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10 yr TIPS auction, another record negative yield.....LIP
As Pat Benatar, a most talented singer once phrased: "Hit me with your best shot, fire away!" You can hear that now, eh? Ok, no pure math with this, although the TIP etf is at $121 as I write this and is a reference point. In a galaxy far, far away; know as the Investor Galaxy, a race of humanoids attempted to sort out the strange world of investments.
Assume all of us prefer two things in our investment world; being safety and dividends from an investment. The safety factor may help ensure that the investment will provide a product that will create a value and thus attract more to this investment and hopefully enough others will choose to invest as to drive the price level higher. In this aspect, safety of product or service equals growth to the investors. Investments are not always viewed from this angle, but is another worthy consideration of perspective. Apple Computer is a fine example of this aspect.
So, now about that negative yield thingy.
All of us decide the above criteria is worthy. We all choose to place equal amounts into two investments: the TIP etf and equity "A". Our investments are placed on 2-17-2011, which happens to be most recent backward date that TIP was at $100. Equity "A" happens to be $100/share on this very date, too; and both have a yield and/or dividend of 2%.
Today finds both investments have risen in price to $121/share; but with this price increase (cap. appreciation), the yield/dividend is now effectively a -.6%. We all would have chosen the yield/dividend to remain higher, but this is what happens when the underlying share price increases. So, we just nod our heads and smile that the capital appreciation is really what is helping the profit from these investments.
Bingo, we're all making a nice profit, eh?
As long as TIP and equity "A" continue to have a product or service that is in demand, the share price will continue to increase and the yield/dividend becomes more of an after thought. At some point in time, the "safety value" of the product or service will be challenged by other forces; and the share price may begin to erode. Those buying at this time point will not find the same value as we do today; and may find losses; as the horse is near to running its last race. As is usual with any type of investment, is to how many more races will there be for a given horse in any sector; at some point in time.
For both of these investments, there will arrive a point where other investors no longer have as much interest. The TIP will be challenged by other events and circumstances; as well as equity "A", which currently has a major share of its market place, will encounter challengers who will start to take some of the market share; with their products/services. "A" will lose some of its high place of safety/value as an investment.
I do believe this is the best that this MI fella may do with this today.
Reply to @catch22: As I recalled TIPs funds provided negative yields over a year ago. We are not facing high inflation today comparing to that of the 80's. There is no compelling reason to own this asset class other than fear itself.
You noted: "As I recalled TIPs funds provided negative yields over a year ago. We are not facing high inflation today comparing to that of the 80's. There is no compelling reason to own this asset class other than fear itself." >>>>> Yes. If I recall properly, the last 3 or 4 TIPs auctions found negative yields; and I do agree that part of the attraction to TIPs is market fear. We generally have held TIPs as our cash equivalents; but during the proper environment, they also perform, too. We hold ACITX and FINPX, with the following results against TIP. --- TIP +5.8%/11.6%/10.1% .........YTD/1 yr/3 yr --- ACITX +5.8%/11.5%/9.9% --- FINPX +5.7%/11.3%/9.8%
Note: not all TIPs funds hold 100% TIPs, but may include other IG bonds, too
Reply to @catch22: Why not consider short duration corporate bonds as the cash equivalent instead? They are much less interest rate sensitive than treasuries. As long as they focus on high quality issues, credit risk is what you are dealing with. We use Vanguard Short-Term Investment-Grade Fund Admiral Shares (VFSUX), $50K minimum, ER 0.11%, SEC yield 1.63%. An ETF equivalent to it, VCSH, is available with a tad higher ER 0.14%.
At present the spread between treasury and corporate bond is sufficiently large to compensate for the added credit risk of corporate bonds. It is important to do apple-to-apple comparison, other fund companies may offer higher yield than Vanguard, many comparable funds hold lesser qualities bonds.
Actually I think Dan Fuss of Loomis Sayles has a compelling argument that Canadian government bonds offer better value considering the federal deficit.
Comments
As Pat Benatar, a most talented singer once phrased: "Hit me with your best shot, fire away!" You can hear that now, eh?
Ok, no pure math with this, although the TIP etf is at $121 as I write this and is a reference point.
In a galaxy far, far away; know as the Investor Galaxy, a race of humanoids attempted to sort out the strange world of investments.
Assume all of us prefer two things in our investment world; being safety and dividends from an investment. The safety factor may help ensure that the investment will provide a product that will create a value and thus attract more to this investment and hopefully enough others will choose to invest as to drive the price level higher. In this aspect, safety of product or service equals growth to the investors. Investments are not always viewed from this angle, but is another worthy consideration of perspective. Apple Computer is a fine example of this aspect.
So, now about that negative yield thingy.
All of us decide the above criteria is worthy. We all choose to place equal amounts into two investments: the TIP etf and equity "A".
Our investments are placed on 2-17-2011, which happens to be most recent backward date that TIP was at $100. Equity "A" happens to be $100/share on this very date, too; and both have a yield and/or dividend of 2%.
Today finds both investments have risen in price to $121/share; but with this price increase (cap. appreciation), the yield/dividend is now effectively a -.6%. We all would have chosen the yield/dividend to remain higher, but this is what happens when the underlying share price increases. So, we just nod our heads and smile that the capital appreciation is really what is helping the profit from these investments.
Bingo, we're all making a nice profit, eh?
As long as TIP and equity "A" continue to have a product or service that is in demand, the share price will continue to increase and the yield/dividend becomes more of an after thought. At some point in time, the "safety value" of the product or service will be challenged by other forces; and the share price may begin to erode. Those buying at this time point will not find the same value as we do today; and may find losses; as the horse is near to running its last race. As is usual with any type of investment, is to how many more races will there be for a given horse in any sector; at some point in time.
For both of these investments, there will arrive a point where other investors no longer have as much interest. The TIP will be challenged by other events and circumstances; as well as equity "A", which currently has a major share of its market place, will encounter challengers who will start to take some of the market share; with their products/services. "A" will lose some of its high place of safety/value as an investment.
I do believe this is the best that this MI fella may do with this today.
Take care of you and yours,
Catch
You noted: "As I recalled TIPs funds provided negative yields over a year ago. We are not facing high inflation today comparing to that of the 80's. There is no compelling reason to own this asset class other than fear itself."
>>>>> Yes. If I recall properly, the last 3 or 4 TIPs auctions found negative yields; and I do agree that part of the attraction to TIPs is market fear.
We generally have held TIPs as our cash equivalents; but during the proper environment, they also perform, too. We hold ACITX and FINPX, with the following results against TIP.
--- TIP +5.8%/11.6%/10.1% .........YTD/1 yr/3 yr
--- ACITX +5.8%/11.5%/9.9%
--- FINPX +5.7%/11.3%/9.8%
Note: not all TIPs funds hold 100% TIPs, but may include other IG bonds, too
Take care,
Catch
At present the spread between treasury and corporate bond is sufficiently large to compensate for the added credit risk of corporate bonds. It is important to do apple-to-apple comparison, other fund companies may offer higher yield than Vanguard, many comparable funds hold lesser qualities bonds.
Actually I think Dan Fuss of Loomis Sayles has a compelling argument that Canadian government bonds offer better value considering the federal deficit.