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As a retiree, it is perfectly rational to obsess about inflation.  If you feel that inflation is going to accelerate you might not want to lock yourself into five year CDs.

Last week I bought some TIPS through the Schwab website, and the amount I paid was exactly the predicted amount.  Apparently the commission costs are either paid by the seller or covered by the buy and asked spread.  I have no intention of selling before maturity, so I am not concerned with the commissions or selling costs, only whether or not the purchase cost is right.

As far as I can tell, you have to be a Schwab customer, and then jump thru a couple of additional hoops before Schwab will let you into their bond site so that you can see their pricing information.

Bryan  

What you want is security.  No real way to get it though.  But I still don't see why anyone would stagger CDS today.  On Bankrate.com there is 1% difference between the average rates for a 6-month CD (3.13%) and a 5-year CD (4.18%).  For 2007 the return on the VG Prime Money Market was 5.14%.

So if you think we are headed for high inflation and you want to do CDs, just put the whole thing into 6 month CDs and wait to see what happens.  I guess the point I am trying to make is WHY LADDER when there is no spread in interest rates AND you expect inflation?  What benefit could there possibly be from tying any of your money up for 5 years?  Unless it is inflation protected like the TIPS. 

 Just want to put my 2 cents in here. I just went to bankcd.com, and they list 5 yrs CDs from 3 institutions (KeyDirect, Capital One, Discover) with rates between 5.23 % and 5.26%.

Brian et al :

I said in an earlier post that I was about ready to just put money to fund upcoming expenses in a ladder of CDs.  What I really meant is that I'd buy some 3 mos, some 6 mos, some 9 mos, and some 12mos -- take out cash as needed when one CD matures each Qtr and renew the balance of that CD for 6 or 12 mos at most.  I dont see locking in 5 yrs either.

But since then I have come around to thinking that buying a string of up to 20 TIPS with maturities staggered at each qtr over the next 5 years or so -- may be a better strategy.  I got a couple of real world prices from a local broker.  The yields are not much over zero in a 0-inflation scenario, but I doubt that inflation is going to be under 3-4% for the next few years; and it may run wild for a while. But the TIPS return aint as good as it used to be.  I guess it all comes down to whether you think the inflation rate or CD rate will be higher.  Right now inflation is leading. 

I dont have a Schwab account and have not been able to find real-world pricing on-line.  I'll see if they will let me open an empty account and get their prices that way.  I have a feeling better rates are to be had than my local broker's, if one can just find them.  There was over a 1% buy-sell spread on the two examples he gave me and one bond was a much better buy than the other for a hold until maturity case.  So it looks like one has to shop hard.  Any tips on finding other sources of real-world odd-lot TIPS pricing would be appreciated.

retiree2001

I get all kinds of fixed income quotes easily through Etrade.

I am personally still in laddered CDs but I don't go out past 2 years.  I recently bought a 4.25% CD that will mature in Dec 2009.

I have considered TIPS but can't get excited at the low returns unless we go into overdrive on inflation.  A short burst won't make them worthwhile.  It would take a prolonged run to make them pay.  I realize I'm gambling on the low inflation side.  Buying TIPS is betting on the other side. 

The complexity of pricing for secondary market purchases of TIPS is a concern.

Since the Treasury does not act as a custodian for IRAs, how does one fund an IRA with TIPS except with a purchase in the secondary market? If TIPS are not in a tax-deferred account, are they worth buying?

If you puchase in the secondary market through a broker, can you pretty much assume that you are getting skinned? How can one tell? Should they give a quote before the puchase?

Anyone?

I have two self directed retirement accounts at different brokerage firms.  Both firms are happy to submit a non-competitive bid from my IRA to the treasury for original issue TIPS.  One brokerage firm charges a flat fee of $25 for the service with a minimum bid for $10,000 face value, maximum of $500,000.  The other firm charges $50 plus $2 per $10,000 face value.

TIPS, like zero coupon bonds, produce phantom income.  You must pay tax each year on this income, but you do not get it until the security matures or you sell it on the open market.  I would have to be really scared of high inflation before I would hold TIPS anyplace but in a tax-deferred account.

Bryan

Thank you Bryan.

The info. was very helpful.

I agree on using TIPS for tax-deferred only accounts.

Gary.

I wonder if there is a way to estimate how much one could lose on a TIPS fund if one bought in today and had to sell when the inflation was low, say zero, and the interest rate was high, say 10%?   Just as a possible scenario.  I am still interested in putting some short-term money into a TIPS fund that I would draw on over the next 2 to 7 years -- for several reasons.  But I would like to size my exposure.   I have a feeling it isnt so great of an exposure but I dont know how to go about estimating it.  The bonds themselves have an intrinsic value that is unlikely to go away.   Anyone have some thoughts on the subject?