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To: FromLori

Yeah, I know. But seriously, why would anyone buy these things, the TIPs, when the gov is deciding what the inflation rate is? Isn’t it in the gov’t’s interest to lie through its teeth, especially since lying doesn’t seem to be a problem for this particular admin? I don’t see the appeal, so what am I missing? :)


18 posted on 10/27/2010 9:53:27 AM PDT by mewzilla (Still voteless in NY-29. Over 400 roll call votes missed and counting...)
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To: mewzilla

First thing that comes to my mind is extortion. Why pay the protection money? Because they’ll burn you out if you don’t, and you’re not strong enough to fight back.

That’s a pretty graphic example meant to convey my point that maybe it’s just the best outcome available. If I want the “safety” of Treasuries, at least with TIPs I won’t lose AS MUCH as I could in an inflationary environment.

Just my opinion, I don’t do this for a living.


23 posted on 10/27/2010 10:33:06 AM PDT by Darth Reardon (No offense to drunken sailors)
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To: mewzilla

I wouldn’t buy them I know what your saying I think there is way too much corruption and risk myself. It was explained to me this way about TIPs.

One of the reasons investors are willing to buy TIPS at a negative yield is that TIPS pay a premium when inflation goes up. So if you believe, as these investors must, that inflation will eventually go up over the next 5 years, the current investment at a negative yield could still pay off nicely.

Another thread explains it better..

TIPS most people understand. They’re “Treasury Inflation Protected Securities,” meaning that the Treasury adjusts your principle for inflation.

If you don’t understand how TIPS work in an inflationary environment, google “how TIPS work” and you’ll see a couple of great examples.

OK, but why a negative yield? Why would someone pay a premium for these?

Well, there are two explanations:

1. Investors in these are expecting inflation. That’s simple enough.

2. Investors are expecting inflation or deflation. That’s not so simple. The normal Treasury debt (bill, note or bond) just pays you the coupon based on your principle investment. If there is inflation, that eats into your yield, and if there is deflation, your coupon looks better due to the negative rate of inflation. Remember that the real rate of yield is nominal yield minus the rate of inflation, and if inflation is negative (deflationary), then you have a higher, not lower, real yield.

OK, so TIPS are asymmetric - the Treasury adjusts your principle if there is inflation, but leaves it alone if there is deflation. If you don’t know whether there is going to be inflation or deflation, you’re better off buying TIPS than Treasuries, because now at least you’re protected on the upside, assuming that the CPI captures the inflation. Which isn’t necessarily a safe assumption these days. Investors know right now that the CPI is effectively at rock bottom, and the Fed has openly declared that they’re trying to cause inflation.

So investors bid up the option of being protected from inflation.

http://209.157.64.200/focus/news/2614309/replies?c=1


25 posted on 10/27/2010 10:47:07 AM PDT by FromLori (FromLori)
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To: mewzilla

I wouldn’t buy them I know what your saying I think there is way too much corruption and risk myself. It was explained to me this way about TIPs.

One of the reasons investors are willing to buy TIPS at a negative yield is that TIPS pay a premium when inflation goes up. So if you believe, as these investors must, that inflation will eventually go up over the next 5 years, the current investment at a negative yield could still pay off nicely.

Another thread explains it better..

TIPS most people understand. They’re “Treasury Inflation Protected Securities,” meaning that the Treasury adjusts your principle for inflation.

If you don’t understand how TIPS work in an inflationary environment, google “how TIPS work” and you’ll see a couple of great examples.

OK, but why a negative yield? Why would someone pay a premium for these?

Well, there are two explanations:

1. Investors in these are expecting inflation. That’s simple enough.

2. Investors are expecting inflation or deflation. That’s not so simple. The normal Treasury debt (bill, note or bond) just pays you the coupon based on your principle investment. If there is inflation, that eats into your yield, and if there is deflation, your coupon looks better due to the negative rate of inflation. Remember that the real rate of yield is nominal yield minus the rate of inflation, and if inflation is negative (deflationary), then you have a higher, not lower, real yield.

OK, so TIPS are asymmetric - the Treasury adjusts your principle if there is inflation, but leaves it alone if there is deflation. If you don’t know whether there is going to be inflation or deflation, you’re better off buying TIPS than Treasuries, because now at least you’re protected on the upside, assuming that the CPI captures the inflation. Which isn’t necessarily a safe assumption these days. Investors know right now that the CPI is effectively at rock bottom, and the Fed has openly declared that they’re trying to cause inflation.

So investors bid up the option of being protected from inflation.

http://209.157.64.200/focus/news/2614309/replies?c=1


26 posted on 10/27/2010 10:47:24 AM PDT by FromLori (FromLori)
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