Subject: Re: Trump's pro-inflation aggression
From the TD ( Treasury Direct ) website:

" We sell TIPS for a term of 5, 10, or 30 years.

As the name implies, TIPS are set up to protect you against inflation.

Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.

When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.

TIPS pay a fixed rate of interest every six months until they mature. Because we pay interest on the adjusted principal, the amount of interest payment also varies.

You can hold a TIPS until it matures or sell it before it matures.From Treasury Direct"

Also from TD:
"The principal of your TIPS goes up and down with inflation and deflation. While the interest rate is fixed, the amount of interest you get every six months may vary based on any change in the principal. Those changes are tied to the Consumer Price Index from the U.S. Department of Labor, Bureau of Labor Statistics."



My thoughts:
So a TIPS purchase will stay at the same interest rate thru the bond's duration.
The principal value is what is adjusted for inflation.

If a $25,000 TIPS is purchased, and inflation rose by 2% at the 1st evaluation date,
then the principal is increased to $25,000 *1.02 = $25,500. This new principal
value is multiplied by the fixed interest rate at time of purchase. For example, if
int-rate at purchase was 1.8%, then the interest payout to the holder would be
( $25,500 * 0.018 )/ 2, since the interest is evaluated and paid twice a year.
This adjusted principal value is cumulative, at the 2nd evaluation, if inflation
is 2%, then the inflated $25,500 figure is multiplied by new 2% rate, and this newest
principal value is multiplied by the original fixed interest rate.
And at the maturity date, the holder gets either their initial $25,000 back, or
whatever greater value the principal has been inflated to. A 5 year TIPS
would be evaluated twice per year, or 10 times over its maturity.

I've never owned a TIPS before, does the above sound correct ?
If inflation was 2% over the entire 1st year, at the end of year 1 would the
principal be $26,010 ?

I just used a pen&paper and calculator, assumed $25k initial purchase,
inflation was 2% all 5 years, and the fixed int-rate was 1.8%. At the end of 5 years,
principal was $30,473, and total payments over 5 years was $2510. This gave a total return
of 5.7% per year. Does that sound about right?

I would make purchase in IRA, so both interest and principal capital gain are
just thrown in the pot, and will be taxed as income whenever money is withdrawn
from IRA ( ie no difference, in an IRA, than any of the others assets in IRA ).
I can see owning a ladder of 5 year TIPS in IRA. The next 5 year auction is
in October. Would have to do that basically once a year, every year for a 5 year
ladder till death.

I would pull the plug on the ladder purchases if after year 1, it appeared that the
current administration was cooking the books in regards to inflation. That is a
very real risk, imo, but with just 1 year purchase it wouldn't be a big deal.
My attitude would be Ok, ya screwed me once, won't let it happen again.