Investing - Theory, News & General • Filling the TIPS gap years with bracket year duration matching

Sorry, your explanations do not make sense to me:

Your first statement is approximately correct; I'd replace "ensure" with "optimize the chances that".

How does setting ARA equal to 93% of DARA "optimize the chances that" DARA equals ARA?

This whole analysis is intended to optimize ARA = DARA. Once you stray from that you've jumped the shark.

This also doesn’t compute:

I showed early in the thread that our duration matching scheme worked excellently in a world where the gap-year TIPS traded on the secondary market, or even behaved as if they did, in which case coupon would be fixed and price would vary with yield. However, one of the many excellent observations by MtnBiker helped me realize that TIPS to be auctioned don't fit that model, because price is approximately fixed at 100 and the coupon varies with the market yield, which essentially determines the auction yield.

Why does this matter at all? Auctions are exactly like the secondary market, their prices are determined by market forces. The fact that the TIPS price is fixed at 100% at auction is completely immaterial. If a coupon is too high then you buy fewer TIPS, or vice versa. Problem solved.

You are concerned about a situation where a high yielding TIPS at auction doesn’t provide enough principal amount to allow the maturity year ARA to approximate DARA. If that’s the case, then the prior year coupons reinvested should be sufficient to make up the difference. You can sell off portions of the prior year TIPS accordingly, which should get you to the same result of ARA close to DARA.

That’s a simple calculation that should work on your spreadsheet. If not, why not?

Statistics: Posted by Jaylat — Thu Jun 20, 2024 7:05 am — Replies 158 — Views 13408

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