Sammy Sosa

I wanted to give a (hopefully) very brief update on my continuing tentative forays into the world of Treasury inflation-protected bonds.

As noted in my previous post, my tentative plan going forward is to start participating in new auctions of 10-year TIPS to start building out a ladder. I haven't yet started the second part of my plan, but I also want to start buying 20-year-out TIPS on the secondary market. Over the next decade or so, I hope to be able to fund my eventual retirement through age 70, when I would start collecting Social Security. This is a modification to my previous plan of maintaining a mix of stock and bond index funds and selling those down in retirement. (I'm definitely not planning to exit stocks, but my current thinking is that stocks would be for "wants" expenses like vacations, new vehicles, etc., while TIPS would cover my "needs" expenses like housing, food, insurance and utilities.)

I've set myself a few recurring Google Calendar reminders to check for TIPS auctions. The exact schedule changes from year to year, but usually occurs within the same general timeframe. The most definitive source seems to be this PDF; this page is easier to scan but only lists auctions for the coming week or so. I'm looking specifically for TIPS, and have gotten better at quickly locating them as opposed to other types of bonds.

Once an auction is announced, there is a relatively short window of about a week to act. My go-to site for an auction preview is tipswatch.com. For me, this really isn't a go-vs-no-go decision, but is interesting to learn some more about what to expect.

For actually bidding on the auction, I log onto my brokerage and navigate through to the section for buying individual treasuries. Again, it takes a little searching to find the TIPS offerings. The brokerage site will clearly indicate when an auction is available for a given term.

I've been talking about "bidding", but for an individual investor like me, it isn't really a competitive bid. The way it works is, large institutional investors will submit "competitive bids" for how much interest they would demand in exchange for their money. Once all those bids are submitted, the Treasury sorts them from the lowest interest rate (what the Treasury would prefer to pay) to the highest interest rate (what investors would prefer to receive). They find the "clearing rate" at which they can sell all the bonds they want to with that rate or lower. Then all the competitive bidders who paid that amount or less, along with all the non-competitive bidders like me, can buy the TIPS (or other Treasury) at that clearing rate. It's kind of like a more benign version of The Prisoner's Dilemma. Each bidder is incentivized to put in the lowest bid possible, since they'll still get the higher rate that's agreed on and won't miss out. But if everyone bids low, then the Treasury is able to clear the auction for less, and investors end up earning less than they would if everyone bid higher.

As a non-competitive bidder, I indicate how many TIPS I want. If you buy them at the official Treasury Direct web site (don't do this!), you can request in increments of $100; for brokerages, the minimum is $1000. One thing that's a little confusing is that the actual amount you pay may end up being either higher or lower than $1000 per TIPS. For a new auction like the one that happened this month, there won't be much of a spread; for a reissue, there may be more of a premium or a discount.

As it turns out, this was a pretty good first original auction to participate in. It ended up with a real yield of 2.243%, the highest result in 16 years. TIPS are more about protecting value than growing wealth, but growth is always good!

This purchase works differently from the types of transactions I'm used to. Typically in the brokerage you'll need to have funds already available in your account, then you put in the order for the trade, then the funds are locked and the actual transaction happens within a day or two. With TIPS, you put in the bid but don't know the exact cost until after the auction ends, then you have over a week to make sure you have enough funds in your account for the settlement.

I think I'm all set on TIPS auctions for 2025 now. I may move ahead with looking for a 2045-maturity TIPS later this year. I definitely want to buy more I-Bonds, too. I've set up a series of Google Calendar reminders for those as well. I-Bonds will work a little differently for me: you can buy those directly from the Treasury at any time, unlike new issue TIPS that have very narrow windows. I-Bond fixed interest rates reset twice in the year, on May 1 and November 1. In April I'll start to monitor TipsWatch (and maybe a few other sources) to see if people think the fixed rates are likely heading up or down (based on recent TIPS auction results). If it seems like rates are heading down or steady, I'll buy in April; otherwise, I'll wait until October, and then decide whether to buy in October or November.

I do slightly regret not investing in I-Bonds before now. They really do seem like a perfect vehicle, flexible and tax-efficient and with a lot of great features, but you are limited in how many you can buy each year and I wish I'd started accumulating them before now. But in the years when I could have bought them they were yielding basically 0% fixed, so I probably wasn't alone in ignoring them.

So, overall I'm feeling pleased with how things are going: I have two whole rungs in my ladder now, yay! I do have to say that TIPS aren't feeling quite as rock-solid as they were when I began seriously considering them last year: as one specific example, there's a no-longer-implausible possibility that the new administration will try to cook the books by claiming that inflation is significantly lower than it actually is. TIPS probably still would do okay in that scenario. People with maturing TIPS could be hit by it, but would still keep accumulated adjustments from the years with valid data; and if, say, we get crooked inflation stats from 2025-2028, I would hope that the numbers would catch up in 2029 to the actual values. But who knows, we're in largely uncharted territory here. My current feeling is that TIPS are riskier now than they were before, but still the least risky option available to me other than the portfolio of canned food and ammunition. (Which historically has underperformed even a 100% bond portfolio by quite a lot!)