Question on TIPS (Treasury Inflation Protected Securities)?

Question

Why do investors say that you need to trade TIPs in large quantities or it may not be worth it? Are there fees associated with trading TIPs on a secondary market? I know ... technical question, but thanks for any insight.

Answer 1

There are fees for buying and selling any security, even when using a discount broker.  The cheapest brokers may not even let you trade bonds.  You may see a fee as large as $50 per bond for a purchase or sale.

Answer 2

You can also look into symbol TIP on the NYSE.  It's a fund that buys TIPs, so you can particpate that way.

Answer 3

First, do you know why you want to buy TIPS? If not, learn about them.

Here's an excellent way to hold TIPS:

http://quicktake.morningstar.com/FundNet...

Make sure you aren't chasing past returns. TIPS has had a great run lately. Is that why you are interested?

Per Morningstar:

"The other side of the discussion is that investors who had been selling mortgage, corporate, and even tax-exempt bonds had to put their money somewhere, and a lot of that lucre ended up in the safest bonds, including Treasury Inflation-Protected Securities, or TIPS, driving their prices higher. That has boosted this fund, which has gained 15% during the 12 months ended May 23, 2008.

The sharp runup has made it more difficult to argue for adding to the fund or TIPS today, despite the fact that inflation has risen lately."

If you have a well thought out asset allocation that calls for TIPS and a long term investing horizon you'll be OK. Otherwise, be warned.

Answer 4

Depends on your definition of "large" and "trade."

Anyone can lower risk (loss of principle, to inflation, and to a lessor degree, volatility) using TIPS -- savings bond for small amounts, Bonds for large amounts.  Many brokerages now allow you to invest in initial treasury offerings for free (buy a bond) if you meet min $ amounts (usually around $10k) and treasury direct (.gov) allows you to do so for amounts as low as $100 per offering.  That is investing.  Maturity "sale" costs nothing and sales (sometimes limited) are relatively cheap although more that low-cost brokerage fees for stocks.

Trading -- as in buying and sell in short periods -- is unwise in blocks of less than $100k and lots of less than $1 million because, ultimately the trading fees will be more than any gain or loss on the bonds, including interest, after taxes.