TIPS Bonds

Hedgematic uses TIPS to to hold the inflation/market risk protected portion of your portfolio.

Bonds are purchased on day zero and held to maturity. We are not concerned about intervening volatility, as we are just purchasing a known current dollar sum as of the maturity date. Bond funds that mix maturity dates take on unnecessary market risk.

Displayed above is your day zero TIPS shopping list for your IRA account. You see a ladder of bonds, each of which are redeemed in separate years to give you the guaranteed portion of your yearly expenses. Note that as the term increases, the values decrease. In the out years we can rely more on the typically more profitable S&P to provide more income.

Your broker will list these bonds with treasury bills. The maturity date and coupon yield (in column 2) is used to identify the specific bond.

When issued, these bonds are denominated at $100 “par” value. The third column tells you how many individual bonds you will buy. Many brokers deal only in $1000/ten bond trades. If that is the case, divide the quantities by ten and enter the rounded count in your order.

Since they were issued, their principal value has been contiuously updated for inflation, so you no longer see 158 bonds worth $15800. Your purchase price reflects the additional coupon and redemption value of the bond. This multiplier is called the factor, and is reported along with other bond info.

Bonds will pay coupons twice a year. In after-tax accounts, coupons and an inflation adjustment are reported as income.

Bond income and redemptions are drawn from the account at the end of the year and applied to next year’s expenses.

Figures shown in following years are denominated in today’s dollars, and can be relied on with one exception; the inflation adjustment shown is only an estimate and has an effect only in after-tax accounts.

Drill down to see more information on individual bonds.

Charts

Three charts are shown. Swipe to view each in turn.

Bond Assets

Total bond value decreases as earlier maturities are redeemed.

Bond Activity

Tall bars are redemptions. Tiny bars are coupons.

Tax Inputs

If we are in an after-tax account, these figures show up on your tax return. Otherwise, they document tax-free accumulations.