs both TIP & VBMFX.
Looking forward, unless one's view is that deflation will take hold, TIPs, post-bond selloff, strike me a marginally more attractive than nominal Trsys.
Opinions, pro or con?
At this point, is 2 yr Treasury or 1 yr Treasury a better bet? When I bought 2 yr notes in April/May, my idea was roll down potential. Now, 1 yr yields only 40 basis points lower than 2 yr. You can PM me as well. Thanks.