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Advice on Treasury Inflation Bonds

Find more information about Treasury Inflation Bonds at the best oniine resource site Teen Analyst.

Q: the treasury inflation protection bonds pay ?
a- fixed interest plus and adjustment for inflation
b-a return that exceeds twice the inflation rate.
c-fixed interest that exceeds the rate of inflation
d- a rate that combines the uknemployment and inflation indices.

A: a

Q: Has anyone bought TIPS (treasury inflation protected bonds)and been satisfied with their performance?

A: the 2nd responder has made an excellent point. With TIPs, you pay taxes on money you do not receive. Sort of an IRS way of putting to you. But if you hold them in an IRA account, that is not a problem. I have some in mine.

There is a way around the tax problem with this type of investment if I understand the tax thing correctly. If you buy instead TIP, which is an index fund investing in TIPS, then you are not taxed on income you have not received. Only on what the index fund pays as interest. They make it a point to distribute each year the indexed portion of the return.

The only real problem with TIPS other than the tax situation is that the government fudges the consumer price index (they low ball it significantly) so wih TIPS you are not receiving the full inflation factor buy maybe only 1/2. Still it is better than being stuck in 3% government bonds when inflation is cooking along at 6% wich is the very least it is today.

Q: Is now a good time to buy Treasury Inflation Bonds (TIPS)?
This would be in my personal a/c not in an IRA.

A: They do fluctuate quite a bit. I bought some today. On Friday I sold some at a profit and bought them back at a lower price today.
I could make a little or lose a little since they could go lower or could go higher. No one can predict the future.

I made a very small purchase since i have no strong convictions about it. You can lose, but would lose a lot less than if you bought stocks in this bear market.

Q: How and where do I buy TIPS (Treasury Inflation Protected Securities)?
These are US treasury bond where your capital is inflation protected. I asked at my bank but they either did not have a clue or asked me to contact their investment adviser. I just wonder whether there is a bank which allows you to open an account which deals in TIPS rather than regular CDs

A: Schwab
Fidelity
E-trade
Scott trade
Ameritrade
/

Q: If China wants to punish the USA for selling arms to Taiwan, can they use their leverage with treasury bonds?
Isn’t it true that China has great leverage over the USA with all the treasury bonds they have bought? Now then, can’t they just sell off all these treasury bonds and drive up inflation in the USA, thus destroying the economy? Why don’t they use this leverage they have over the USA to do just that? What would happen if they did? Help me out with this, ye economists, for I will check to award 10 points for someone who can elucidate this situation for me.

A: There are only about 10 or so licensed dealers in treasuries. If you’ll notice the business pages, the various Notes go on sale every week. In fact, last week the sales were so poor the price on Bonds fell by weeks end.

So if China wanted to sell in bulk they’d have to wait in line. In other words, they’d never get sold. If they wanted to sell one Note at a time it might work, but it would be a tedious and long drawn out process. There would be no chance for a run on the market. Like a penny stock, the market is fairly illiquid to begin with and big numbers being thrown around impress nobody. For the most part orders just sit there.

It takes a long time to become a respected and recognized government bulk dealer in Bonds and Treasuries.

Q: How ill inflation linked bond funds be affected by the treasury bubble?
I know regular bonds will suffer but the inflation linked bonds fate is not as clear to me. They are almost exclusively issued by the Treasury so I would think they are in trouble also even though they are geared towards inflation.

A: They will be effected similarly because the supply is outpacing the demand so you will probably see a decline in the price of the underlying bonds as a result. They also have duration risk because they are only issued in specific maturities and they tend to be 5 and 10 year increments, the increase in treasury yields on a real basis will also effect tips because the TIPS has a nominal yield at issuance which is based on the estimated nominal yield of similar maturity treasury. If those yields rise as they should, the outstanding TIPS will fall in value. The benefit of TIPS is that they give you the nominal yield plus what ever the actual inflation rate is (as a % of par, applied to par, NOT as coupon) while the actual treasury rate is the nominal rate plus expected inflation. You buy TIPS when you think inflation will be higher than the estimated real yield of the treasury. The treasury bubble will effect TIPS though not as severely as the actual treasury bond.

Q: link between inflation stocks bonds and treasury bills?

A: well,

1. if stocks go up, bonds(t-bills,t-noteS,t-bondS) will go down. why? – because stocks give a higher return than bonds.

2. if stocks go down? bonds go up. why? because bonds are fixed-income assets meaning the return on them is fixed. so if stocks are coming down, bonds will go up as investors switch to bonds to have a safer rate of return.

3. if inflation goes up? bonds come down. why? because bonds give a fixed rate of return on the fed rate. lets say 5%. if inflation rises from 1% to 2%, ur REAL rate of return declines by 1%. but u can buy inflation-adjusted bonds!

4. inflation vs stocks? difficult. inflation broadly defind is rising prices – which can raise nominal income – which can increase expectations and raise stock prices. inflation is also a sign of a strong, somewhat booming economy, so stocks should be rising. too much inflation, persisted over longer time can damage stocks. to grasp a better understanding of this relationship see the definition of inflation. it effects the economy in many ways. but it surely damages bonds which have already been issues.

Q: Why does the US sell unlimited numbers of Treasury Bonds?!?
Im no economist but I really don’t understand why the US sells unlimited numbers of US treasury bonds.

If my understanding is correct, the foreign nations that buy these bonds heavily are doing so because they get paid interest on them and rather than converting their dollars into Yen or some other domestic currency of the nation they decide its just easier to buy dollar denominated assets, obviously US treasury bonds are a major option to them.

My question is why the US allows unlimited bonds to be sold when we have to pay interest on those bonds. As it stands we have a problem with inflation because of so much debt is owed on these interest payments to foreign nations. Obviously thats not the only reason for inflation but it is a definite contributing factor.

So why then do we allow this unlimited selling of treasury bonds to foreign nations?
Wow, the answers so far have been great. Thanks guys.

My understanding was that we paid for the Iraq war and other extra expenses with revenue we already had collected through taxes. This is all enlightening to me, again thanks.

A: I don’t know where you got the idea that the US sells an unlimited amount. They do indeed have the ability to do so, but its not a situation where they will sell them because somebody decides they want to invest in them.
The Treasury issues bonds to fund the deficit spending of the government. Generally speaking, they limit the issue and sale of bonds to the amount necessary to cover funding needs, which will include interest and principal payments on previously issued debt.

Q: What is going to happen to the US economy when China cashes in on their Treasury Bonds for the stimulus?
Please read the entirety of the question and details before answering. Thank you for answering!

China is putting together a 2 trillion dollar stimulus package for next year.

They will most likely finance this stimulus through selling off US Treasury Bonds and their massive reserves of US currency.

How will this, in your opinion, affect the US economy when we have to start paying them back for their taking on our IOU Treasury Bonds? Could it create RUNAWAY inflation?

I don’t know but I can only assume it will go over very badly with the new administration since we are currently trying to borrow money ourselves through the sale of treasury bonds to finance our own stimulus package worth about 1 trillion dollars.

It could turn into a complete disaster with the US’s trust being lost completely and countries not wanting to lend to us anymore because we are completely unreliable on paying back what we owe other countries.

Question asked on December 29, 2008

A: it’s US bonds, and the US is still the strongest economy in the world.
if China will do that, the US will be forced to raise interest rates, to make the loans more attractive
or raise taxes, so everyone will know it will be paid.
either way – it will hurt US economy a bit, but not a desaster.

if China does that fast – it will loose lots of money, and send the whole world spiralling toward depression. all the economies will be forced to raise taxes and interest rates.

but either way – the US has sound economy, and no-one fear it won’t pay back.

Q: I heard about the govt. wanting us to invest in the t.i.p bond I think it stands for Treasury Inflation?
Protection. Have any body borough one of these bonds are they an good investment long term /

A: TIPS or Treasury Inflation Protected Securities are a unique type of debt instrument in which the principal amount will vary depending on the rate of inflation. They pay a constant coupon rate, but because the principal amount can go up with inflation as well as down, the amount of the interest payments can fluctuate over time.

They work perfectly fine and can pay pretty well when inflation is a concern. Right now however, inflation is fairly low, so their yield is lower than a comparable maturity Treasury bond.

Q: How does deflation cause treasury bonds to make profits for bondholders?
There is an article called “40%-50% Chance Stocks Will Crash To New Low, Says Gary Shilling” on Yahoo Finance today with the following comment from Shilling:

“Buy Treasury bonds, Gary says. Contrary to the concerns of they hyper-inflation crowd, the world is awash in excess capacity. We have too much production capacity, too many houses, too much labor. Overcapacity leads to deflation, not inflation. So today’s 4.5% long-term Treasury yield will go to 3%, making bondholders 25% in the process.”

How is that equivalent to a 25% profit? Can someone please explain?

A: The price of bonds moves opposit of interest rates. If a $l,000 bond is selling at par(original cost) and pays 4.5% on par it pays $ 45 a year in interst ; but if rates fall to 3% the value of the bond will go up because now you have to invest $1,500 to get $45 annual interest. $45/.03 = $1,500 Forty-five dollars divided by three percent equals $1,500. Apparently the long bond was already selling at a premium( more than par) because my example shows a 50% profit. It would have to have been selling around $1,200—- $1,500-1,200= $300 profit on $1,200 = 25$ return.

Q: Where does the government get money from to keep paying treasury bond interest?
This seems like a Ponzi scheme. They buy money from the public with bonds, then when the first investors want their money back, they just borrow it from more investors.

I don’t see how they can keep doing this (faster than inflation or the rate of economic growth) without either raising taxes, causing more inflation, taking on more debt, the government becoming a greater and greater percentage of the GDP, or reducing government services.

A: 1) It’s not the Ponzi scheme considering that the government does receive an income.

2) Just like in Finance, we consider the debt relative to your income. In order to establish this, we look at the National Debt relative to the GDP(adjusted for Purchasing Power Parity).

Here is a ranking list of the National debt in relation to GDP, from the CIA website: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
We’re not that far from other countries.

Simple answer: From the government’s income… our taxes.

Q: Which of the following is likely to be the least preferred?
asset to hold, if there are likely to be inflation rate increases that are currently unanticipated by market participants?
a. rare coins
b. stocks
c. gold
d. treasury bonds
e. U.S. treasury inflation protected securities (TIPS)

A: D

Q: What’s the relationship between subprime/credit crisis and the Treasury Bond rate?
The Federal Reserve has been resistant to lowering the its bond interest rate on the ground that inflation is its first priority to cope with, and it claims the subprime mortage problem is still confined to credit market, despite investment market critics urges for lower interest rates in attempt to save the industry(most of which are investment banks getting involved in ABS, MBS, and particularly CDO).

How can low interest rate save the plagued credit crisis, most notably the CDO trade between investors and investment banks?

Any rational or professional analysis is welcomed.

A: Much of the subprime mess relates to variable rate mortgages that lots of people are barely able to pay. If interest rates werre to go up, millions of these mortgages would adjust up and many more people could not afford the payments. Thus, foreclosures wold skyrocket (more than they have) causing more of a housing glut making this market even softer. So, the few really needs to keep interest rates as low as possible to avoid this problem as much as possible, but as you mentioned they also need to worry about inflation and may need to raise rates in fear of that. In short they walk a tight rope between the 2 fears (inflation and housing problems) as well as other fears and must set the rates taking these both into account.

Q: What Investment: offers Liquidity, and Safe Returns?
* Stocks are Too Volatile to be considered “Safe”
* Treasuries, Bonds and CDs are “Not Liquid” enough
* Just Holding Cash in a Money Market Account, yields “No Return” due to Future Inflation Prospects (Lost Purchasing Power) and Opportunities Lost, in either the Stock or Bond Market.

So, Based on this Matrix: 1. Liquid (Cash like), 2. Safe (US Treasury Inflation Protected+ like), 3. Return (Stock like)

What single – Investment offers something like this, but is not this, and is something that you would Recommend?

A: Unfortunately, it doesn’t exist. I’ve been a trade analyst for 12 years.

The reason it cannot exist is because safe and stock like returns are described by the same variable beta. Beta is a measure of risk in finance. For stocks, beta is a measure of volatility over an index (often the SP500). A beta of 1 means that it behaves the same as the index. A beta of over 1 means that it is more volatile or riskier than the index. And a beta of under 1 means that it is less volatile or safer than the index.

Since safety and ’stock like’ returns are both descriptors of risk or beta, there is an inherent conflict as far as finance is concerned; i.e. the variable beta cannot be both over 1 and under 1. There are certain instruments that attempt to market to those seeking these attributes but it comes at a cost. Variable annuities are relatively safe depending on the underwriter and can show stock like returns when pegged to an equity index. They are however, not liquid, but certain companies may allow loans against principal (they’ll charge interest on it though because you using your contract as collateral for the loan rather than withdrawing against your asset). In addition, variable annuities are marked up to compensate they company for “adminstrative fees” and management fees.

But if you do find something that fits your three critieria. Don’t tell a soul. For if you do, one of those criteria will vanish at light speed as the efficient market comes knocking.

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