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Deflation


 

For another purpose, I had reason to look up TIPS yields. 

The current Treasury Inflation-Protected Security (TIPS) yields are -1.27% (5 years) -0.98% (10 years) and, amazingly, -0.35% (30 years). You pay them 0.35% per year for a stable real value. I did not realize it was this low. 

The context. I serve on the advisory board of a small nonprofit that has an endowment. The endowment is intended to be perpetual. We’re discussing the equity vs. fixed income allocation. I wanted to lay out the options. If they want absolute safety of principal and payout, under a perpetual constraint, they can pay out… -0.35% of the principal every year! I advised they accept some risk in the payout stream. 

It is not common for foundations to link the payout rate to the portfolio beta or composition. On economic grounds it should be. If you want a perpetual investment, the payout rate has to relate to the average portfolio return. Fixed income should have a lower payout rate than equity. 

Of course, some payouts are set by IRS rules or by a conflict between managers and donors, and there apparent illogic can serve other purposes.

John H. Cochrane 2020-09-15 00:02:00

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