by trod1234 | 2025-06-07 18:42:50+00:00
> Neither was your comment.

The comment I made refers to the underlying process of inflation indexing a yield curve in loose terms. You seem to be nitpicking on semantics for no real reason.

You also seem to have messed up your math with regards to calculating the loss in purchasing power due to inflation of the principal and interest (coupon) of an investment.

Inflation in 1990 was 5.4%, the return was 8.2% for that year, but I see you rounded that down to 8% in your example, so I'll stick with what you rounded down to in my breakdown below but the real rate of return for that year without your adjustment was 2.8% without taxes. Taxes play an important part in figuring your breakeven.

In your 1990 example, you make $8 as a coupon payment in interest for that year at what appears to be an 8% interest rate. Inflation in that year was 5.4%.

Depending on your ordinary income capital gains bracket/investment you may be taxed on this payment anywhere from 10% to 37%.

That's between $0.80-$2.96 of that $8 in tax.

The real profit/gain after inflation losses was $2.60, absent taxes, but you have to account for your real investment which includes taxes. You are taxed on $8, not that $2.6.

We'll assume its the upper tax rate, which taxes amount to 2.96. $2.60-2.96=-0.36, it is negative so you lost purchasing power on your principal for that year but still made a real return of $5.04 in that years dollars.

Lets look at the next year (its a 10 year bond after all). You get 8%, inflation is at 4.8%, real is $0.30 after subtracting out the tax. You still haven't broken even in purchasing power from the previous year, and if you do the autosum each year you end up making an ever so slight profit because stars align, and only because you caught the top of the bond market.

Over the years rates dropped to 6% down to, 4% in 2001 which enters our low rate era.

Now the general consensus at the time in the 90s was it was a great time to buy bonds, but that was only because the stock market during that time on average lost 6% per annum (iirc), and gold was down too. Nearly everyone was losing some money in purchasing power.

Lets say you reup that bond, $100 in 2001, rates are at 4%, You invest 100 you get 140 at the end, $4 coupon payments per year. Inflation is at 2.8%.

Real gain for that year is $1.20, but you are taxed on $4, which is $1.48 in tax (@37%). Your net profit after taxes: -0.28 in purchasing power.

This gets worse later on when rates go negative as a result of inflation (2011, and 2020), you pay people at a loss for the privilege of loaning them money.

In the long-run you barely break even, maybe, and that bond bubble still hasn't popped yet.

Now these are pretty good estimates considering you don't need to know lot of financial math so long as you handle the calculations properly at the right time, there is some error but not much.

The exact gain amounts also greatly depend on how accurate that CPI calculation is and in most recent years its almost borderline fabrication to the point of uselessness. Shadowstats produces reports on CPI utilizing the older more accurate methods, and those reports show much worse losses which agree with subjective observations I've seen during that time.

The point of note is, percentages depend upon the basis they indirectly reference, you can't perform operations on them out of order and expect to get a accurate answer.

> The annualized return of IEF ETF ...

The annualized returns of bond ETFs cannot be relied upon because they all utilize shennanigans such as the yield to maturity loophole, and they do not mark to market the actual value of assets held in the ETF even when they expire.

There is also synthetic share manipulations on the options chains for those at times where the valuation and share price become entirely divorced from reality, also you don't get coupon payments on ETFs.

This is why, if you happened to be paying attention to the interest trends and purchased long-term inversely correlated contracts on a bond ETF like say... TLT ... well ahead of the FED announcing their intent to raise interest rates dramatically, you would have been significantly burned when the price didn't drop appropriately for the assets held in trust when they did actually raise interest rates.

Take a look for yourself, the TLT fund was ~99% 1.8 10YR treasuries trading at 120, FED raised rates in 2022. The value loss on the assets of the ETF put the ETF book value on a par ~$67/share in 2022 instead it remained between 120-110.

There are a lot of older people whose financial advisor told them to invest in bonds, and that market was teetering on the edge ever since 2020, and is now being backstopped through currency devaluation through blackrock/Fed partnership. This only creates more inflation, on top of the petrodollar/geopolitic adverse consequences.