Non-US equivalent of iBonds and TIPS?

[conwy]

From listening to a lecture by Zvi Bodie, I learned about these fantastic things you have in America called iBonds and TIPS.

These are bonds that can be purchased directly, priced at face value, and earn interest above inflation.

It seems like this is almost an ideal investment for most of a portfolio, especially in early retirement.
1. You can maintain principle
2. You can earn interest
3. You can avoid inflation

I would ideally like to have 50% or more of my portfolio in such a low-risk investment, if it were available to me.

Unfortunately, as far as I know, this is a US-only investment.

For Australian investors:

The closest thing I could find is eTIBs. Unfortunately these can only be purchased from the ASX via a broker or online brokerage, which causes the price to fluctuate.

For example, at the moment, for the 21 August 2035 2.00% eTIB (GSIO35) CMC Markets is quoting me $149.990. (See screenshot)



This is, of course, far above the $100 face value, so maybe not a good deal (though I'd have to run numbers I guess to work out whether it would be a guaranteed net loss after compounding interest and ex. expected inflation).

Does any non-US person know if there any foreign equivalents of directly-held, inflation-protected bonds for, e.g., UK, Australian or Canadian investors?

If not, are you jealous of the Americans having such awesome investments?

Or any general thoughts?

[zbigi]

Does any non-US person know if there any foreign equivalents of directly-held, inflation-protected bonds for, e.g., UK, Australian or Canadian investors?

If not, are you jealous of the Americans having such awesome investments?

Poland has this as well (I hold 65% of my NW in them). They're 10 year bonds that you purchase directly from the government. First year is currently returning 5.75%, and subsequent years return the official inflation rate for the prior year + 1.5%. There's only one payout, at the end end of the 10 year period - in the meantime, the interests roll into the principal. Also, the bond can be cancelled at any time without loss of already accured interest, for a 2% fee. All in all, it's a pretty good offer. The one drawback is that there is a flat 19% tax on the interest, which means that, in periods of high inflation (anything above 7%), even though the bond nominally pays above inflation, it still ends up being a money loser. It's still better/safer than alternatives I researched though (I don't consider TIPS as an alternative because of how expensive dollar is at the moment).

[chenda]

Yes the UK has them (search nsandi index linked)

Though of course how they calculate inflation may be different from actual inflation or your personal inflation rate.

[conwy]

Yes the UK has them (search nsandi index linked)

Though of course how they calculate inflation may be different from actual inflation or your personal inflation rate.

Interesting, thanks for referencing this.

To your point - true that official inflation figures might differ from an individual basket of goods, either positively or negatively.

However, can you think of any asset class with a similar risk and principle protection that has a better chance of protecting against inflation?

All else equal, it seems that a directly held inflation linked bond would be more likely to protect from inflation while preserving principle than, say, a directly held non-inflation-linked bond or a bond ETF or a stock index ETF.

What do you think?

[prudentelo]

In the long term stocks will protect against inflation as corporate profits will rise in line with increased money supply.

Stocks, unlike govt bond, will protect against underreported inflation, because they repond on "actual" increase in spending, not increase in govt index

inflation-protect govt bond is funny product because govt causes inflation AND govt with western friedman type inflation targeting money policy promises not to cause inflation. so, you trust promise of person to protect you from consequences of breaking his other promise to everyone. really what you say with this trade is you believe you (or class of bond holders) are more valuable political client than general public. maybe true, maybe not true. hard to judge.

If time horizon is 30yr, very hard to understand why hold govt "protected" bond rather than stocks. Boring and standard though such portfolio is.

[conwy]

In the long term stocks will protect against inflation as corporate profits will rise in line with increased money supply.

Are you sure? There have been periods - long periods, even longer than a decade - where stocks lost their value in real terms.

The future might be even worse than the past. What if the stock market loses value in real terms for 30 years? Then a retiree who is withdrawing money is more likely to run out of money.

Stocks, unlike govt bond, will protect against underreported inflation, because they repond on "actual" increase in spending, not increase in govt index

Yes, but at the cost of risk.

There's a very real possibility of stocks losing their value.

What if I want a (more or less) risk free investment?

If time horizon is 30yr, very hard to understand why hold govt "protected" bond rather than stocks. Boring and standard though such portfolio is.

What if the time horizon is 60 years (early retirement) and I don't want to risk losing all my money before I die?

[prudentelo]

Of course stocks are more volatile than bonds. You asked about inflation protections. Stocks do not suffer from inflation (in ideal model/after initial shock) because stock pays out nominal profits derived by nominal consumer spending which rises with nominal money supply/velocity expansions. In "real" observations, stocks survived Weimar inflation.

With buying "protected" bonds, you eliminate risk that stock market will be down for 30 years (if this happens will not be due to inflation) but accept risk that government lie to you (which as govt reliable informs us, never happens ...). If govt lies that inflation is 7% when it is 10% then after 30 yr you lost 60% of principal. Perhaps you believe stock market might be down 60% total return for 30 years. Maybe you should buy ammunition


edit: "What if the time horizon is 60 years (early retirement) and I don't want to risk losing all my money before I die?
"

Misunderstanding here is serious

problem gets less with longer time horizon not worse. "protected" bond rational use is protect against short term class flow problem. With 30 year time horizon, withdrawing 1/30 of portfolio each year, so cash flow problem/liquidity crisis almost impossible. EVen more unlikely with 60 year.

[jacob]

For example, at the moment, for the 21 August 2035 2.00% eTIB (GSIO35) CMC Markets is quoting me $149.990. (See screenshot)

[...]

This is, of course, far above the $100 face value, so maybe not a good deal (though I'd have to run numbers I guess to work out whether it would be a guaranteed net loss after compounding interest and ex. expected inflation).

That is because it's likely been a long time since the real rate in Australia was 2.0%. I'm not familiar with the AU scene, but consider the US where the 10y is about 3% while inflation is about 8%. This means the real rate is -5%. A bond offering 2% real with several years to go before maturity would thus trade far above parity(=100). Key point: Insofar you held it to maturity, you'd get the current expectation of the real rate. It's basically locked in. You know EXACTLY what you'll get. What you don't know is how much what you're getting is actually worth. And this basically explains why bonds don't stay at the 100 price.

Consider that if you do go this way that in order for this to work, inflation-based payouts are supposed to be reinvested. You can only take withdrawals from eating principal or the actual interest rate (which may very well be negative!). As such the 4% rule [of thumb] goes out the window---you're playing a more conservative belt&suspenders kinda game; not the expectation that the 21st century economy will grow as much as the 20th century one did.

Methinks reading more about how bond investors work/think will be helpful. Don't worry too much about the inflation part. Just try to get a better feel for yield to maturity, duration, etc. and how those respond to the "interest rate" which really is a kind of matrix of future expectations, not a scalar.

[chenda]

@conwy You could look at gold as in the permanent portfolio if your looking at long term value retention.

[prudentelo]

ERN is very good source for understanding "feeling" of how asset classes behave and affect likely FIRE outcomes.

FOr example "why not be 100% in equities until retirement": https://earlyretirementnow.com/2021/03/ ... s-part-43/

I do not suggest you should be 100% in equities, I suggest the article is helpful for understanding "power" of equities and therefore "powerlessness" of switching out of equities into zero-return assets. Again, with LONG time horizon (which smooth exposure to volatility).

[zbigi]

Of course stocks are more volatile than bonds. You asked about inflation protections. Stocks do not suffer from inflation (in ideal model/after initial shock) because stock pays out nominal profits derived by nominal consumer spending which rises with nominal money supply/velocity expansions. In "real" observations, stocks survived Weimar inflation.

What happens to stocks in 15-20 years, when the large number of people who have been saving for retirement this way starts selling them? I wonder if someone has looked into how much that will be in term of additional stocks supply.

[prudentelo]

Does market not know how old population is ?

What happens if you lose 3% per year for 20 years and then try to buy back in to "non-zero return investment plan"

Ultimate safety some have sought in god, and others sought in very human historically unreliable governments, is not part of life

[zbigi]

Does market not know how old population is ?

Market prices are dictated by market participants. Currently, market participants are buying tons of stock because loading money into ETFs is the default retirement strategy for millions of middle class people. These people do little to zero long-term analysis.

[prudentelo]

Looks to me that buying of stock mostly follows interest rates set by central bank

[jacob]

What happens to stocks in 15-20 years, when the large number of people who have been saving for retirement this way starts selling them? I wonder if someone has looked into how much that will be in term of additional stocks supply.

https://earlyretirementextreme.com/the- ... sting.html

[prudentelo]

"In fact, US index returns have been flat for the periods of 1905-1942 ... Imagine for a while saving $1000 a month starting in 2005 and continuing until 2042 and assuming that the 1905-1942 period repeats. At this time, you would have $456,000. Discounting by 3% inflation, this would be worth $152,750 in today’s dollars which is somewhat short of a standard calculation which usually touts millions! Now, this is not a worst case scenario. It is simply the worst that has happened within the past century. It could be worse."

This would be devasting argument because 37 year time horizon not smoothing volatility means stock potentially way too dangerous for anyone.

However, shiller real total return data (http://www.econ.yale.edu/~shiller/data.htm) tells other story, with 600% real return between 1905 and 1942. (5% real CAGR which is indeed worse than historical average but still higher than WR ...)

Also question if you really did simulation with $1000/mo DCA, or just multiplied 1000 x 37 * 12 and assumed it was all invested in 1905. DCA should give better return than 600% (did not test it) edit: on second consideration probably worse as most of TR here is dividends (you may have used index only) and DCA end-load dividends

[prudentelo]

In above post I mistakenly used 1945 as end date. With 1942, real return is actually 340%/4% real CAGR.

Weak CAGR. But point remains, not 60% real loss of value. Still higher than WR (but 4% may fail due to sequence risk).

[prudentelo]

"Power" of stock is in giving holder entitlement to business profits.

Stock is not "GDP linked bond" or reflector of if your country wins wars. It is simply an entitlement to business profits. Business will continue to make profit if GDP does not grow and also if GDP shrinks.Businesses make profits in countries that are losing and recently lost wars. (of course victorious conuquer can steal your stocks or otherwise confiscate - so can own government in peacetime with no good cause)

To illustrate power of stock as entitlement to business profit, consider market crash, which many people fear. Market crash may take P/E from 24 to 8, 66% loss of instant sale value. Big problem if you need to sell instantly. If dont need to sell instantly, then dividend/yield went up from 4.2% to 12.5%, which 12.5% real annual return on top of any growth-driven excess you reinvest in stocks which are now at historical cheap point.

This is why stock is powerful. "Market crash" is much more entertainment for the masses than consequential for long term investments. (Of course it matters if you are withdrawing early in retirement - sequence risk - which is why 3 or 4% rule rather than 6 or 7% rule)

Of course can imagine yield doesnt rise because no profits because economy is destroyed or something. Many people seem to disappear in such apocalypse scenarios in effort to stay fearful. But what makes you think in such disaster other strategy is better? Warsaw Pact currency holdings often deleted entirely in 1990. Why is stockaggedon such major risk, but currency and bond deletions are not major risk?

[zbigi]

Problem is, unless you go with the dividend strategy, you will have to start selling those stocks at one point. And then, irrationally low valuations will hurt you a lot. Case in point - Polish stock market has been super-weak for the past 15 years and is currently at 8 P/E. Sounds like a great oppotunity to buy, except - what if the prices remain irrationally low for the next decades?

[prudentelo]

My model works in theory and has worked in practice but, as always, future can differ from past.

You believe "irrational" high US valuations reflect poor value but "irrational" low Polish valuations reflect likelihood of continued "irrational" valuations and/or stockaggedon in this market. So, you have no mental model that can justify purchasing finite risk/return assets in any circumstances. Is this rational or effective?

Whether profit paid out or retained as dividend has no deep level meaning. Just technicality of tax optimization (hence edit to my post, to reflect total yield rather than current typical US dividend)