Personal Finance

Guest · Posted: Tue Nov 08, 2005 1:01 am Post subject: Inflation protected bonds

Hi, can anyone clue me into to exactly what external factors effect the
share price of inflation protected bond funds?

thanks!

Geoff

Herb · Guest

<ghusic@gmail.com> wrote in message
news:1131408294.345677.261090@g49g2000cwa.googlegroups.com...

ghusic@gmail.com · Guest

I appreciate the answer, but it doesn't help much. let me clarify. What
exactly would the external economic conditions be that would cuase the
demand for an inflation protected bond fund to ebb or wane?

Geoff

Elle · Guest

IIRC, inflation protected bond funds behave about the same way as investment
grade bond funds of similar duration. As interest rates rise, their NAV
falls, but the yield of course goes up.

IMO, it's a good time to start a bond ladder and so, within the ladder, hold
bonds to maturity.

<ghusic@gmail.com> wrote

rono · Guest

Hi Geoff,

The primary consideration would be the ANTICIPATION of inflation in the
coming months or years. I say anticipation because existing inflation
is a done deal and until it gets way out of hand, doesn't have as much
impact as the Anticipation of future inflation in my opinion.

And this is the primary difference in the decision making process a
bond buyer has to go thru. Normal bonds hate inflation in a big way.
They make the original bond worth less in inflated dollars and they
normally stimulate interest rate increases (to fight it) which also
decrease the value of your existing bond.

For example, if I buy a 10K bond that pays 5% and two years later rates
go up to 6% no one will buy my 5% bond unless I sell it at a discount
to par so that the yield equates to 6%. The reverse is true on the
downside. If I own a 6% bond and rates drop so that new bonds are only
going at a 5% rate, I'm going to want more than 10K for my bond should
I desire to sell it.

I-bonds and TIPs have taken the inflation issue out of the bond buyers
decision because they protect you against inflation. Normally,
however, they offer a lower rate of return ON FACE, but should
inflation actually occur, not only protect you from the nastyness
outlined above, but actually return you an increased payout.

Think of bonds as a defensive play - relative to equites. Folks who
buy bonds want a yield, but particularly want safety and preservation
of capital. Well, the greatest threat to both of those is inflation.
Ergo - inflation protected bonds.

Now where does the anticipation of future inflation arise? commodity
prices, energy prices, retail, wages, union contracts with cola's, too
much money being printed, etc.

best,

rono

ghusic@gmail.com · Guest

thanks, Rono. that helps a great deal!

Geoff

darkness39 · Guest

ghusic@gmail.com wrote:

ghusic@gmail.com · Guest

One follow up, Rono. The fund I am looking at is the one in TIAA-CREF
(TIILX). I imagine it holds bonds of a variety of maturities. Does that
mean the the share price should generally be more stable? It seems like
the motivation for demand for such a fund would be a little more
complex than for a single bond, no?

thanks again

Geoff

darkness39 · Guest

ghusic@gmail.com wrote:

rono · Guest

Hi Geoff,

Darkness had a good response.

Actually with a bond fund, you are more exposed to inflation risk than
if you actually held the bond from issue to maturity. This is because
a bond fund is constantly buying and selling bonds and who knows if
they hold however many to maturity. This means that inflation risk as
personified by rising rates can hammer them with regard to principal
(your NAV goes down even while you're still earning nice interest
coupons.) This is why in a rising rates environment, you generally
want to be in short term bonds vs. longer. - you want to wait until
rates are UP before locking your money in for a long time.

Inflation protected bonds funds obviate the pure inflation threat
because of their nature. However, they do NOT obviate the threat of
rising rates. Which rules? Geez, who knows.

For the bond portion of my wife's portfolio, we split it between
Inflation Protected, Short Term, Intermediate Term Corporate and the
Bond Index fund (all of this is at Vanguard). Our only exposure to
longer term risk is via the latter. The TIPs is as a hedge. However,
she also owns some I-bonds (buy them directly from the treasure at
their website treasureydirect.gov). And for that matter she's got a
small stack of gold eagles, owns vanguards precious metals funds and
has about 15% overall in varioius natural resource type plays - all
hedges against inflation.

Inflation protected bonds are simply one avenue to cover your ass.

If you're at TIAA-CREF, I'd divy up the bond portion of your portfolio
to INCLUDE the TIP fund, but have some short term (to move to longer
term should rates continue to rise) and get a little better yield with
an intermediate term corporate bond fund.

best,

rono

One follow up, Rono. The fund I am looking at is the one in TIAA-CREF
(TIILX). I imagine it holds bonds of a variety of maturities. Does that

mean the the share price should generally be more stable? It seems like

the motivation for demand for such a fund would be a little more
complex than for a single bond, no?

thanks again

Geoff

Ed · Guest

"rono" <overtonr@cablespeed.com> wrote
.. - you want to wait until

rono · Guest

Howdy Ed, you old rascal,

Hey, what's UP to me, might not be to you. ;-)

Actually, I think UP is best defined in relation to expected returns
from other sources, particularly equities. And this needs to be be
adjusted for Risk. If you can lock in a longer term bond for 7-8% or
so, relative to an expected return from stocks of 9-10%, then
considering the reduced risk of bonds, they become attractive.

Our taxable account is a perfect example. It consists of mostly blue
chip dividend paying stocks that also have some growth. We also have a
couple that are strictly growth with little or no dividend. One fund
and that's Tocqueville Gold TGLDX. Now the dividend yield from this
account has been around 2.5% overall. In an effort to juice this, I've
been buying into a CEF that invests in municipal bonds from michigan -
MIY. It's yield is 6.36%. However, that's a tax free yield, so my net
yield is ~8.3+%. Well, relative to stocks and their inate risk, this
is pretty gd good.

As for our current rate environment, I'd suggest waiting until the fed
is done raising rates and then DCA into longer term bond funds.
Pundits have them stopping after two more hikes and that would mean
January as the end point for this current round of increases. However,
I'd DCA my shorter term stuff just to cover my ass in case inflation
manifests itself somewhere and they're forced to react.

take care, old friend,

rono

Loose On the Lead · Guest

rono wrote:

Ell · Guest

"Loose On the Lead" <dts2172-ng@yahoo.com> wrote

Loose On the Lead · Guest

Ell wrote:

	Personal Finance Forum Index -> Mutual Funds	All times are GMT Goto page 1, 2, 3 Next
Page 1 of 3