Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Buy I-bonds now or wait until Nov?
Old 10-18-2004, 06:21 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Aug 2004
Location: Houston
Posts: 1,435
Buy I-bonds now or wait until Nov?

Given that the fed has rased the fed funds rate a few times, would I be better off buying I-bonds now, before the new rates are set in November or should I wait until the new rates are posted? That is to say, is it likely that the treasury will have to offer a higher fixed component on i-bonds now that rates are rising (ING savings up to 2.2%) to attract capital or will they probably keep rates the same (or lower)? I am going to buy I-bonds either way, it's just a question of timing. Would appreciate your input.
__________________

__________________
soupcxan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Buy I-bonds now or wait until Nov?
Old 10-18-2004, 07:11 PM   #2
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Buy I-bonds now or wait until Nov?

You can come pretty close to predicting the real yield on the new i-bonds by looking at the 5-year TIPS yield, which is currently around 1%. * So, the real component probably won't change, and the inflation component will go up a bit to reflect higher inflation over the last 6 months.

In other words, it probably won't matter if you buy now or wait.
__________________

__________________
wabmester is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-18-2004, 08:18 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: Buy I-bonds now or wait until Nov?

I haven't looked at the yield curve a lot lately (boy this indexing stuff is making me lazy!) but the movement in short term rates is fairly independent of the long term rates, which, though the feds would like to be able to move them, too, are usually set by Mr. Market based on long term assumptions about inflation, deficits, relative currency strength economic growth rates etc. *

So, to Wab's point, *the interest (real) part of the new I-Bonds probably won't bump up as much as the headlines on Fed tightening might make you think. *In fact, looking at 10 year Treasury rates at the time of the last rate-setting (May?) and comparing them to now shows us that rates have actually fallen by .4% or so since May. Wonder if that means the I-Bond rates might actually be lower next time up? (I'd take Wab's TIPS-derived indicators for more value as he knows more about this than I, though. Maybe 10-years are too long? Five year index hasn't dropped - is pretty much flat with today's rate, which would explain keeping the fixed I-Bond rate at the 1% going forward)

Five Year Treasury Index Graph:
http://finance.yahoo.com/q/bc?s=^FVX&t=6m

Ten Year Treasury Graph: last 6 months
http://finance.yahoo.com/q/bc?s=^TNX&t=6m

(feels like getting an MBA all over again)

ESRBob
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-18-2004, 09:55 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Buy I-bonds now or wait until Nov?

Some pretty good articles I read suggest not bothering with ibonds at interest rates below 2%.

So far I'm not.

The only reason why I might consider them is if they reached 2%, as a college "fund" for my as yet unborn kid.

I'll probably just continue with my current plan and peel that money out of the portfolio when it happens. Heck, that wont be until I'm 60, and we're going to have so much money coming out of our ears then that a college education probably wont mean much.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 05:16 AM   #5
Recycles dryer sheets
 
Join Date: Feb 2004
Posts: 123
Re: Buy I-bonds now or wait until Nov?

Quote:
long term rates, which, though the feds would like to be able to move them, too, are usually set by Mr. Market based on long term assumptions about inflation, deficits, relative currency strength economic growth rates etc.
This has been a curious aspect of our interest rate raises. At some point as short term interest rates rise and show a trend for the longer run, would it not be almost inevitable for longer term rates to start bumping up as the spread between short and long term money narrows. Wouldn't the fed want to influence longer term rates by increasing the coupon rate of longer term treasuries? Not arguing at all, but trying to inderstand.
__________________
"He who speaks of dryer sheets has not seen the clothes line." Al B. Tross
Roger_R is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 06:22 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Re: Buy I-bonds now or wait until Nov?

I think the longer rate(as noted) is set buy what sells(bids at auction). On occasion the Treasury has withdrawn/changed maturities when they didn't like the bids.

Someone correct me if I'm wrong - I'm not a bond person.
__________________
unclemick is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 06:33 AM   #7
Thinks s/he gets paid by the post
 
Join Date: Aug 2004
Location: Houston
Posts: 1,435
Re: Buy I-bonds now or wait until Nov?

Hmm...given the dismal 1% fixed rate on I-bonds, would it make more sense to go with series EE?
__________________
soupcxan is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 07:16 AM   #8
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Buy I-bonds now or wait until Nov?

Quote:
Hmm...given the dismal 1% fixed rate on I-bonds, would it make more sense to go with series EE?
Would it make more sense to go with a 5 year CD? EE bonds pay 2.84% while 5 year CDs pay 4.5%
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 07:36 AM   #9
Thinks s/he gets paid by the post
 
Join Date: Aug 2004
Location: Houston
Posts: 1,435
Re: Buy I-bonds now or wait until Nov?

True, but CDs don't offer any protection against rising rates. And they're not tax-deferred. And there may be larger penalties for breaking them.

Quote:
Would it make more sense to go with a 5 year CD? *EE bonds pay 2.84% while 5 year CDs pay 4.5%
__________________
soupcxan is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 08:05 AM   #10
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Buy I-bonds now or wait until Nov?

Quote:
True, but CDs don't offer any protection against rising rates. And they're not tax-deferred. And there may be larger penalties for breaking them.
Some CDs do offer protection against rising rates with a bump-up feature. True, they are not tax deferred, but chances are the taxes we are talking about are insignificant and sometimes if you lump thousands of dollars in interest income in one year you may jump up a tax bracket and pay a higher marginal tax rate. Penalties could be higher with a bank CD, but a non-issue if you hold to maturity. Don't forget that with a bank CD paying over 1.6% more than a Series EE bond, it would add up to $500 more a year in interest per $30,000 invested.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 08:57 AM   #11
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Buy I-bonds now or wait until Nov?

Quote:
Hmm...given the dismal 1% fixed rate on I-bonds, would it make more sense to go with series EE?
Well, that's 1% real yield. So, on top of inflation of 3% or so, you're looking at 4% which will beat EE's for a while.
__________________
wabmester is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 09:17 AM   #12
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Buy I-bonds now or wait until Nov?

Quote:
Well, that's 1% real yield. *So, on top of inflation of 3% or so, you're looking at 4% which will beat EE's for a while.
I just checked the I bond interest rates for May through Oct 2004. The total composite rate is 3.39%. Lousy rate, but still better than the EE Bonds at 2.64%.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 09:47 AM   #13
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Buy I-bonds now or wait until Nov?

Quote:
I just checked the I bond interest rates for May through Oct 2004. *The total composite rate is 3.39%. *Lousy rate, but still better than the EE Bonds at 2.64%.
CPI growth for the last 6 months has been around 1.4%, which annualizes to 2.8%, with the 1% real yield will give you 3.8%. * That's probably pretty close to what the composite rate will look like in November.
__________________
wabmester is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 06:28 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Buy I-bonds now or wait until Nov?

The rule of thumb is to buy ibonds if you think inflation will rise and rates wont climb much. Buy EE bonds if rates will rise but inflation wont climb much.

Since the govt is already understating inflation, and correctly stating it makes them look bad and costs them money, my bet is they'll do whatever it takes to make inflation look as tame as possible.

On the other hand, rates almost have to go up at least a little more.

Given a shot at locking money up a while in ibonds at 1%+fake inflation, in tips at 2.5%+fake inflation for 20 years, i'm currently keeping that money in 3% 11 month cd's and waiting a while to see what happens.

If ibonds went to 2% or tips went over 3.25%, I'd think about it.
Otherwise I'll stay a little more liquid and move it into stocks after a correction.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 07:43 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: Buy I-bonds now or wait until Nov?

Quote:

If ibonds went to 2% or tips went over 3.25%, I'd think about it.
.
TH, are you referring to the real rate or the total rate (inflation plus the real rate)? *Want to be sure we compare apples as best as possible, even though the I or TIPS bonds are not directly comparable to other bonds.

Regarding a previous question about whether the Fed can influence long term rates, (This is not done by adjusting the spread or price at auction of long bonds, either, as the relevant long rates are the ones companies and decsionmakers face on their own corporate paper, not treasury bond prices.) *

It may be time to crack out the old economics text books on Fed Open Market Policy etc., but what I remember in short is that the Fed can influence short term rates through Open Market Operations and setting the Fed Funds and Discount Rates, (forcing banks to give them cash or lend more, for example), but the long term rates are in such vast, liquid markets and quantities that the Fed cannot really move them. *There is no direct mechanism, and you'd need to buy up trillions before you could have a sustained impact on interest rates, which would of course need to come from somewhere besides issuing new debt to pay for it! *

The long rates are set mostly by expectations of lots of smart decision-making people (investors, credit granters (lenders), borrowers, traders) on things like inflation, relative currency strength, trade deficits, economic growth, as well as supply and demand for credit. (with a premium applied to this base rate for credit risk) *That would appear to be why the Fed spends so much time trying to signal reassurance and 'jawbone' the market into keeping optimistic expectations about inflation and the like so that credit can stay cheap and the economy can keep rolling. If the Fed wants to increase long rates, they need to convince us that the economy really is going to heat up and create a future shortage of credit, or possibly on the flipside, future negatives like dollar weakness or inflation. Arencha glad you're not a central banker?

ESRBob

__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 10-19-2004, 08:25 PM   #16
Recycles dryer sheets
 
Join Date: Jan 2004
Posts: 75
Re: Buy I-bonds now or wait until Nov?

i think its misguided to exclude CD's in the mix,since noone really knows with CERTAINTY where rates are going.So we must hedge our bets.To exclude TIPS/Ibonds for there rediculously low rates is also a mistake,since they should (imo) be viewed as a hedge and also should be looked at in terms of total return.the TIPS 1/15/14 series which auctioned 1/8/04 @99.829 are now priced at 105.53.

the recent auction ,series 7/15/14 was originally priced at 99.82 as well on7/08,this last go around(rehash) priced at 101.018,currently priced at 102.69.

There are also inflation indexed corps as well.To exclude bonds/CD's based on popular expectations for rates is a serious mistake.Its really quite amazing how much stability bonds can lend a portfolio.It seems to me that perhaps a way to hedge total return for bonds is to buy out of favor corps selling less than par,ive tried to keep my focus on anything AA and abuv.With that high of a rating the yields wont be too spectacular,but then im more worried about getting my investment back than yield,which is my focus on bonds at less than par--ak
__________________
real men dont use dryer sheets
ak4195 is offline   Reply With Quote
Re: Buy I-bonds now or wait until Nov?
Old 11-01-2004, 12:57 PM   #17
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Buy I-bonds now or wait until Nov?

Quote:
CPI growth for the last 6 months has been around 1.4%, which annualizes to 2.8%, with the 1% real yield will give you 3.8%. * That's probably pretty close to what the composite rate will look like in November.
As of today, the new composite rate is 3.67%, and the real yield is unchanged at 1%.
__________________

__________________
wabmester is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Don't need no stinkin' bonds Rich_by_the_Bay FIRE and Money 52 04-05-2007 03:43 AM
Reporting maturing bonds on tax forms woolybully FIRE and Money 1 02-25-2007 05:56 PM
Short Term vs. Intermd Term Bonds TromboneAl FIRE and Money 35 07-21-2006 08:58 AM
Buy House Now w/Low Down or Save Bigger Down? BigMoneyJim Young Dreamers 11 07-14-2004 05:23 PM
Allocate to Bonds Now or Wait? mccl FIRE and Money 12 05-05-2004 04:36 AM

 

 
All times are GMT -6. The time now is 05:39 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.