I think you are confusing coupon with yield. A 10y TIPS at auction will get about the same yield as the secondary market yield on TIPS with similar maturity. So you won't find a 0% yield TIPS with a maturity of about 10 years if the 10y auction results in a 2% yield.So assume someone is selling TIPS with 0% yield and now new 10 YR is being offered at 2%, will those 0% in secondary be offered at significant discount to make up for the higher yields now? This is what I am trying to understand. How do I check that buying that 0% vs new one at 2% for given duration, I will come out to be very same at the end. Maybe there is some spreadsheet or formula I can use to get my returns.
Price, yield and coupon are all related. Looking at some examples in the 8y maturity range, the Jan 2032 TIPS has a 0.125% coupon and the Apr 2032 TIPS has a 3.375% coupon. The yields for both are about 2%, but the price for the Jan issue is 86.714 and the price for the Apr issue is 110.123. The difference in prices is what results in the yields being about the same, despite the large difference in coupons.
Bottom line is that the yield to maturity is the main thing to consider, but with TIPS adjusting for seasonality matters. I chose Jan and Apr because the seasonality difference isn't very big for them right now.
Personally I would favor the lower coupon, because there's less reinvestment risk, but for a ladder it doesn't really matter, since you're looking for annual real income, and both principal from maturing TIPS and coupons from all TIPS contribute to that. In other words, the realized return of a higher-coupon TIPS is likely to be more different from the initial yield if you were reinvesting the coupons, but if you're spending the coupons it doesn't matter.
Statistics: Posted by Kevin M — Wed Mar 20, 2024 10:14 am — Replies 4125 — Views 457617