Author Topic: Emergency Fund in VTIP?  (Read 1807 times)

jnw

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Emergency Fund in VTIP?
« on: March 26, 2022, 02:35:01 PM »
What do you think about VTIP? It's US Gov backed bond ETF which tracks inflation.  And I guess you aren't locked out of your cash, you can buy and sell the ETF anytime you want?

Seems like a great way to store your emergency fund so it doesnt' deteriorate.  Or perhaps even for timing the market with cash on the side.

I am already putting $10k in Series I Bonds.  But you are locked out of that for 12 months.  Not great for an immediate emergency fund or for buying any potential big dips in VTI.


MustacheAndaHalf

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Re: Emergency Fund in VTIP?
« Reply #1 on: March 26, 2022, 04:05:21 PM »
The yield might be lower - and volatility higher - than you expected.

Vanguard shows VTIP has having -3% SEC yield for comparison with other bonds.  If you're thinking it has a 7% yield, I know an ETF holding TIPS is more complicated than that, but I don't know them well enough to comment.
https://investor.vanguard.com/etf/profile/VTIP

On Friday VTIP lost half it's YTD gains - in one day (-0.35% Friday, +0.35% YTD).  If you look at year by year performance data on Morningstar, you'll see 2013-2014 had losses (-1.5%, -1.4%) while 2020-2021 had gains (+5.0%, +5.4%).
https://www.morningstar.com/etfs/xnas/vtip/performance

MustacheAndaHalf

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Re: Emergency Fund in VTIP?
« Reply #2 on: March 26, 2022, 04:23:27 PM »
For most of March I held inverse bond ETFs, which is like a short position on bonds.  I turned 4% of my NW into 5%, which is not bad for a few weeks.  But I also mention that to explain that I don't think bonds are a good investment right now, and I don't hold any myself.

I'd recommend "The Bond Book" if you want to understand bonds in greater detail.
https://www.amazon.com/Bond-Book-Third-Everything-Treasuries/dp/007166470X/

I understand non-TIPS bond funds better, so I'll explain with Vanguard's Total Bond ETF (BND).  If bond yields go up 0.25% across all durations, the bond fund's "duration" gives the multiplier for losses.  So for BND it's 6.8, and that means (6.8 x .25 =) 1.7% loss.  I said "across all durations" because the Fed mostly influences short term bonds, and then the market decides what happens with long term bonds.


I was going to say I find something puzzling about the bond market, but I think I've figured it out.  Last year ended with the market expecting 2 rate hikes from the Fed (0.25% each).  And now the market expects about 6, an increase of 1%.  If you look at BND performance YTD, it's -6.8%.  Given BND with a 6.8 duration, that's the exact loss you'd expect from a 1% rate hike.
https://www.morningstar.com/etfs/xnas/bnd/performance

Scandium

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Re: Emergency Fund in VTIP?
« Reply #3 on: March 28, 2022, 11:08:26 AM »
The yield might be lower - and volatility higher - than you expected.

Vanguard shows VTIP has having -3% SEC yield for comparison with other bonds. 

Wow, where do I sign up?!
With 7% inflation you get a nice, round 10% loss on your cash per year? Tempting..

ChpBstrd

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Re: Emergency Fund in VTIP?
« Reply #4 on: March 28, 2022, 03:29:07 PM »
I was going to say I find something puzzling about the bond market, but I think I've figured it out.  Last year ended with the market expecting 2 rate hikes from the Fed (0.25% each).  And now the market expects about 6, an increase of 1%.  If you look at BND performance YTD, it's -6.8%.  Given BND with a 6.8 duration, that's the exact loss you'd expect from a 1% rate hike.
https://www.morningstar.com/etfs/xnas/bnd/performance

Maybe keep shorting bond funds, in a defined-risk way. If the market expects only 1.5% in rate hikes this year, and NO rate hikes for the next 5.8 years, I'd suggest that is unreasonable.

The only way such an expectation could be fulfilled would be if.... a major disinflationary financial crisis occurred like a housing crash, crypto crash, stock crash, banking crisis due to bond market losses... Oh snap, that's exactly what the bond market is telling us will happen.

jnw

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Re: Emergency Fund in VTIP?
« Reply #5 on: March 28, 2022, 08:53:24 PM »
I am not going to bother with VTIP. I don't understand it and it appears to be nothing like what Series I Savings Bonds will give me.

I am going to invest each month, 60% of net monthly income into Series I Savings Bond and will have 40% to invest in something else.  I am not going to do VTI right now.  I have just about settled on BRK-B  since Buffet is a pro dealing with volatile markets during inflation and is good at choosing good value companies which can weather inflation.  BRK-B has been doing relatively well this past year vs VTI.

MustacheAndaHalf

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Re: Emergency Fund in VTIP?
« Reply #6 on: May 17, 2022, 07:20:57 PM »
The yield might be lower - and volatility higher - than you expected.

Vanguard shows VTIP has having -3% SEC yield for comparison with other bonds. 

Wow, where do I sign up?!
With 7% inflation you get a nice, round 10% loss on your cash per year? Tempting..
If you prefer 2.5% yield, there's also PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund (ZROZ).

Maybe in fine print it should say -28% YTD, though.... before inflation.

MustacheAndaHalf

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Re: Emergency Fund in VTIP?
« Reply #7 on: May 17, 2022, 07:40:34 PM »
I was going to say I find something puzzling about the bond market, but I think I've figured it out.  Last year ended with the market expecting 2 rate hikes from the Fed (0.25% each).  And now the market expects about 6, an increase of 1%.  If you look at BND performance YTD, it's -6.8%.  Given BND with a 6.8 duration, that's the exact loss you'd expect from a 1% rate hike.
https://www.morningstar.com/etfs/xnas/bnd/performance

Maybe keep shorting bond funds, in a defined-risk way. If the market expects only 1.5% in rate hikes this year, and NO rate hikes for the next 5.8 years, I'd suggest that is unreasonable.

The only way such an expectation could be fulfilled would be if.... a major disinflationary financial crisis occurred like a housing crash, crypto crash, stock crash, banking crisis due to bond market losses... Oh snap, that's exactly what the bond market is telling us will happen.
Two months ago, I can believe 1.75% was the expected Fed funds rate at year end.  Now the market expects 3.25% ... yet even long-term treasuries are yielding less than 3.25%.  Markets don't generally predict a yield curve inversion, and right now consensus is for no recession (I disagree).  So if there's no yield inversion, then longer duration treasuries need to have higher yield (by definition).

So the Fed funds rate will go from 0.75% now to 3.25% in Dec 2022.  The inconsistency is that US Treasuries yield 3% now, so they don't fit that expectation.  I can short US treasuries and wait for their yields to rise from 3% to 4%, all while only expected events take place.

BTW, I didn't pick 3.25% myself - it's a figure I've heard repeated over and over on Bloomberg TV and CNBC.  Nobody talks about 2023 December, only 2022 December.  So I think the market is ignoring 2023 for now, and waiting for more information from the June & July FOMC meetings.

So while I do not recommend this to anyone else, I've got an inverse or short position in bonds.  I believe in most scenarios that will be profitable.  If inflation and the stock market collapse at the same moment, it's nearly certain that investment takes a big loss extremely quickly.

Mr. Green

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Re: Emergency Fund in VTIP?
« Reply #8 on: May 17, 2022, 08:07:46 PM »
The yield might be lower - and volatility higher - than you expected.

Vanguard shows VTIP has having -3% SEC yield for comparison with other bonds. 

Wow, where do I sign up?!
With 7% inflation you get a nice, round 10% loss on your cash per year? Tempting..
Worth noting is that the current SEC yield is only a snapshot of April, which may not be indicative of the return for the rest of the year.

 

Wow, a phone plan for fifteen bucks!