Transcript:
Easan Arulanantham:
“Are Treasury iBonds i.e. inflation protected treasury bonds a good bet for an inflation period?
Tom Vaughan:
Yeah. As Easan said, this came in as a comment on our YouTube video that we posted on our channel, dealing with how to deal with inflation. So the question is, should you use treasury inflation protection securities, we call them ‘TIPS,’ just for short, because inflation is expected to kind of continue upward. And what we’re seeing, for example, in the 10 year treasury, it was at a half a percent in August of 2020. And right now, it’s at 1.62%, or something like that, percent. So as the yield grows on a treasury, for example, or any bond, the price will fall. And so the idea behind a Treasury Inflation Protection Security, is that as the yields go up, so does the payment coming out of that bond, which should insulate the price from moving down as much. So it’s got an adjustable rate of return on the upside. And so yes, this is a great time to do that. We have an overweight position, we use Exchange Traded Funds. There are a lot of great ones out there that buy these TIPS, and put them in little baskets, and you can buy them yourself.
We don’t buy the bonds directly: we use them through these Exchange Traded Funds. But that has worked out really well actually, our bond portfolio is outperforming the market so far this year, big piece of is because of those TIPS. Having said that, you can’t really tell where things are gonna go. I mean, I know by March everybody thought inflation was super hot and then it fell. It wasn’t as hot, now it’s coming back. And I mean, inflation has been out there as a thought process forever and hasn’t always worked out that we actually have that much left to see how this goes. But nonetheless, still want to keep your broad market / bond market exposure. So we still have Vanguard Total bond market for example, BND, in our portfolio. I still have some intermediate term treasuries in the portfolio, and I have short term bonds in the portfolio, I still have high yield bonds in the portfolio. So we are overweight, our normal allocation by quite a bit (with) these TIPS, but don’t get too carried away. Because, you know, again, they won’t perform as well as some of these other things. So you always want to have this kind of balance amongst both your stock and your bond portfolios. And you really just want to maybe overweight based on some thought process, or actual things that you see happening, and react to those. And so yeah, I think that the TIPS are a great bet right now that they’ve been working out well, so far.
Easan Arulanantham:
Yeah, and another example of an inflationary protected treasury bond is the actual iBonds. But the only issue iBonds is, you’re very limited in how many you can purchase per year. So I believe it’s $10,000 if you buy, and you have to go directly to the Treasury and buy these.
Tom Vaughan:
Yeah, exactly. So that, for us managing hundreds of millions of dollars, that it’s too limited for what we can deal with. I would say one other quick point is that another thing that you want to think about in an environment where the bond prices are falling, is being in shorter term bonds. At least for a while here, because they don’t fall as much. And so even shorter term TIPS, which is one of our biggest holdings, are not a bad idea.