long dated T's conventional versus inflation linked?
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Clive
long dated T's conventional versus inflation linked?
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Last edited by Clive on Sun Oct 14, 2012 2:39 pm, edited 1 time in total.
Re: long dated T's conventional versus inflation linked?
Clive,
This is something I have been thinking about as well. But wouldn't gold be going bonkers if cash and LLT were receiving a real return of -10%?
This is something I have been thinking about as well. But wouldn't gold be going bonkers if cash and LLT were receiving a real return of -10%?
Re: long dated T's conventional versus inflation linked?
Clive,
I've thought about this as well. I've done some very limited back testing using 50% EDV and 50% LTPZ (long dated TIP etf) as well as EDV/TIP and you seem to get better overall reward and lower max DD than compared with TLT.
Of course EDV has only been around since 2008 and LTPZ is even newer so there is not a long history to draw from.
With that said, it stands to reason that a mix of zeros and long dated tips could hold up better in both inflation and deflation than say TLT.
I've thought about this as well. I've done some very limited back testing using 50% EDV and 50% LTPZ (long dated TIP etf) as well as EDV/TIP and you seem to get better overall reward and lower max DD than compared with TLT.
Of course EDV has only been around since 2008 and LTPZ is even newer so there is not a long history to draw from.
With that said, it stands to reason that a mix of zeros and long dated tips could hold up better in both inflation and deflation than say TLT.
Re: long dated T's conventional versus inflation linked?
I agree that TIPS and LTT of the same maturity have similar characteristics. But I still think gold will take care of periods of high negative real returns on cash and LTT. I'm not sure silver can act as a good proxy pre-1971...I cannot wrap my brain around why people would flee to silver (ie. treat it as a safe-haven or store of value) when their money is already based on gold?
I tinkered around with the Robert Shiller data, and came up with this:
The two times that inflation significantly outpaced the 10 year yield (post 1971) was 1974 and 1980, and gold went to the moon.
Also, I'm not too sure how accurate that CPI data is, but if it is correct, then WOW! So much for the gold standard providing price stability.
I tinkered around with the Robert Shiller data, and came up with this:
The two times that inflation significantly outpaced the 10 year yield (post 1971) was 1974 and 1980, and gold went to the moon.
Also, I'm not too sure how accurate that CPI data is, but if it is correct, then WOW! So much for the gold standard providing price stability.
Last edited by Gosso on Thu Jun 21, 2012 3:03 pm, edited 1 time in total.
Re: long dated T's conventional versus inflation linked?
You could be right. But if inflation is running out of control then you cannot rule out the government tinkering with the CPI (in the name of maintaining order in the system).Clive wrote:Perhaps so, but if both are generally similar whilst one (Index Linked) has the greater assurance for protection if/when yields are being held artificially low and 'unexpected' high inflation suddenly occurs, then it seems sensible to go with that. It might be a case of belt and braces - but if the belt ever does break !!!But I still think gold will take care of periods of high negative real returns on cash and LTT
It is interesting to see how similar the returns for XLB and XRB have been over the past 5-10 years. For some reason I have always thought that TIPS were more stable and simply returned inflation plus a little extra, but apparently they have the same interest rate risk as normal bonds. I doubt many owners of TIPS are aware of the interest rate risk they are exposed to. I know I wasn't when I considered buying them.
Last edited by Gosso on Thu Jun 21, 2012 3:59 pm, edited 1 time in total.
Re: long dated T's conventional versus inflation linked?
The Canadian Real Return Bonds (the equivalent of TIPS) are taxed annually on the CPI adjustments, which is similar to the phantom coupon payments of zeros. http://www.bylo.org/rrbs.html#rrb4 So no luck there with the tax break. I'm not sure how they are taxed in the US or UK.
Another downside to RRBs is that the principal can turn negative if there is net deflation over the duration of the bond. From what I've read, only TIPS guarantee that you'll receive at least 100% of you original investment at maturity (I don't remember where I read this, so it might be BS).
I wonder if TIPS (or RRBs) would outperform LTT during a period of slowly increasing interest rates, similar to the period from 1950 to 1980?
Another downside to RRBs is that the principal can turn negative if there is net deflation over the duration of the bond. From what I've read, only TIPS guarantee that you'll receive at least 100% of you original investment at maturity (I don't remember where I read this, so it might be BS).
I wonder if TIPS (or RRBs) would outperform LTT during a period of slowly increasing interest rates, similar to the period from 1950 to 1980?