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Bond Yields are Low
Old 06-18-2011, 01:05 PM   #1
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Bond Yields are Low

Scott Burns does a pretty good job of getting down to the nitty-gritty of our current bond yield/inflation dilemma in this response to an email. Somethings gotta give.

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The Vanguard Total Bond Index fund, which is an intermediate maturity fund, currently yields about 3.39 percent for the Admiral shares. Admiral shares are available for those who invest more than $10,000. That 3.39 percent is significantly short of the 4 percent yield you want.
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In other words, the rate of inflation currently exceeds the yield on this major fund. Historically, the real return on intermediate-term government bonds was about 2 percent. They provided a yield that exceeded inflation by 2 percentage points.
Investor Beware: Yields Are Lower Than the Inflation Rate - Registered Investment Advisor
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Old 06-18-2011, 01:27 PM   #2
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From your article link...
The other problem is inflation. While a current yield of 3.39 percent might be adequate today, its purchasing power would decline in the future due to inflation. If you visit the web page the Social Security Administration uses for cost-of-living-adjustment calculations, you'll see that the trailing one-year inflation rate at the end of April was 3.64 percent. (http://www.ssa.gov/oact/STATS/cpiw.html ).

I went to the above SS site link and saw a table of numbers and a much easier to visualize graph here.
Consumer Price Index graph

Now the million dollar question...how does Scott Burns derive the 3.64 percent trailing 1 year inflation rate in April (I assume he means 2011) value from the CPI table (and graph) whose values are currently are in the 200-220 range?
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Old 06-18-2011, 01:52 PM   #3
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Quote:
Originally Posted by freebird5825 View Post
From your article link...
Now the million dollar question...how does Scott Burns derive the 3.64 percent trailing 1 year inflation rate in April (I assume he means 2011) value from the CPI table (and graph) whose values are currently are in the 200-220 range?
( APR2011 / APR2010 ) - 1 = ( 221.743 / 213.958 ) - 1 = 0.0364 = 3.64%

Note that from last month's numbers:

( MAY2011 / MAY2010 ) - 1 = ( 222.954 / 214.124 ) - 1 = 0.0412 = 4.12%

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Old 06-18-2011, 01:55 PM   #4
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The only dumb question is the one that goes unasked.

Thank you
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Old 06-18-2011, 03:01 PM   #5
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Yes.... the fed needs to stop manipulating rates.

May 10 year TIPs auctioned at a rate of 1.25%... plus the inflation adjustments that would be due.

Recent Note, Bond, and TIPS Auction Results

iBonds are at 4.60% till oct 2011. I had to do a double take on that. The fixed rate in May 2011 was set at 0%. This is a little confusing. But they show the calculation.

Individual - I Savings Bonds

http://www.treasurydirect.gov/indiv/...esandterms.htm
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Old 06-18-2011, 03:21 PM   #6
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Y'know, that Scott Burns article (and this thread) would be a really good reference for those occasions when a new poster "rediscovers" the 4% rule vs TIPS or I bonds.
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