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@sma3, older TIPS will have accumulated inflation adjustments in principal. Pay attention to YTM (for real-yield). Short-term TIPS look more confusing due to the current inflation reflected in quotes.
TIPS at auctions don't have these issues, but TIPS auctions are less frequent.
5-Yr TIPS Auctions: April (OI), June (R), October (OI), December (R); OI = Original Issue, R = Reissue.
For example the YTM on TIPS maturing 1/2028 is 1.697 at Schwab. That is the YTM received after paying original price plus accumulated inflation adjustment, correct? (For this particular example, I can't see the actual accumulated adjustment, as it has a $75000 minimum and Schwab won't let me look at the final proposed trade)
In order for that to beat similar treasury YTM at 3.84, inflation has to run at greater than 2.143 ( 3.84-1.697), and the additional income will be in the form of accumulated inflation adjustment in principal?
Yes, I agree with you to this point about primary housing. We've not held individual U.S. gov't bonds in a taxable account; but I recall the ordinary dividends (paid two times a year?) are taxable at a Federal level annually, but not at the state and local levels; although one doesn't actually receive the dividend. I stand corrected, if I misunderstand this tax point.
A little knowledge is a dangerous thing; exhibit 1
What you are describing are STRIPs - zero coupon government bonds (created by "stripping" the coupons from the bonds). And your description of their tax treatment (imputed interest) is correct.
What Lewis is talking about is your run of the mill, coupon-paying bond, whether Treasury note/bond or corporate. The idea is that the coupon payment you'd receive would cover the mortgage payments, or at least the interest portion. That seems like it might be possible if you have a mortgage obtained a while ago when mortgage rates were lower, and you buy a bond now paying a higher rate.
In any event, that coupon paying bond would be subject to income taxes. But if the coupon roughly matched the interest portion of the mortgage payment, you'd be taking a deduction (on the mortgage) equal to the amount of the coupon.
The suggestion is essentially a quick and dirty cash flow matching strategy - simple, elegant, and liquidity enhancing.
@msf Agreed. I do my best to keep my dangerous knowledge to the minimum, thus; my stand corrected add-on. Next best thing would be to place a hold harmless statement Take care, Catch
Comments
TIPS at auctions don't have these issues, but TIPS auctions are less frequent.
5-Yr TIPS Auctions: April (OI), June (R), October (OI), December (R); OI = Original Issue, R = Reissue.
For example the YTM on TIPS maturing 1/2028 is 1.697 at Schwab. That is the YTM received after paying original price plus accumulated inflation adjustment, correct? (For this particular example, I can't see the actual accumulated adjustment, as it has a $75000 minimum and Schwab won't let me look at the final proposed trade)
In order for that to beat similar treasury YTM at 3.84, inflation has to run at greater than 2.143 ( 3.84-1.697), and the additional income will be in the form of accumulated inflation adjustment in principal?
What you are describing are STRIPs - zero coupon government bonds (created by "stripping" the coupons from the bonds). And your description of their tax treatment (imputed interest) is correct.
What Lewis is talking about is your run of the mill, coupon-paying bond, whether Treasury note/bond or corporate. The idea is that the coupon payment you'd receive would cover the mortgage payments, or at least the interest portion. That seems like it might be possible if you have a mortgage obtained a while ago when mortgage rates were lower, and you buy a bond now paying a higher rate.
In any event, that coupon paying bond would be subject to income taxes. But if the coupon roughly matched the interest portion of the mortgage payment, you'd be taking a deduction (on the mortgage) equal to the amount of the coupon.
The suggestion is essentially a quick and dirty cash flow matching strategy - simple, elegant, and liquidity enhancing.
Agreed. I do my best to keep my dangerous knowledge to the minimum, thus; my stand corrected add-on. Next best thing would be to place a hold harmless statement
Take care,
Catch