No. of Recommendations: 5
I suspect it is a fault in my mental model but I see short-term T-bills as being just as responsive to actual inflation as the TIPS would be without any of the messiness of resetting the principal.
Short term rates DO NOT track inflation. TIPS increase in principle monthly based on CPI-U thus roughly tracking inflation and their coupon is paid on that principle. Let's take a look at a person turning 85 soon.
Let's say in September 2008 a person was 65 years old (i think that was full SS retirement age at that time?) and considering taking $100k and holding 4wk Tbills for ~20yrs and then converting to an annuity around age 85. Here we are 17 years later and that person would have about $120k to put towards their annuity in a few years (ignoring all taxes). After inflation they have lost nearly 30% of their purchasing power. Ouch, years of zero interest monetary policy stings and doesn't care about that person's exposure to inflation.
Same person put $100k into TIPS with a 1.5% coupon in that same September. Yes things were extremely volatile for 18-24mo around that time, but it's a fun date to think about maximum anxiety were a person entering retirement. That person would now have a total of about $169k (~$150k of inflation adjusted principle and ~$19k of coupons) to put towards their annuity in 3 years, again ignoring taxes. Purchasing power actually up about 12% due to luck at time of purchase.
The latest CPI-U was 3% so both the 30yr TIPS coupon of 2.37% and the 5yr TIPS coupon of 1.125% are out performing the 1mo treasuries at 4%. I think the key take away is TIPS seems to be the best instrument to alleviate the unknown of inflation. Yes it relies on the government not manipulating CPI and no one knows what future monetary policy will be, but you at least have some confidence you have accounted for the inflation variable as best you can. Buying any other non-inflation protected fixed yield instrument is completely relying upon your ability to accurately predict inflation over the term of the instrument. People at work like to ask me where i think rates or inflation are going and my canned response is, "if i could do that with any level of accuracy, I wouldn't be working here".
None of that is to say one should ALWAYS buy TIPS when considering this type of strategy. TIPS yields were negative for a period during COVID and it certainly would have paid to be patient.
Disclaimer: I did prompt AI on the total return calculations, but I did a high level check against FRED data I keep up to date and I believe it to be accurate. None of the above was written with AI. Grok has been my go to for calculations like this but Gemini seems to be on par these days after the latest update. We have M365 at work with full Copilot integration and I find it lacking in computation ability but very good at prompts against email and corporate documents for topical summaries.
Jeff
