Inflation protected bonds

Hi, can anyone clue me into to exactly what external factors effect the
share price of inflation protected bond funds?

thanks!

Geoff

Re: Inflation protected bonds

<> wrote in message
news:
> Hi, can anyone clue me into to exactly what external factors effect the
> share price of inflation protected bond funds?
>
> thanks!
>
> Geoff

Supply and demand. ;-)

-herb

Re: Inflation protected bonds

I appreciate the answer, but it doesn't help much. let me clarify. What
exactly would the external economic conditions be that would cuase the
demand for an inflation protected bond fund to ebb or wane?

Geoff

Re: Inflation protected bonds

IIRC, inflation protected bond funds behave about the same way as investment
grade bond funds of similar duration. As interest rates rise, their NAV
falls, but the yield of course goes up.

IMO, it's a good time to start a bond ladder and so, within the ladder, hold
bonds to maturity.

<> wrote
> I appreciate the answer, but it doesn't help much. let me clarify. What
> exactly would the external economic conditions be that would cuase the
> demand for an inflation protected bond fund to ebb or wane?

Re: Inflation protected bonds

Hi Geoff,

The primary consideration would be the ANTICIPATION of inflation in the
coming months or years. I say anticipation because existing inflation
is a done deal and until it gets way out of hand, doesn't have as much
impact as the Anticipation of future inflation in my opinion.

And this is the primary difference in the decision making process a
bond buyer has to go thru. Normal bonds hate inflation in a big way.
They make the original bond worth less in inflated dollars and they
normally stimulate interest rate increases (to fight it) which also
decrease the value of your existing bond.

For example, if I buy a 10K bond that pays 5% and two years later rates
go up to 6% no one will buy my 5% bond unless I sell it at a discount
to par so that the yield equates to 6%. The reverse is true on the
downside. If I own a 6% bond and rates drop so that new bonds are only
going at a 5% rate, I'm going to want more than 10K for my bond should
I desire to sell it.

I-bonds and TIPs have taken the inflation issue out of the bond buyers
decision because they protect you against inflation. Normally,
however, they offer a lower rate of return ON FACE, but should
inflation actually occur, not only protect you from the nastyness
outlined above, but actually return you an increased payout.

Think of bonds as a defensive play - relative to equites. Folks who
buy bonds want a yield, but particularly want safety and preservation
of capital. Well, the greatest threat to both of those is inflation.
Ergo - inflation protected bonds.

Now where does the anticipation of future inflation arise? commodity
prices, energy prices, retail, wages, union contracts with cola's, too
much money being printed, etc.

best,

rono

Re: Inflation protected bonds

thanks, Rono. that helps a great deal!

Geoff

Re: Inflation protected bonds

wrote:
> Hi, can anyone clue me into to exactly what external factors effect the
> share price of inflation protected bond funds?
>
> thanks!
>
> Geoff

expected inflation.

Real interest rates (expected).

Break-even inflation rate is a way of pricing these bonds against
nominal bonds of the same maturity.

Re: Inflation protected bonds

One follow up, Rono. The fund I am looking at is the one in TIAA-CREF
(TIILX). I imagine it holds bonds of a variety of maturities. Does that
mean the the share price should generally be more stable? It seems like
the motivation for demand for such a fund would be a little more
complex than for a single bond, no?

thanks again

Geoff

Re: Inflation protected bonds

wrote:
> One follow up, Rono. The fund I am looking at is the one in TIAA-CREF
> (TIILX). I imagine it holds bonds of a variety of maturities. Does that
> mean the the share price should generally be more stable? It seems like
> the motivation for demand for such a fund would be a little more
> complex than for a single bond, no?
>
> thanks again
>
> Geoff

Yes.

The volatility of a bond price is driven by:

- credit risk - since all these bonds are US govt, the risk should be
the same
- liquidity - in principle, more bonds means more liquid bonds,
therefore smaller price jumps (lots of caveats in that)
- maturity - the fund will have a spread of maturities and therefore
moves in the interest rate 'yield curve' will have less dramatic
effects than they would on a single bond with a long time to maturity
(but more than a with a short time to maturity)

The key measure of the last is 'duration'. A fund with a longer
duration than an individual bond will, in theory, be more volatile than
its shorter duration counterpart.

Duration for TIPS is tricky. In a fixed rate bond, you just have to
make an assumption about how the coupons from the bond are reinvested
(so for example, a stripped bond, with no coupons, has a duration
exactly equal to its time to maturity). However for TIPS, the
principal of the bond is adjusted for inflation, and we don't know what
that inflation will be over say the remaining 20 year life of the bond.
So the duration calculation is more complex. It is fair to say in
general that the duration of a TIPS is normally longer than the
duration of a fixed rate (nominal) bond, for the same maturity (because
you get more of your money at the end, in the increase in the face
value of the bond due to inflation).

Assuming a low MER for the fund, in general I favour a small investor
holding a bond fund (TIPS) over holding individual bonds: as a small
trader in individual bonds, you face big dealing spreads (buy v. sell),
and you are not always liquid.

If your plan is to hold to maturity, then the factor in the above
paragraph is not as important.

Re: Inflation protected bonds

Hi Geoff,

Darkness had a good response.

Actually with a bond fund, you are more exposed to inflation risk than
if you actually held the bond from issue to maturity. This is because
a bond fund is constantly buying and selling bonds and who knows if
they hold however many to maturity. This means that inflation risk as
personified by rising rates can hammer them with regard to principal
(your NAV goes down even while you're still earning nice interest
coupons.) This is why in a rising rates environment, you generally
want to be in short term bonds vs. longer. - you want to wait until
rates are UP before locking your money in for a long time.

Inflation protected bonds funds obviate the pure inflation threat
because of their nature. However, they do NOT obviate the threat of
rising rates. Which rules? Geez, who knows.

For the bond portion of my wife's portfolio, we split it between
Inflation Protected, Short Term, Intermediate Term Corporate and the
Bond Index fund (all of this is at Vanguard). Our only exposure to
longer term risk is via the latter. The TIPs is as a hedge. However,
she also owns some I-bonds (buy them directly from the treasure at
their website treasureydirect.gov). And for that matter she's got a
small stack of gold eagles, owns vanguards precious metals funds and
has about 15% overall in varioius natural resource type plays - all
hedges against inflation.

Inflation protected bonds are simply one avenue to cover your ass.

If you're at TIAA-CREF, I'd divy up the bond portion of your portfolio
to INCLUDE the TIP fund, but have some short term (to move to longer
term should rates continue to rise) and get a little better yield with
an intermediate term corporate bond fund.

best,

rono



One follow up, Rono. The fund I am looking at is the one in TIAA-CREF
(TIILX). I imagine it holds bonds of a variety of maturities. Does that

mean the the share price should generally be more stable? It seems like

the motivation for demand for such a fund would be a little more
complex than for a single bond, no?


thanks again


Geoff

Re: Inflation protected bonds

"rono" <> wrote
.. - you want to wait until
> rates are UP before locking your money in for a long time.

Of course the problem remains, what is "up"?

Re: Inflation protected bonds

Howdy Ed, you old rascal,

Hey, what's UP to me, might not be to you. ;-)

Actually, I think UP is best defined in relation to expected returns
from other sources, particularly equities. And this needs to be be
adjusted for Risk. If you can lock in a longer term bond for 7-8% or
so, relative to an expected return from stocks of 9-10%, then
considering the reduced risk of bonds, they become attractive.

Our taxable account is a perfect example. It consists of mostly blue
chip dividend paying stocks that also have some growth. We also have a
couple that are strictly growth with little or no dividend. One fund
and that's Tocqueville Gold TGLDX. Now the dividend yield from this
account has been around 2.5% overall. In an effort to juice this, I've
been buying into a CEF that invests in municipal bonds from michigan -
MIY. It's yield is 6.36%. However, that's a tax free yield, so my net
yield is ~8.3+%. Well, relative to stocks and their inate risk, this
is pretty gd good.

As for our current rate environment, I'd suggest waiting until the fed
is done raising rates and then DCA into longer term bond funds.
Pundits have them stopping after two more hikes and that would mean
January as the end point for this current round of increases. However,
I'd DCA my shorter term stuff just to cover my ass in case inflation
manifests itself somewhere and they're forced to react.

take care, old friend,

rono

Re: Inflation protected bonds

rono wrote:
> Actually with a bond fund, you are more exposed to inflation risk than
> if you actually held the bond from issue to maturity.

This is a myth. Bonds behave the same way outside a fund as they do
inside. If you hold to maturity, you don't see a loss on paper, but
that doesn't mean you haven't lost something in real terms.

Darin

Re: Inflation protected bonds

"Loose On the Lead" <> wrote
> rono wrote:
> > Actually with a bond fund, you are more exposed to inflation risk than
> > if you actually held the bond from issue to maturity.
>
> This is a myth. Bonds behave the same way outside a fund as they do
> inside. If you hold to maturity, you don't see a loss on paper, but
> that doesn't mean you haven't lost something in real terms.

And this is incredibly poor writing.

Bonds held to maturity: Principal is returned.
Bonds held in a fund: Principal is not necessarily returned.

Re: Inflation protected bonds

Ell wrote:
> "Loose On the Lead" <> wrote
> > rono wrote:
> > > Actually with a bond fund, you are more exposed to inflation risk than
> > > if you actually held the bond from issue to maturity.
> >
> > This is a myth. Bonds behave the same way outside a fund as they do
> > inside. If you hold to maturity, you don't see a loss on paper, but
> > that doesn't mean you haven't lost something in real terms.
>
> And this is incredibly poor writing.

Funny you should write that after misspelling your own name.

> Bonds held to maturity: Principal is returned.
> Bonds held in a fund: Principal is not necessarily returned.

That's wonderful, as long as all you care about is getting your
principal back. Some people are more interested in long-term total
return, in which case holding a bond to maturity is not always the best
course of action. And that brings me to the inflation issue, which I
forgot to address directly the first time around. A bond held in a
mutual fund is the same as a bond held individually. When a bond in a
mutual fund is sold, the sale presumably takes place because the
manager thinks he can improve returns by holding a different bond. If
the manager is right, then clearly the fund keeps up with inflation
better than the original bond would have on its own. If he's wrong, it
doesn't.

Regarding TIPS, Rono and Darkness are right. TIPS behavior is
complicated.

Darin

Re: Inflation protected bonds

"Loose On the Lead" <> wrote
> Ell wrote:
> > "Loose On the Lead" <> wrote
> > > rono wrote:
> > > > Actually with a bond fund, you are more exposed to inflation risk
than
> > > > if you actually held the bond from issue to maturity.
> > >
> > > This is a myth. Bonds behave the same way outside a fund as they do
> > > inside. If you hold to maturity, you don't see a loss on paper, but
> > > that doesn't mean you haven't lost something in real terms.
> >
> > And this is incredibly poor writing.
>
> Funny you should write that after misspelling your own name.

You are dull.

>
> > Bonds held to maturity: Principal is returned.
> > Bonds held in a fund: Principal is not necessarily returned.
>
> That's wonderful, as long as all you care about is getting your
> principal back. Some people are more interested in long-term total
> return, in which case holding a bond to maturity is not always the best
> course of action.

This is such crap.

It can be the best course of action. There's simply no telling in advance.
Plus it depends on the individual's goals.

> And that brings me to the inflation issue, which I
> forgot to address directly the first time around. A bond held in a
> mutual fund is the same as a bond held individually. When a bond in a
> mutual fund is sold, the sale presumably takes place because the
> manager thinks he can improve returns by holding a different bond. If
> the manager is right, then clearly the fund keeps up with inflation
> better than the original bond would have on its own. If he's wrong, it
> doesn't.

This is woefully misguided or just flat out bullshit.

The structure of investment grade bond funds is much more constrained than
stock mutual funds. Duration of a certain length is sought. A certain
quality (investment grade or closer to junk, for example) of bond is sought.
Running such funds is much more mechanical than running non-index stock
mutual funds.

> Regarding TIPS, Rono and Darkness are right. TIPS behavior is
> complicated.

The markets are complicated, period.

TIPS bond funds follow investment grade bond funds of similar duration.

Re: Inflation protected bonds

"Loose On the Lead" <> wrote in message

> Funny you should write that after misspelling your own name.

It is trying to get past filters.

Re: Inflation protected bonds

"Ell" <> wrote in message
news:jCAcf.2276$
> "Loose On the Lead" <> wrote
>> Ell wrote:
>> > "Loose On the Lead" <> wrote
>> > > rono wrote:
>> > > > Actually with a bond fund, you are more exposed to inflation risk
> than
>> > > > if you actually held the bond from issue to maturity.
>> > >
>> > > This is a myth. Bonds behave the same way outside a fund as they do
>> > > inside. If you hold to maturity, you don't see a loss on paper, but
>> > > that doesn't mean you haven't lost something in real terms.
>> >
>> > And this is incredibly poor writing.
>>
>> Funny you should write that after misspelling your own name.
>
> You are dull.
>
>>
>> > Bonds held to maturity: Principal is returned.
>> > Bonds held in a fund: Principal is not necessarily returned.
>>
>> That's wonderful, as long as all you care about is getting your
>> principal back. Some people are more interested in long-term total
>> return, in which case holding a bond to maturity is not always the best
>> course of action.
>
> This is such crap.
>
> It can be the best course of action. There's simply no telling in advance.
> Plus it depends on the individual's goals.
>
>> And that brings me to the inflation issue, which I
>> forgot to address directly the first time around. A bond held in a
>> mutual fund is the same as a bond held individually. When a bond in a
>> mutual fund is sold, the sale presumably takes place because the
>> manager thinks he can improve returns by holding a different bond. If
>> the manager is right, then clearly the fund keeps up with inflation
>> better than the original bond would have on its own. If he's wrong, it
>> doesn't.
>
> This is woefully misguided or just flat out bullshit.
>
> The structure of investment grade bond funds is much more constrained than
> stock mutual funds. Duration of a certain length is sought. A certain
> quality (investment grade or closer to junk, for example) of bond is
> sought.
> Running such funds is much more mechanical than running non-index stock
> mutual funds.
>
>> Regarding TIPS, Rono and Darkness are right. TIPS behavior is
>> complicated.
>
> The markets are complicated, period.
>
> TIPS bond funds follow investment grade bond funds of similar duration.
>
>

Re: Inflation protected bonds

"Gary C" <> wrote

> It is trying to get past filters.

She has this name thing. Maybe she thinks Ell is sexier than Elle. I think
she is is not sexy.

Re: Inflation protected bonds

"Ed" <> wrote in message
news:
>
> "Gary C" <> wrote
>
>> It is trying to get past filters.
>
> She has this name thing. Maybe she thinks Ell is sexier than Elle. I think
> she is is not sexy.

Can you confirm *it* as being a *she*?

Elle McPherson, you can confirm a she.
Elle McPherson, you can confirm as sexy TOO! :-)

Re: Inflation protected bonds

Ed wrote:
> Maybe she thinks Ell is sexier than Elle. I think
> she is is not sexy.

I wish someone did.

Darin

Re: Inflation protected bonds

"Gary C" <> wrote

> Can you confirm *it* as being a *she*?

I'm 90% confident. She is very jealous of males, doesn't like them at all
but wishes incesantly that she was one.

Re: Inflation protected bonds

"Loose On the Lead" <> wrote in message
news:
>
> Ed wrote:
>> Maybe she thinks Ell is sexier than Elle. I think
>> she is is not sexy.
>
> I wish someone did.
>
> Darin

I have heard that there is someone for eveyone but then there are the
exceptions. I think there is no hope for her.

Re: Inflation protected bonds

"Ed" <> wrote in message
news:

> but wishes incesantly that she was one.
>

See! .... that's what I mean.

I'll just run with "shim"
Half she, half him :-)

Re: Inflation protected bonds

Darin,

I think we're saying the same thing, although I might have mistated it.
Rising rate risk doesn't apply to a bond held to maturity - only to a
bond bought or sold before maturity. To the extent that a fund holds
their bonds to maturity, rising rates don't impact principal. Where
they do have an impact is that you'd rather have a fund full of higher
paying bonds than lesser paying ones.

As for inflation risk per se', you're correct that it's the same for
older bonds regardless of where how you invest in them - in a rising
inflation environment, your principal will be worth less in the future
than it is today.

best,

rono

Re: Inflation protected bonds

rono wrote:
> I think we're saying the same thing, although I might have mistated it.
> Rising rate risk doesn't apply to a bond held to maturity - only to a
> bond bought or sold before maturity. To the extent that a fund holds
> their bonds to maturity, rising rates don't impact principal. Where
> they do have an impact is that you'd rather have a fund full of higher
> paying bonds than lesser paying ones.

Oh, sorry. Then we do agree.

Darin

Re: Inflation protected bonds

Loose On the Lead wrote:
> rono wrote:
> > Actually with a bond fund, you are more exposed to inflation risk than
> > if you actually held the bond from issue to maturity.
>
> This is a myth. Bonds behave the same way outside a fund as they do
> inside. If you hold to maturity, you don't see a loss on paper, but
> that doesn't mean you haven't lost something in real terms.
>
> Darin

Loss on holding a nominal, coupon bond to maturity if interest rates
rise.

1. lost opportunity to invest previous coupons at higher interest
rates. Effedtively, I think , this is called 'duration risk'?

2. assuming inflation is flat, no other loss

Is my analysis correct?

Re: Inflation protected bonds

Is the other difference a fund keeps buying and selling bonds to
maintain a certain duration?

Whereas holding a single bond, your duration is always falling (as you
get closer to maturity)?

Re: Inflation protected bonds

darkness39 wrote:
> Loss on holding a nominal, coupon bond to maturity if interest rates
> rise.
>
> 1. lost opportunity to invest previous coupons at higher interest
> rates. Effedtively, I think , this is called 'duration risk'?
>
> 2. assuming inflation is flat, no other loss
>
> Is my analysis correct?

I think so, but I'm not sure about "duration risk". I think duration
risk is the familiar notion that if rates change by x percent, and the
duration of a bond is D, then the price of the bond changes by about
Dx. What you describe in (1) is about interest, not price. I can't
think of what it's called, if it even has a name. It's definitely an
opportunity cost.

Darin

Re: Inflation protected bonds

Loose On the Lead wrote:
>
> darkness39 wrote:
> > Loss on holding a nominal, coupon bond to maturity if interest rates
> > rise.
> >
> > 1. lost opportunity to invest previous coupons at higher interest
> > rates. Effedtively, I think , this is called 'duration risk'?
> >
> > 2. assuming inflation is flat, no other loss
> >
> > Is my analysis correct?
>
> I think so, but I'm not sure about "duration risk". I think duration
> risk is the familiar notion that if rates change by x percent, and the
> duration of a bond is D, then the price of the bond changes by about
> Dx. What you describe in (1) is about interest, not price. I can't
> think of what it's called, if it even has a name. It's definitely an
> opportunity cost.
>
> Darin

It's "reinvestment risk" - the risk that you won't be able to get the
same (or better) interest with the coupon payments. If one is using the
bond for income (i.e. spending the payments as they come in), this is
not an issue. That's one way to "immunize" against reinvestment risk.
Another way is to buy zeros for your target date.

You might "hold[] ... a bond to maturity", but be left holding a
worthless piece of paper if the company folds; or the company might just
be late in making payments. Either way, there's still credit risk.
--
Mark Freeland

Re: Inflation protected bonds

darkness39 wrote:
>
> Is the other difference a fund keeps buying and selling bonds to
> maintain a certain duration?
>
> Whereas holding a single bond, your duration is always falling (as you
> get closer to maturity)?

That's not necessarily true with callable bonds. A common example, that
people really should understand better, is a mortgage-backed security
(i.e. bond) - MBS (e.g. GNMA, CMO, etc.)

As interest rates rise, people will hold onto their fixed rate mortgages
longer - if you had a mortgage that was 1% above the going rate, you
might refinance, but if you had a mortgage that was 1% below the going
rate (because rates were rising), you'd hold it longer; you'd also be
less inclined to prepay. So the expected "maturity" of the bond
increases as rates increase, extending the duration for awhile, as time
passes.

On the other hand, if the mortgage is an adjustable rate mortgage, then
the coupon will drop as interest rates drop. This also increases the
duration, because while the payment schedule remains the same, fewer
dollars are paid monthly (in the extreme, if the interest rates went
down to zero, you'd have a zero coupon bond - so you can see that
falling rates increase duration). So here too, there is a period of
time when rates change (fall) and duration increases.

I'm not even going to get into interest only (IO) bonds and negative
convexity (where the second derivative of price vs. rates is negative).


(very clear discussion of convexity)

(same site explaining duration)

(Stern School slide presentation on mortgage backed securities also
going into convexity, duration, etc.)

--
Mark Freeland

Re: Inflation protected bonds

I wrote:

>
> On the other hand, if the mortgage is an adjustable rate mortgage, then
> the coupon will drop as interest rates drop. This also increases the
> duration, because while the payment schedule remains the same, fewer
> dollars are paid monthly (in the extreme, if the interest rates went
> down to zero, you'd have a zero coupon bond - so you can see that
> falling rates increase duration).

Since mortgage payments typically include principal, even with a zero
percent rate, a mortgage would not be equivalent to a zero. So it is a
bit more complex. Rather than going into the calculations, suffice to
say that changing rates will affect the duration, so we may reasonably
conclude that there is a direction of rate change (either up or down)
that increases the duration - thus duration can increase for some finite
periods of time (as interest rates shift).

--
Mark Freeland

Re: Inflation protected bonds

Mark Freeland wrote:
> darkness39 wrote:
> >
> > Is the other difference a fund keeps buying and selling bonds to
> > maintain a certain duration?
> >
> > Whereas holding a single bond, your duration is always falling (as you
> > get closer to maturity)?
>
> That's not necessarily true with callable bonds. A common example, that
> people really should understand better, is a mortgage-backed security
> (i.e. bond) - MBS (e.g. GNMA, CMO, etc.)[snipped for brevity]

Thank you.

Very helpful comments.

D.