Sunday, March 02, 2008

TIPS and zero real return

I have a habit of checking Pimco’s website regularly to find out what is going on in the bond market. The homepage of Pimco for US lists the yields of US treasuries of various maturities, and TIPS yield of various maturities. There is an image of the current yield curve also on that page. All these information gives me a quick glance into the bond market.

I saw that the Vanguard inflation protection bond fund’s price rose above $13 and YTD performance is up 5% and it is only March 1, 2008. This made me about curious what was going on in the TIPS market. So, I went to Pimco’s website to check what is going on.

And when I saw the yield on the 5-year TIPS, I almost fell out of my chair. I could not believe what I was seeing. The 5-year TIPS are trading at 0% yield. So, this means that the investors in the 5-year TIPS are accepting government reported inflation numbers as their future return. This makes the real return of 5-year TIPS at 0% in a retirement account.

The real return in the taxable account would be negative because investors will have to pay taxes on the income they get from these TIPS. There you have it: TIPS are providing negative real return. I never thought I will ever see this kind of market action in TIPS.

I am attaching a cropped screenshot of the Pimco’s page as reference below.

1 comment:

Cory said...

Hah! I shared this with my friends at work and they thought it was hilarious ... a negative return in a taxable account ... hehe