At 132 or so, up from 99 when we first started discussing them in this space (plus interest and inflation), I’m selling a third of my 30-year Treasury Inflation Protected Securities (the 3.375’s maturing April 15, 2032). I have one smart friend who thinks they may hit 140. But Jim Grant, who is by no means always right, but who is by all means one of the very smartest guys around, argues that at this price they have lost much of their appeal.
If they go straight to 140 and stay there, I’ll be glad I kept two-thirds of them (and maybe then sell more). If, as I believe is more likely, I get the chance to buy them back at 115 or 120 or even 125 in the not too distant future, I will have come out a few bucks ahead.
Note that because of the way they are taxed, it makes best sense to own TIPS in a tax-sheltered retirement account, which is where I have mine – so my trading in and out, while it may prove foolish, will not prove taxable.
Note also that TIPS prices are quoted without reflecting the inflation factor by which they may have appreciated. In other words, each of my TIPS, with its $1,000 face value at issue, may now have a $1,050 face value because of the past two years’ inflation. (I haven’t checked to see the exact value.) But that’s separate from the price at which they trade.
Let’s say that, by 2032, they have grown to a face value of $4,500 each (as they would if, from here on out, inflation compounded at 5.3%). At that point – maturity – they will, by definition, be trading at exactly 100 cents on the dollar, when the Treasury redeems them for $4,500 each. So, in fact, they can’t literally stay at 140 forever, if they should climb that high. They will eventually wend their way back down to ‘par.’ Not a penny more or less than 100% of the by-then face value.
Today, though, they trade at about 132% of face value.
Not crazy. (At today’s price, held to maturity, you are guaranteed a return of nearly 1.9% above inflation.)
But perhaps a little rich.
Laurie: ‘Yes, it is Dutch. It says, ‘The bears keep getting smarter.”
Bill Spencer: ‘You could go to nobodyhere.com/justme/tower.here to see the bears in English. Better yet, go to nobodyhere.com and click on English so all of the weirdness will be in English. Hours of fun!’
George: ‘The Bears by themselves are fun. The problem is if one clicks on one of the Commentary links, one gets to read some sick messages. You can’t be our big brother in this issue, but please, when possible, warn your readers about what may be lurking behind the basic link someone sends to you for viewing by the rest of us.’
☞ Beware! (And don’t all click at once.)
Quote of the Day
Why shouldn't the American people take half my money from me? I took all of it from them.~Edward A. Filene, Department Store Magnate, 1860-1937
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