tag:blogger.com,1999:blog-30643134.post8972279104236598199..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: Here's a tip, don't buy TIPSAccrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-30643134.post-27235518106596682762012-09-05T20:47:34.950-05:002012-09-05T20:47:34.950-05:00You provide a wonderful and worthy blog. I am hono...You provide a wonderful and worthy blog. I am honored that I visited your post and get a lot of knowledge here. Thank you.Charles@Real Estate Philippineshttp://www.atayala.com/noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-56050892283028354592007-11-25T21:57:00.000-05:002007-11-25T21:57:00.000-05:00A Lehman Brothers index comprising U.S. TIPS is up...A Lehman Brothers index comprising U.S. TIPS is up 11.7% since the start of 2007 and 10.4% in the past 12 months through Nov. 21, 2007. By contrast, the Standard & Poor's 500-stock index is nearly flat year-to-date and up 1.2% for the past 12 months through Nov. 21. <BR/><BR/>Accrued Interest, nice call....not!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-22221238961181168882007-02-02T14:22:00.000-05:002007-02-02T14:22:00.000-05:00Hey no problem. We should get to the bottom of thi...Hey no problem. We should get to the bottom of this. I think I'll do another full post about this today.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-53350578195636948552007-02-02T14:00:00.000-05:002007-02-02T14:00:00.000-05:00Alright. Well done on the liquidity front. So il...Alright. Well done on the liquidity front. So illiquidity cannot explain the higher yield on TIPS vs. nominal Treasuries given expected inflation from household and professional surveys. But that would make TIPS inefficiently priced (a bargain in this case).<br /><br />I don't mean to belabor the point, but there's alpha (or not) in this discussion, so I think it's worth talking about.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-86562429402685440982007-02-02T11:30:00.000-05:002007-02-02T11:30:00.000-05:00Well, you certainly have solid background on this ...Well, you certainly have solid background on this subject. I agree that for a select group of investors, the TIP has the benefit of matching a liability. So that's a great benefit. <br /><br />That there is a liquidity premium for Treasuries vs. TIPS is a fact, not debatable. But that its 100bps is hard for me to swallow. Maybe at one time, but not now.<br /><br />Long-term TIPS have a bid/ask around 5 ticks or so. That's not a guess, I'm looking at a live screen as I'm typing this. In yield, that's 1bps or less. The on-the-run 30-year has a bid/ask of 1 tick, which is around 0.25bps.<br /><br />That bid/ask of 5 ticks is tighter than say, long-term large deal agencies, which only pay about 40bps more than Treasuries. Therefore liquidity premium for the Treasury vs. the agency can't be more than 40bps unless you argue that there is a negative credit risk premium!<br /><br />So given that the bid/ask spread is tighter for TIPS vs. agencies, and the agency liquidity premium is something less than 40bps, then the liquidity premium for TIPS must be a good deal less than 40bps.<br /><br />So it comes down to actual inflation coming in higher than expected inflation, which gets to the later part of my original post.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-39011046075682253652007-02-02T10:59:00.000-05:002007-02-02T10:59:00.000-05:00Well, I was just pointing out that though investor...Well, I was just pointing out that though investors would in theory pay to avoid inflation--Campbell and Schiller wrote about the very thing 10 years ago--there is evidently something else that makes TIPS yield more than Treasury - expected inflation.<br /><br />In "Expected Inflation and TIPS," Carlstrom and Fuerst found that thing to be liquidity (using the yield differential between on-the-run and off-the-run Treasuries versus their difference in liquidity as an explanatory factor for the yield on TIPS). TIPS earn a liquidity premium of 100 to 150 basis points minus an estimated 50 to 100 basis points for getting rid of inflation risk, giving about 50 basis points of differential between expected inflation and Treasury / TIPS differential.<br /><br />Clearly, as last year, this does not always play itself out. Furthermore, liquidity is dynamic, so if the liquidity premium drops to near zero and you don't want to pay for inflation protection, then yes, it would be a pretty poor investment. But for people nearing retirement, TIPS can provide a guarantee of real income, which might lend itself to an investment, not just a trade.<br /><br />Plus, really, in a fully diversified portfolio, it should be somewhere if it's not 100% correlated with another asset and is not grossly overpriced (and I think there's not much evidence of that).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-80952507155159660002007-02-02T07:12:00.000-05:002007-02-02T07:12:00.000-05:00TIPS may work as a trade from time to time, but I ...TIPS may work as a trade from time to time, but I don't like them as a core investment for all the reasons I stated in my post.<br /><br />I suppose you are right when you say that TIPS can work if the Fed is a little wrong, but for what? 30bps? You can buy a Freddie Mac bond for 30 extra bps. Plus you are talking about a 10-year issue. Inflation has to remain higher for 10-years for your bet to work.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-89544973711552485532007-02-01T17:57:00.000-05:002007-02-01T17:57:00.000-05:00TIPS have historically (admittedly short history) ...TIPS have historically (admittedly short history) understated expected inflation as measured by the unbiased Michigan Household Survey and the slightly biased Survey of Professional Forecasters.<br /><br />Right now, 10-Year TIPS are priced for higher inflation (2.27% on Jan. 11--dunno about now) than Bernanke's target, so you are to some extent betting against the Fed, but you're not betting that they'll fail completely--just that they won't quite make their target.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-69194332018608579612007-01-11T15:24:00.000-05:002007-01-11T15:24:00.000-05:00I was at a conference here in Baltimore maybe 6 mo...I was at a conference here in Baltimore maybe 6 months ago where some Western Asset Management honchos were speaking. For anyone who hasn't heard of them, WAM is probably #2 among U.S. bond managers by assets. At least top 5. Anyway, they were heavy on TIPS. So my tone in this post might have been a little haughty, there are obviously smart people who like TIPS. Just not me.<br /><br />I suspect there is plenty of speculative trading in TIPS, so certainly hedge funds can get involved. Maybe some traders can get more leverage on TIPS than they can on oil? Dunno.<br /><br />I think the natural bid for TIPS comes from pension funds.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-41762906849931118682007-01-11T15:04:00.000-05:002007-01-11T15:04:00.000-05:00can't fight the tape as your facts are compelling ...can't fight the tape as your facts are compelling ... also a fan, generally speaking, of common sense, and given Bernanke's Fed has been telling us repeatedly that inflation will subside, one way to see that we in the investment community are believing him is with TIPS doing exactly what you said -- UNDERperforming -- no? In Bernanke We Trust should be printed right there on TIPS certificates (do they even have such a thing)? <br /><br />Can't help but ask the question after today's sloppy (at best) 10yr TIPS auction ... what caught my eye was the HUGE direct bid of 5.8% (directs include bids by non-primary dealers submitted for their own accounts) ... would appear someone, somewhere is willing to pay UP for said protection ... perhaps a hedge against stronger than anticipated econ growth that leads to inflation (and Bernanke being wrong?) ... any info on who this might have been would be extremely interesting ... would imagine it was NOT PIMCO given how overtly bullish on Treasuries they've been ... Speaking of which, with 2yrs bumping up against 200day moving avg (4.87) would think a fair amount of short-term traders are covering here ahead of ReSale Tales and investors like PIMCO may be adding to trades ... any thoughts there?Unknownhttps://www.blogger.com/profile/04098980411730832121noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-14338024599918208382007-01-11T10:21:00.000-05:002007-01-11T10:21:00.000-05:00Floating pfds aren't bad. +70 would only be a good...Floating pfds aren't bad. +70 would only be a good spread on a very strong credit though. The only trouble with preferreds is that they have such a long maturity, so if the spread on the underlying credit widens, your dollar losses can be large. What's the name?<br /><br />A lot of floating rate product has larger minimums, like municipal floaters usually have $100,000 mins, which is tough for most individuals. I know Nuveen and other closed-end fund companies sell floating rate bonds backed by a portfolio of municipal bonds, which are a good deal if you can find them.<br /><br />Taxable corporate floaters are usually available in reasonable denominations. For a A-rated credit, and like 5-years to maturity, you should be something like +15 vs. LIBOR. If you have a broker, tell him you want to know the next time there is a new Merrill Lynch or Lehman Brothers or some such floating rate note (FRN) deal. That way you don't have to pay his ridiculous commissions. The big brokerage houses do FRN deals at least a couple times a year so between the 8 or 9 biggest firms, someone is likely to be doing a new deal soon.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-91786450964271719772007-01-11T09:18:00.000-05:002007-01-11T09:18:00.000-05:00Do you have any opinions on the NYSE listed prefer...Do you have any opinions on the NYSE listed preferred stocks that, for example pay LIBOR +.70% adjusted quarterly usually with a minimum of about 4%. The dividends are also qualified so you get the low tax rate.<br />I like your idea for the floating rate bonds but as an individual where can I find them?<br />Thanks.Anonymousnoreply@blogger.com