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Pastimes : Triffin's Market Diary

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To: Triffin who wrote (350)	11/28/2008 5:47:13 PM
From: Triffin	Read Replies (1) of 868

BC: TIP 'O THE HAT .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. If you hold actual TIPS from the government, you get an interest payment twice a year based on a base yield, determined at the time the TIPS are auctioned. The TIPS ETF holds TIPS bonds yielding anywhere from about 0.75% to 3.875% as the base yield of 5- and 10-year TIPS has fluctuated quite a bit over the last few years. If you hold actual TIPS, the principal is adjusted each year based on CPI-U readings. you do not receive this money immediately - it is instead deferred until the bond matures. At maturity, you get the greater of par value (you don't lose if there is deflation) or the higher value if there was net inflation. The TIPS ETF pays out both interest and principal changes each month as dividends. So the actual monthly payment ends up fluctuating quite a bit based on monthly CPI-U readings. So while oil prices were skyrocketing last summer, TIPS paid very large dividends (TIPS uses the raw CPI-U reading rather than the "core" reading that excludes energy and food). based on recent dividend payments annualized, it appeared that TIPS yield was 8+%. In September, we saw a mildly deflationary CPI-U reading (about -0.15%), which reduces the principal of the TIPS bonds, and also reduces the dividend paid by the TIPS ETF. This wiped out the dividend for November. The recent CPI-U reading was more strongly deflationary (oil going from $150 to $60 will do that), so I don't expect a dividend from the ETF in December, either. The reported yield on Yahoo will collapse with this as well.

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