Key insights
- The user's experience highlights a potential pitfall in purchasing Treasury Inflation-Protected Securities (TIPS) at a premium (above par), leading to an immediate paper loss upon purchase. This occurs when market yields rise after the TIPS are issued, making existing bonds with lower coupon rates less attractive and thus trading at a discount. While TIPS protect against inflation, buying them when yields are low or rising can negate the principal protection benefit due to the premium paid. This situation suggests a bearish sentiment for investors who bought TIPS at unfavorable prices, potentially impacting demand for such instruments if market participants perceive similar risks.
In 2022 I bought a 100k 5 year individual TIPS fund on Treasury Direct I paid over $102k. I understand that when it matures next year I will recover 100k and not 102k. The interest payments are great but overall it’s hard to see buying this TIPS fund was a good decision when you lose over $2k at the start.
Am I missing something here? Or what did I do wrong? Buying TIPS after pandemic? Joining an auction as a retail investor with institutional investors bidding so the price spikes?
The idea of a TIPS ladder sounds great for security, but not when you incur losses at the gate.