LQD vs. TIP: Corporate Fixed Bonds vs. Inflation Indexed Securities

In case I was living under a rock and did not notice CNBC, Barrons and The Wall Street Journal reminding me that bonds are falling (yields rising), I have a series of internet pop ups that have been telling me about new 52-week lows in TIP (iShares Lehman U.S. Treasury Inflation Protected Securities Bond Fund)  and LQD (iShares GS $ InvesTop(TM) Corporate Bond Fund).   

I have been accumulating and writing about TIP for months,  (see first entry April 5, 2006) but now would like to make a little comparison with investment grade corporate bonds. 

When I look at how LQD and TIP stack up against each other, it seems the inflation protected bonds win in nearly all likely scenarios.  And, with the latest twelve month CPI (US Inflation) number coming in at 4.2%, I don't really think I'm getting paid to take fixed rate corporate bond risk.

                              LQD                              TIP
Price/share             103.13                        99.00

Historic Yield             5.27%                        6.75%

My estimate
of forward Yield:      5.9%                          6.75%


Credit Risk               BBB- and better          NONE- issued by US Treasury
                               (aka investment grade)
Performance
in high inflation:       TERRIBLE                CPI + 2.5%

Performance in
low and declining
 inflation:                  GREAT                    CPI + 2.5%

Tax:                          Fully taxable           Fed taxable. Not taxable 
                                 as income               at state and local level
                                 (fed and state)

In my taxable account I prefer to hold Treasury Inflation Indexed Bonds in the ETF form rather than directly.  The ETF pays out the inflation component of it's yield.  If you hold the bonds directly, you have to figure out the inflation accrual and pay tax on that. (even though you never received the income).  For more on TIPS tax considerations see here.  For my tax deferred retirement account I have TIPS as a core asset.

Disclosure: Nothing in this blog is meant to be a recommendation to buy or sell.  I do not give investment advice.  Do your own research.  Do not rely on anything in this weblog to make investment decisions.  I do not log all my trades here. I only describe or mention those that I think might be interesting. Consult your own investment professional before buying or selling any security.

I own LQD (small)  TIP (one of my top 10 positions).  I also own TIPS directly in my tax deferred retirement account.  I am looking for a good entry point to go short LQD and long TIP in my speculative account.  This may occur at any time after I publish this blog entry.