As of today, the 10 year TIPS rate is 1.95%. For simple math, let’s assume you bought $1M of new issue with the below assumptions:
-fixed 2.5% average inflation rate for the next 12 months
-Fed starts interest rate decreases in the second half off the year
-You hold for 1 year, and then sell when the current TIPS rate is back to 1%. You don’t have to look back far to see it return to 1%, especially once the fed starts cutting it will drop quickly.
Given all these assumptions, You’d have the below returns from this investment after 1 year.
-With a drop in yield of 0.95% after 1 year, the premium increase (capital gain) with 9 years left in duration would be $1M x 9 x 0.0095 = $85,500.
– With a yield of 1.95%, the interest income would be $19,500.
– The inflation adjusted principal assuming 2.5% inflation would be $1,025,000, or an appreciation of $25,000.
If you liquidated this position, the return (pretax) after 12 months would be $130,000, or 13% on $1,000,000 invested.
It seems too good to be true, what am I missing here??
