I wonder whether the retail customer is the 'holder' in this context. If so, then one could divide a 30 year TIPS used to extend the ladder, retain the principal part and sell the interest components. There will be direct costs (there will be commissions on selling 60 individual coupons for a 30 year TIPS) and indirect ones (bid-ask spread) that may make this an expensive option.Notes or bonds may be ‘‘stripped’’—divided into separate principal and interest components. These components must be maintained in the commercial book-entry system. Stripping is done at the option of the holder, and may occur at any time from issuance until maturity. -31 CFR Part 356.31Thank you for the recent comments. I was wrong in one assumption (about US treasury markets) and consequently wrong in my conclusions.
1) The (non)existence of stripped TIPS. Since https://www.treasurydirect.gov/marketab ... es/strips/, states "Treasury securities with a fixed-principal, such as notes, bonds, and TIPS are eligible and may be stripped." and Zwecher's book (Retirement Portfolios) incorporates them (in either coupon or principal form) I assumed that stripped TIPS were available to retail customers. This was my first mistake! Does anyone know why they are not available?
2) My second mistake, was then assuming that a ladder consisting of zero coupon TIPS was actionable (which, obviously it isn't if they are not available).
FWIW, I've redone my calculations assuming reinvested coupons and found that a 2 percentage point drop in total returns from 2.135% to 0.135% (with coupons of 2.124% and 0.135%) at the start of Year 1, means that the 35th rung is reduced to providing just under 1% income compared to over 3% income for the zero coupon version. In other words, I agree that the interest rate sensitivity of the extended ladder income is larger with coupons than without.
cheers
StillGoing
The short answer is because no holder of TIPS has chosen to create any STRIPS. Why? I don't have a clue.
cheers
StillGoing
Statistics: Posted by StillGoing — Sun Jun 30, 2024 1:28 am — Replies 52 — Views 3262
