Wednesday
Apr052006
Portfolio Trade - TIP
April 5, 2006 at 7:00 PM
I have been buying TIP (iShares Lehman TIPS Bond Exchange Traded Fund) over the last two days.
WHY?
1. Yield is now over 6%. I'm getting inflation plus about 2.5%
2. There is no state income tax on US treasury interest.
3. I want to have longer bond exposure but I don't want to take the inflation risk and these bonds cover that for me and at a higher current yield than fixed rate treasuries. Based on the prices of TIPS (Treasury Inflation Protected Securities) and , the market is betting that inflation will fall
4. Holding TIPS in a taxable account is a bit complicated because you have to pay tax on the inflation accrual. These ETF's pay out the inflation accrual as a dividend and thus simplify the tax reporting.
5. It isthe only asset with positive inflation correlation that is going down in price right now.
Financial Pipeline has a nice explanation of TIPS.
WHY?
1. Yield is now over 6%. I'm getting inflation plus about 2.5%
2. There is no state income tax on US treasury interest.
3. I want to have longer bond exposure but I don't want to take the inflation risk and these bonds cover that for me and at a higher current yield than fixed rate treasuries. Based on the prices of TIPS (Treasury Inflation Protected Securities) and , the market is betting that inflation will fall
4. Holding TIPS in a taxable account is a bit complicated because you have to pay tax on the inflation accrual. These ETF's pay out the inflation accrual as a dividend and thus simplify the tax reporting.
5. It isthe only asset with positive inflation correlation that is going down in price right now.
Financial Pipeline has a nice explanation of TIPS.
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