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

While the results for Plans 1 and 2 (i.e., but multiple amounts of the bond on one side or the other of the gap) covered in previous posts are useful, there are (at least) two further questions I have
1) Is there an ‘optimum’ set of multipliers for Plan 3 (i.e., where multiple amounts of each bond on either side of the gap are bought) that produces a fairly flat income as a function of ytm?
2) What happens if the yield curve is not flat over the period 2034 and 2040?

The answer to the first of those questions is considered in this post.

Using the #cruncher spreadsheet with a required income of $40k, prices from 1 July 2024, and multipliers of 3.95 (for 2034) and 3.05 (for 2040) gives the following outcome (from the ToPaste sheet – only the 2034 and 2040 bonds are shown)

<snip>

Two things to note:
1) There is now a minimum in total income (and N) at a yield of about 1%
2) At that minimum, the income is only about $67 short of the target!

I note that this outcome is very sensitive to multiplier (and I suspect to the yields of the 2034 and 2040 bonds when the ladder is constructed at the beginning of retirement). For example, using multipliers of 3.74 and 3.26, the outcome is close to (but not quite identical with) that of the average in my previous post (viewtopic.php?p=7946700#p7946700), i.e. the income declines slightly with increasing yield. On the other hand, changing the multipliers to 4.1 and 2.9 results in the opposite behaviour since income then increases with increasing yield.

These results have been calculated assuming a flat yield curve. I think I can see a way to model the outcomes where the yield curve between 2034 and 2040 is not flat, but need to develop a couple of tools to do so. My guess is that a non-flat yield curve will make the outcomes worse - but by how much will depend on the gradient (both magnitude and sign). In terms of finding historical values of the yield curve, I note that, unlike the nominal yield curves, the real yield curves at https://home.treasury.gov/policy-issues ... statistics only start from 5 years. But has anyone used the data at https://www.federalreserve.gov/data/yie ... 805_1.html which does appear to have par and zero coupon yields for maturities from 2 to 6 years (and higher) for 1999 onwards?

cheers
StillGoing

Statistics: Posted by MtnBiker — Wed Jul 10, 2024 10:29 am — Replies 272 — Views 23095